REPORTABLE
IN THE HIGH COURT OF SOUTH AFRICA (WESTERN CAPE HIGH COURT, CAPE TOWN)

In the matter between:

(formerly TH RESTAURANTS CC)
(Registration no 2010/013014/23)

And

EDEN ON THE BAY
(Registration No 2007/021783/07)

(Registration no 2006/012636/07)

NATIONAL EMPOWERMENT FUND TRUST

Coram:        Yekiso, J Delivered:     8 June 2012 Summary:
Contract (franchise agreement) - whether obligations reciprocal or collateral Interpretation of contract - phrase in consideration of when contract containing a "without deduction or set-off' clause
Held - obligations reciprocal as opposed to being collateral

REPORTABLE

IN THE HIGH COURT OF SOUTH AFRICA
(WESTERN CAPE HIGH COURT, CAPE TOWN)

In the matter between:
T H RESTAURANTS (PTY) LTD 
(formerly TH RESTAURANTS CC)
(Registration no 2010/013014/23)						Applicant

And

EDEN ON THE BAY
(Registration No 2007/021783/07)

(Registration no 2006/012636/07)

THE TRUSTEES FOR THE TIME BEING OF THE N

Adv K loulianou

Attorneys for Applicant:		Steve loulianou Attorneys	

REPORTABLE
IN THE HIGH COURT OF SOUTH AFRICA (WESTERN CAPE HIGH COURT, CAPE TOWN)

In the matter between:

(formerly TH RESTAURANTS CC)
(Registration no 2010/013014/23)

And

EDEN ON THE BAY
(Registration No 2007/021783/07)

(Registration no 2006/012636/07)

NATIONAL EMPOWERMENT FUND TRUST

JUDGMENT DELIVERED ON 8 JUNE 2012

YEKISO, J

instituted proceedings against the first, second and the third respondent for various forms of relief.

[1.1.] The first such relief is a declarator confirming that the franchise agreement concluded between the applicant and the first respondent has since been terminated.

[1.2.] The second such relief sought is an interdictory relief restraining the first respondent from continuing to conduct the franchise business at Shop no 56 in the development known as Eden on the Bay ("the premises") under the name and style Karoo Cattle & Land, including the use of the applicant's trademarks, signs, cards, notices, stationery and any other displays or advertising matter of any nature whatsoever indicative of the franchise granted in the franchise agreement.

[1.3.] The third such relief sought is an order declaring that the applicant is entitled to be substituted as the lessee of the premises where the first respondent is presently conducting the franchise business in terms of the lease agreement concluded between first and the second respondent, coupled with the order for the eviction of the first respondent from such business premises.

has failed to carry out multiple obligations resting upon it in terms of the franchise agreement and that, arising from the applicant's failure to carry out such obligations, the first respondent, as the franchisee, is not required to perform. The first respondent goes further to say that since the conclusion of the franchise agreement it has effected payments totalling some R800,000-00 in respect of royalties and advertising fees against which it has received no counter-performance and is, accordingly, entitled to recover the monies so paid.

concerned, it is contended on behalf of the first respondent that the lease agreement on which the applicant relies for the proposed substitution, does not create a benefit of substitution as a lessee capable of acceptance by the applicant. The benefit of substitution and the proposed substitution of the applicant as the tenant of the business premises in point is challenged on the basis that the entity, T H Hyde Park, which purportedly ceded its rights in terms of the lease agreement to the applicant, did not, in itself, acquire rights in terms of the lease capable of being ceded to the applicant. The further issue, on the basis of which the first respondent resists the relief sought, in as far as the lease agreement is concerned, is the question as to whether the applicant has indeed exercised an election to be substituted as a tenant whilst vested with a right to do so in terms of the lease agreement. It is thus contended on behalf of the first respondent that even if it were accepted that the applicant is vested with a right to be substituted as a tenant, the applicant has not exercised its right to be substituted as a tenant. Furthermore, the first respondent denies that the lease agreement, which constitutes the basis for this kind of the relief sought, is of force and effect, for want of fulfilment of a suspensive condition, thus placing the applicant's entitlement to rely on annexure "I" to the lease agreement which entitles the applicant to be substituted as a tenant in dispute.

