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and
ROSEBUD WESTERN PROVINCE FRANCHISE RESPONDENT
(PTY) LTD
___________________________________________________________________
Coram: Howie, Schutz, Navsa, Brand JJA and Lewis AJA
Date of hearing: 23 May 2002
Date of delivery: 31 May 2002
Summary: Interpretation of two linked agreements to determine whether cancellation of one results in the termination of the other.
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NAVSA JA:
[1] This is an appeal, with leave of this Court, against a judgment of the Full Bench of the Cape of Good Hope Provincial Division of the High Court (Comrie and Selikowitz JJ with Josman J dissenting), upholding a judgment of Foxcroft J, in terms of which the learned judge ordered the appellant to repay the respondent an amount of R715 701-62, representing part-payment of the purchase price for a franchise business.
[2] The issue in this appeal is whether the cancellation of one of two linked agreements resulted in the termination of the other with attendant consequences. The answer lies in the interpretation of the agreements in question. The background facts are as follows.
[3] The appellant is a South African company that sells franchise rights to persons enabling them to trade in second hand goods under the name and style of Cash Converters, using a system and method developed by an Australian company from which it acquired the right to act as the South African franchisor. It also sells to others (as in the present case), the right to act as Cash Converter sub-franchisors.
[4] On 15 August 1997 the parties concluded the two written agreements that are the subject of the present appeal. In terms of one of the agreements ('the sale agreement') the appellant, Cash Converters Southern Africa (Pty) Ltd (Cash Converters) sold to the respondent, Rosebud Western Province Franchise (Pty) Ltd (Rosebud), as a going concern, its business in the Western Cape, the operation of which was concerned with the selling of franchise rights to persons to carry on business in the Western Cape under the Cash Converters banner as dealers in second hand goods. The purchase price was an amount of R800 000-00 to be paid by way of a deposit of R250 000 00 and the balance (plus interest) in 36 equal monthly instalments.
[5] The second agreement concluded by the parties ('the franchise agreement') is entitled Sub-Master Franchisor Agreement. In consideration for purchasing the business the franchise agreement granted Rosebud franchise rights and the use of intellectual property in order to enable it to conduct the business. The franchise agreement regulated the manner in which the business acquired in terms of the sale agreement was to be conducted. The franchise agreement deals with matters such as the logos to be used, the slogans to be employed in promoting the business, marketing and operations manuals, etc. It bound Rosebud to observe strict secrecy in relation to information or data incidental to the Cash Converter business methods and systems and to intellectual property connected therewith. It also prescribed how fees received from sub-franchisees were to be divided between Cash Converters (the master franchisor) and Rosebud.
[6] Clause 3.1.4 of the franchise agreement provided that Rosebud:
'…shall cause to be opened at least five (5) Cash Converter stores per year for the first two (2) years of this Agreement, and at least thirty (30) such stores open and trading (including existing stores) at the conclusion of the Initial Term…'
The 'initial term' is defined in the franchise agreement as a period of ten years from 1 August 1997. It is common cause that Rosebud failed to solicit sufficient new business timeously to enable it to open five new Cash Converter stores and that it was in breach of its obligations in terms of the franchise agreement. In April 1999 Cash Converters, acting in terms of clause 11.2 of the franchise agreement, gave Rosebud three months written notice of termination. Subsequently, Cash Converters applied to the Cape of Good Hope Provincial Division of the High Court for an order declaring the franchise agreement to have been validly cancelled and for related relief, including an order prohibiting Rosebud from using any of the methods, systems and intellectual property of the Cash Converter franchise and from associating itself in any way with the franchise. Rosebud initially opposed the application and in a counter-application sought repayment of the amount of R715 710-62 being the amount already paid in terms of the sale agreement. It is common cause that at the time that notice of termination was given Rosebud was not in arrears in paying the purchase price in terms of the sale agreement.
[7] The matter came before Foxcroft J and it was agreed between the parties that the only matter to be adjudicated was the counterclaim, Rosebud conceding that the franchise agreement was validly cancelled. It was contended on behalf of Rosebud that without the rights granted to it in terms of the franchise agreement it would be unable to conduct the business. It was further contended that a necessary consequence of the cancellation of the franchise agreement was the termination of the inextricably linked sale agreement, with the result that Cash Converters was obliged to repay the purchase price against restoration of the business. Foxcroft J accepted the correctness of these contentions and granted Rosebud the relief sought in the counterclaim.
