(1) Miscela Ltd (Claimant/Appellant) (2) Deepal Shehan Goonetillake (3) Marcela Goonetillake v Coffee Republic Retail Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Coulson |
| Judgment Date | 23 June 2011 |
| Neutral Citation | [2011] EWHC 1637 (QB) |
| Court | Queen's Bench Division |
| Docket Number | Claim No: HQ10X01883 |
| Date | 23 June 2011 |
[2011] EWHC 1637 (QB)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Hon. Mr Justice Coulson
Claim No: HQ10X01883
Mr N Strauss QC & Mr S Johnson (instructed by Richard Slade and Company) for the Claimant/Appellant
Mr J Small QC & Mr G Healey (instructed by Hill Dickinson LLP) for the Defendant/Respondent
Hearing Date: 22 nd June 2011
Introduction
On 15 December 2010, Master Eyre entered summary judgment for the defendant against the 1 st claimant, Miscela Limited, in respect of paragraphs 4–15 of the Particulars of Claim. He also dismissed Miscela's own application for summary judgment. Miscela appeals against that decision with the leave of Davis J. The issue turns on the proper construction of clause 2.2 of the Franchise Agreement between Miscela and Coffee Republic Franchising Limited ("CRFL"), and is therefore suitable for summary determination.
In late 2005, Miscela bought an existing Coffee Republic business at 40–42, High Street, Weybridge in Surrey ("the business"). The plan was for Miscela to run that business in the future. There were three separate agreements required to bring that about:
a) A Business Sale Agreement, dated 15 December 2005, pursuant to which Miscela paid £178,500 plus VAT, for the business and related assets. The Business Sale Agreement was with the owners of the business, Coffee Republic UK Limited ("CRUK").
b) An Underlease, largely agreed by 14 December 2005, but ultimately finalised on and dated 20 January 2006, also between Miscela and CRUK, pursuant to which CRUK sub-let the premises at 40–42, High Street, Weybridge to Miscela, for a period of 5 years, at an annual rent of £38,250. The freeholder and landlords of the property were BA Systems. The underlease contained a break clause, pursuant to which it could be determined by CRUK on one month's notice.
c) A Franchise Agreement dated 14 December 2005, pursuant to which CRFL granted various rights to Miscela, entitling it to operate a Coffee Republic Deli at the premises for a period of 5 years, with a further 5 year option. Pursuant to this Agreement, Miscela were obliged to pay a franchise fee to CRFL of £17,500, together with other annual fees and charges.
In the summer of 2009, CRUK and CRFL both went into administration. The defendant took an assignment of CRFL's rights and obligations under the Franchise Agreement. CRUK surrendered the head lease to the landlords, and it was they who exercised the break clause in the underlease, at the end of 2009. As a result, Miscela vacated possession of the premises. Miscela now claim that these events rendered CRFL, and therefore the defendant, in breach of clause 2.2 of the Franchise Agreement. This appeal is therefore limited to a consideration of clause 2.2, and certain terms which Miscela say should be implied into the Franchise Agreement, if their interpretation of clause 2.2 is wrong.
In essence, Miscela submit that, pursuant to clause 2.2, they obtained the right to occupy the premises on Weybridge High Street. Therefore, they say, if through no fault of their own the break clause in the underlease was triggered and they were obliged to vacate the premises, they have a claim for breach of clause 2.2 against CRFL and thus, by virtue of the assignment, against the defendant. This argument relies heavily on the alleged unfairness of the result (or "the contractual absurdity", as Mr Strauss put it) whereby Miscela – having bought the business – were left without a remedy following the exercise of the break clause. In response, the defendant submits that clause 2.2 was wholly unconnected with property rights and that, even if it was, no obligation of the kind alleged by Miscela could arise as a matter of proper construction of the Franchise Agreement.
I propose first to consider briefly the relevant law relating to contract interpretation, before going on to set out the key provisions of the three agreements. Then, having set out what I consider to be the relevant background and context of those agreements, I analyse the proper construction of clause 2.2. Thereafter, there is a final section of this Judgment, dealing with the alleged implied terms.