[8] Foxcroft J granted leave to appeal to the Full Bench. The majority, per Comrie J, agreed with Foxcroft J's reasoning and conclusion. Dealing with the argument on behalf of Cash Converters that during the currency of the franchise agreement Rosebud received franchise fees and ought first to tender the return of such fees before being able to claim repayment of the purchase price, Comrie J stated that this was fallacious as the fees were earned by Rosebud and ought not to be considered to be part of what had to be restored.
[9] In his dissenting judgment, Josman J agreed that the two agreements were inextricably linked, but reasoned that even though the full purchase price had not yet been paid the sale agreement should be seen as having run its course and should be considered to have been fully executed with no question of breach by either party. The learned judge was of the view that it could never have been in the contemplation of the parties that a breach of the franchise agreement constituted by Rosebud's failure to establish the requisite number of outlets would terminate the sale of the business. Josman J considered that the rights of the parties following on the termination of the franchise agreement had to be determined solely by reference to the provisions of that agreement and stated that Rosebud had only itself to blame for the failure of the franchise agreement and the consequent forfeiture of the purchase price. The judgment of the Full Bench is reported as Cash Converters SA v Rosebud Western Province Franchise 2002 (1) SA 708 (C).
[10] As the appeal turns on an interpretation of the two agreements it is necessary to examine each agreement in some detail. The relevant provisions of the sale agreement are set out in this and the following six paragraphs. Clause 2, under the heading Narrative, reads as follows:
'2.1 The Seller carries on the business and wishes to sell the business on condition that the Purchaser thereof will conduct the business in terms of a Sub-Master Franchise Agreement with the Franchisor;
2.2 The Purchaser wishes to purchase the business;
2.3 The Franchisor has indicated its willingness to enter into a Sub-Master Franchise Agreement with the Purchaser on the Franchisor's standard terms and conditions;
2.4 The Purchaser has agreed to enter into a Sub-Master Franchise Agreement on the terms required by the Franchisor.'
[11] Clause 3 deals with the transfer of risk and provides:
'Subject to the reservation of ownership set out below, the Seller sells to the Purchaser who purchases the Business, as a going concern, with effect from the Effective Date, on which day all risk in and benefit attaching to the business shall pass to the Purchaser.'
'Business' is defined in the definition section as '…that part of the Seller's business as a going concern conducted by the Seller in the Western Cape Province, in terms whereof it promotes the Franchised System by granting franchise rights to persons within the Western Cape Province to carry on business as secondhand dealers of various products and merchandise, under the name "Cash Converters", but excluding the name "CASH CONVERTERS", insignia and colour schemes and any rights thereto;'
[12] Clause 9 reads as follows:
'The Purchaser shall enter into a Sub-Master Franchise Agreement with the Franchisor and such other agreements as the Franchisor may require on the Franchisor's current terms and conditions."
[13] Clause 10.1, under the heading Reservation of Ownership, provides that until the alienation date, which is defined as being the date on which the full consideration is paid, '[t]he assets, including the fixed assets and all movables (if any), sold by the Seller in terms of this Agreement shall not pass to or vest in the Purchaser, but shall remain the sole and absolute property of the Seller; …'
[14] Clause 13 deals with intellectual property and provides:
'The Purchaser acknowledges that the name "CASH CONVERTERS" and the trading style and trading methods used in the business including trade marks, trade names, logos and designs, whether registered or not, used in connection with the business and its merchandise are licenced exclusively to the Franchisor in terms of its Master Franchise Agreement with Cash Converters (Pty) Limited, an Australian corporation. The Purchaser acknowledges that by purchasing the business the Purchaser will not acquire any rights to any of the aforegoing.'
(emphasis added)
[15] Clauses 16.2 and 16.4 provide:
'16.2 This document constitutes the sole record of the agreement between the parties in respect of the subject matter hereof.
…
16.4 No addition to or variation or agreed cancellation of this agreement shall be of any force or effect unless in writing and signed by the parties or on their behalves by their respective duly authorised representatives.'
[16] Clause 17 spells out the seller's remedy upon a breach by the purchaser and reads as follows:
'If the Purchaser fails to make payment of any amount payable in terms of this agreement on due date thereof or breaches any other provision or term of this agreement and fails to make any such payment or remedy the breach in question within thirty (30) days of the date of receipt of written notice requiring the Purchaser to do so, the Seller shall without prejudice to his other legal remedies be entitled to cancel this agreement by written notice, repossess the business and retain any monies paid by the Purchaser or to claim immediate payment of the balance of purchase price and interest then outstanding.
Notwithstanding that the Seller may claim payment of the balance of purchase price ownership in the business shall not pass until the full purchase price has been paid.'
[17] The relevant provisions of the franchise agreement are referred to in this and the following three paragraphs. It is recorded in the franchise agreement that Cash Converters has already licensed franchisees in the Western Cape who established Cash Converter stores. Clause 2.1 records the following:
'In consideration of the Sub-Master Franchisor having purchased from the Franchisor the business described in the preamble to this agreement, and the performance and observance of the conditions and obligations in this Agreement on the part of the Sub-Master Franchisor to be performed and observed, the Franchisor hereby grants to the Sub-Master Franchisor the right and authority for the Term and within the Territory to market, promote, and distribute by way of franchise, the Franchised System and the right to use and/or apply the Industrial Property in connection with Franchised Businesses…'
Clause 2.3 grants the respondent a percentage of the gross receipts of all individual franchisees in the Western Cape.
[18] Clause 11.2 deals with the consequences of Rosebud's failure to meet its obligation to establish the requisite number of Cash Converter outlets within the stipulated time:
'Notwithstanding any other term covenant or condition contained herein, the Franchisor may at any time during the term or any extension thereof, terminate this Agreement upon giving to the Sub-Master Franchisor three (3) months notice in writing if the Sub-Master Franchisor fails to achieve its obligations in terms of clause 3.1.4 and thereupon all the rights and entitlements, burdens and obligations under this Agreement shall immediately cease without either party having any rights to claim for compensation or damages whatsoever in respect of such termination provided that the Sub-Master Franchisor shall in any event fully and unconditionally perform and observe each of the obligations set out in clauses 11.3, 12 and 14 hereof.'
(emphasis added)
[19] Clause 11.1 provides that upon the expiration of the initial term either party is entitled to terminate the agreement by giving not less than three calendar months notice. Clause 12 provides that upon termination of the franchise agreement for any reason whatsoever all rights of the sub-master franchisor 'shall terminate' and Rosebud will not be entitled to receive any rebate or refund of any amounts paid in terms thereof.
[20] Importantly, clauses 17.6 and 17.8 provide:
'17.6 Notwithstanding anything said or written prior to the execution hereof, this Agreement embodies the entire understanding of the parties and constitutes the entire terms agreed upon between them and supersedes and replaces entirely any prior written or verbal agreement between the parties.
…
17.8 This Agreement may only be varied by written agreement signed by the parties.'
[21] Counsel for Rosebud submitted that the two agreements were parts of one indivisible transaction. The doctrine of divisibility or severability is usually invoked when the question of the enforceability or legality of a part or parts of an agreement is in dispute. See R.H. Christie The Law of Contract (4th ed) at 423. In my view the categorisation employed by counsel is unhelpful as is the reliance by Comrie J at 713 I – 714 B on Chitty on Contracts where in vol 1 at para 824 the learned author states:
'Several instruments may be construed as one instrument, and be read together but so that each shall have its distinct effect in carrying out the main design…'
This statement begs the question. The appeal turns on the true meaning and purpose of the two documents in question. This entails an exercise in interpretation.
[22] In interpreting the two agreements it is necessary at the outset to consider what exactly was 'sold' to Rosebud. Apart from some movable assets and goodwill what Rosebud purchased was the opportunity to exploit the Cash Converter franchise in the Western Cape for a defined time. In consideration for concluding the sale agreement Cash Converters transferred in the franchise agreement the franchisor rights and the right to the use of intellectual property to enable the business opportunity to be exploited. It should be borne in mind that in terms of clause 12 of the franchise agreement termination for any reason whatsoever would result in those rights reverting to Cash Converters without compensation to Rosebud.
[23] I accept, as did Foxcroft J and all the members of the Court below, that the two agreements are linked. They were both concluded on the same day and the sale agreement clearly served as the basis for the conclusion of the franchise agreement and vice versa. However, the fact is that there are two agreements, related but distinct, each serving a specific purpose. The purchase price for the business as set out in the sale agreement was intended to ensure that Cash Converters received value for the transfer of the franchisor rights which would be given effect to with the conclusion of the franchise agreement. The sale agreement thus served as a springboard for the franchise agreement. Once the franchise agreement was concluded the sale agreement had served its purpose. Save for regulating the payment of the balance of the purchase price the sale agreement had no further part to play. The franchise agreement regulated the future relationship between the parties and determined the manner in which the franchise business was to be conducted.