The Relevant Principles of Interpretation
The starting point, of course, is Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 and in particular the well-known principles, five in all, set out at pages 912H to 913F in the speech of Lord Hoffmann. In essence, a contract must be construed to ascertain "the meaning which the document would convey to a reasonable person, having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract". Lord Hoffmann went on to say:
"The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had."
This approach was restated in helpful terms by Moore-Bick LJ in Ravennavi SpA v New Century Shipbuilding Co Ltd [2007] 2 Lloyds LR 24. At paragraph 12 he said:
"Unless the dispute concerns a detailed document of a complex nature that can properly be assumed to have been carefully drafted to ensure that its provisions dovetail neatly, detailed linguistic analysis is unlikely to yield a reliable answer. It is far preferable, in my view, to read the words in question fairly as a whole in the context of the document as a whole and in the light of the commercial and factual background known to both parties, in order to ascertain what they were intending to achieve."
It is always important to construe a commercial contract by reference to commercial common sense. As Lord Diplock put it in The Antaios [1985] AC 191, "if detailed semantics and syntactical analysis of the words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense." Lord Hoffmann said in Co-Op Wholesale Society Limited v Natwest Bank PLC [1995] O1 EG 111that the court must not "re-write the language which the parties have used in order to make the contract conform to business common sense. But language is a very flexible instrument and, if it is capable of more than one construction, one chooses that which seems most likely to give effect to the commercial purpose of the agreement."
As Mr Strauss repeatedly urged on me, it is legitimate for a court, when construing a clause in a contract of this kind, to have regard to the reasonableness or otherwise of the competing interpretations. Lord Reid noted in L Shuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 251E, that "the more unreasonable the result, the more unlikely it is that the parties can have intended it and, if they do intend it the more necessary it is that they shall make that intention abundantly clear."
But the emphasis on the reasonableness or otherwise of the result cannot be taken too far. As Lord Hoffmann noted in Chartbrook Limited v Persimmon Homes Limited [2009] 1 AC 1101, at 1113, at paragraph 20 of his speech:
"…the fact that a contract may appear to be unduly favourable to one of the parties is not a sufficient reason for supposing that it does not mean what it says. The reasonable addressee of the instrument has not been privy to the negotiations and cannot tell whether a provision favourable to one side was not an exchange for some concession elsewhere, or simply a bad bargain."
And in the most recent case on the subject, Rainy Sky SA and Others v Kookmin Bank [2010] EWCA Civ 582, [2011] 1 All ER Comm 18, Patten LJ said at paragraph 42:
"Unless the most natural meaning of the words produces a result which is so extreme as to suggest that it was unintended, the court has no alternative but to give effect to its terms. To do otherwise would be to risk imposing obligations on one or other party, which they were never willing to assume, in circumstances which amount to no more than guess work on the part of the court."
The Three Agreements
Agreement 1 – The Business Sale Agreement 14/12/05
As noted above, pursuant to this Agreement, Miscela bought the Coffee Republic business at 40–42 High Street Weybridge, for £178,500 plus VAT. Clause 1.1 stated that it was an agreement "for the sale and purchase of the Business as a going concern." As part of this arrangement, Miscela had to take on the contracts of employment of existing staff and the burden of other supply contracts.
Clause 2 provided that:
" 2 Sale and Purchase of Assets
2.1 Subject to the terms and conditions of this Agreement, the Vendor shall sell and the Purchaser, relying on the representations of the Vendor herein contained, shall purchase the Business as a going concern and all of the Assets free from all liens, charges and encumbrances, with effect from the Completion Date.
2.2 The Assets to be sold pursuant to this Agreement shall be as follows:
a) The Fixtures, Fittings and Equipment;
b) The Records; and
d) The benefits subject to the burden of the Contracts."
Oddly, amongst the matters excluded from the sale in clause 2.3 was any goodwill in the business, which, so I would have thought, would have been an integral part of the business as a going concern.
Clause 4 provided that:
" Full Completion
4.1...
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