[24] Each agreement records that the document embodying it is the entire agreement between the parties and may not be varied except in writing. Nowhere in the franchise or sale agreement is it recorded that in the event of the franchise agreement being cancelled because of a breach on the part of either party the sale agreement would terminate. Each agreement has its own breach provisions and there is no cross-referencing. The franchise agreement has been cancelled in terms of clause 11.2. There was no cancellation of the sale agreement either in terms of clause 17.8 thereof or at all and it is thus still extant. In principle, apart from the question of prescription, there appears to be no obstacle to Cash Converters claiming the balance of the purchase price. In these circumstances there can be no talk of restitution. I agree with Josman J that the ostensible purpose behind two agreements was to ensure that the failure of the franchise agreement did not impact on the sale agreement and that in the event of a failure of the franchise agreement the rights of the parties are to be determined solely by reference to that agreement.
[25] Following the reasoning of Foxcroft J and the majority of the Court below would have the absurd result that, having concluded the sale agreement, a sub-master franchisor could sit back for a year and do nothing to achieve the target set in clause 3.1.4 of the franchise agreement and on the basis of its own default claim the return of the purchase price. It would also mean, that if the target for the initial term (beyond the first two years) was not met, the franchisee, having had the use of the business for almost a decade and having earned fees from so many franchisees as it may have recruited and from those that might have existed at the time of the conclusion of the sale agreement, can now recover the purchase price from the master franchisor who will be left with underdeveloped and perhaps worthless franchisor rights in the Western Cape.
[26] Rosebud would have us accept that the two agreements are one and indivisible yet would restrict the operation of clause 11.2 to the franchise agreement. The provisions of clause 11.2 set out in paragraph [18] of this judgment preclude either party from claiming compensation or damages 'whatsoever' in respect of a termination of the franchise agreement.
[27] With respect, Josman J recognised the absurdities referred to earlier and rightly came to the conclusion that to interpret the document as contended for by Rosebud makes no commercial sense.
[28] It was submitted on behalf of Rosebud that it could never have been intended that Cash Converters, which had been paid a large sum of money for the business and was entitled either to retain ownership because a final instalment had not been paid or to retake the business for failure of the franchise agreement, could keep both the business and the money.
[29] In my view this is exactly what was intended in the event of Rosebud failing to meet its obligations in terms of clause 3.1.4. The two agreements were concluded on the same day. Any prospective sub-master franchisor would of necessity have had regard to both before signing either. It must have been clear to Rosebud that if any of the targets set by clause 3.1.4 were not met, the first agreement would be terminated and the business purchased in terms of the sale agreement would be rendered inoperative. Rosebud must have been aware of the provisions of clauses 11.2 and 12 of the franchise agreement. The conduct of the business was subject to the terms of the franchise agreement. It was a business risk Rosebud consciously undertook and it must bear the responsibility for the failure of the franchise agreement and the forfeiture of the amounts paid as part of the purchase price.
[30] I turn to deal with Rosebud's alternative argument. It was contended on behalf of Rosebud that subsequent to the termination of the franchise agreement Cash Converters, in allegedly attempting to physically take back the business, repudiated the sale agreement. This submission ignores the following. First, Rosebud in its answering affidavit did not rely on the behaviour of Cash Converters in attempting to reassert control over the business as a repudiation of the sale agreement but rather as a repudiation of the franchise agreement. Secondly, the consequence of the termination of the franchise agreement as spelt out in the agreement itself is that Rosebud would be obliged to return to Cash Converters such materials as are related to the conduct of the business and would be prohibited from operating the Cash Converter franchise. Finally, the breach by Rosebud of its obligations in terms of clause 3.1.4 rendered the business then in its hands inoperative. In these circumstances it is not open to Rosebud to contend that Cash Converters repudiated the sale agreement.
[31] It remains to deal with a costs related issue. Cash Converter's counsel rightly conceded that the volumes of the appeal record referred to in the order that follows were unnecessary and that the related costs should be disallowed.
[32] In the light of the conclusions reached the following order is made:
1. The appeal is allowed with costs including the costs for special leave to appeal to this Court but excluding the costs related to volumes 3,4 and 7 of the appeal record;
2. The order of the Full Bench is set aside and for it is substituted the following:
'2.1 The appeal succeeds with costs, including the costs of the application for leave to appeal;
2.2 Paragraphs 4 and 5 of the order of the Court below is set aside and for it is substituted the following:
2.2.1 "The Counter-application is dismissed with costs".'
__________________
M S NAVSA
JUDGE OF APPEAL
CONCUR:
HOWIE JA
SAFLII:
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.RTF of original document