THE PARTIES
[4] The applicant is T H Restuarants (Pty) Limited (formerly TH Restaurants CC, registration number 1989/013014/23), a limited liability company duly incorporated in terms of the laws of the Republic of South Africa, bearing registration number 2010/013014/23, and carrying on business as franchisors from its principal place of business situate at 53 Oak Road, Athol, Sandton, Johannesburg. The applicant was converted to a company during 2010 in terms of section 29C of the Companies Act, No 61 of 1973.

[5] The first respondent is Rana Pazza (Pty) Limited, trading as Karoo Cattle and Land, a limited liability company duly incorporated in terms of the laws of the Republic of South Africa, bearing registration number 2007/021783/07 and carrying on business as a restaurant at Shop No 57A, Eden on the Bay, Big Bay, Western Cape Province.

company duly incorporated in terms of the laws of the Republic of South Africa, bearing registration number 2006/012636/07 and having its principal place of business at Eden on the Bay, Big Bay, Western Cape Province.

person of 74 Riemland, Wapadrand Estate, Stangketting Street, Wapadrand, Tshwane, Gauteng Province. The third respondent is cited by reason of the interest she may have in this application and no relief is sought against her, save in the event of her opposing this application.

[8] The fourth respondent is the trustees for the time being of the National Empowerment Trust, a trust established in terms of section 2, read with section 4 of the National Empower Fund Trust Act, 105 of 1998, of West Block 187, Rivonia Road, Momingside, 2057.

THE FRANCHISE AGREEMENT
[9] On 24 August 2009, and at Rosebank, Johannesburg, in the Province of Gauteng, the applicant, represented by its director, Theodore Holiasmenos and the first respondent, represented by Ntsebe Flora Matjila, the third respondent in these proceedings, concluded a written franchise agreement in terms of which the applicant granted to the first respondent the non-exclusive right and licence to operate a restaurant business trading under the name and style of Karoo Cattle & Land.

[11] Annexed as schedule "B" to the franchise agreement is a deed of suretyship in terms of which Ntsebe Flora Matjila, the third respondent, binds herself as a surety and co-principal debtor in favour of T H Restaurants CC for all sums of money which might become owing by Rana Pazza (Pty) Ltd, the latter entity being the franchisee in the franchise agreement.

[12] Paragraph 6 of the franchise agreement sets out the initial obligations of the parties. The franchisor's initial obligations are set out in paragraph 6.1 of the franchise agreement. These obligations, amongst others, involve the following, namely: advice on the initial opening, advertising and promotional campaign for the business and the supply of point of sale and promotional material; advice on initial staffing requirements and staff recruitment; advice and assistance on merchandising of products and general initial advice to enable the franchisee to operate the business efficiently.

[13] The franchisee's initial obligations to be complied with in terms of the franchise agreements are set out in paragraph 6.2 of the franchise agreement. These involve, amongst other things, the securing of the right to occupy the premises by lease or otherwise; the purchase or otherwise acquisition and installation of all necessary equipment; obtain all statutory licenses required to conduct the relevant business and to obtain the necessary stationery, promotional literature and signage as stipulated by the franchisor.

[14] The franchisor's continuing rights and obligations are set out in clause 7 of the franchise agreement. Clause 7.2 of the franchise agreement, where appropriate, provides:

"7.2        The Franchisor shall at all times during the term of this agreement:
7.2.1 supply the Franchisee with sales and marketing literature, directives, updates to the operations manual, bulletins, product and pricing information (collectively 'the material'), which shall pertain specifically to the system and the products and provide the Franchisee with details of any alterations or improvements in or to the system. Such material, together with updates thereof, shall at all times be supplied by the Franchisor at such times as the Franchisor may, in its sole discretion, consider appropriate. In the event of any dispute, the authentic text of such material shall be the copies kept by the Franchisor at its head office. The Franchisee hereby acknowledges that the copyright in the operations manual and the material is vested in the Franchisor;
7.2.4. provide the Franchisee with guidance on standards of operation and service;
7.2.6.      conduct quality control inspections;
7.2.8. conduct advertising and marketing of the trademarks;
7.2.9. assist the Franchisee in developing a marketing plan for the franchise;
7.3. Notwithstanding anything to the contrary herein contained, it is recorded that the nature and extent of the advice and assistance to be furnished by the Franchisor will at all times be within the Franchisor's entire discretion.

[15] Clause 10 of the franchise agreement, under the heading "fees and charges", where appropriate, provides as follows:

"10.1. In consideration for rights awarded to the Franchisee in terms of clause 6.1 above, the Franchisee shall pay to the Franchisor the sum of R150, 000.00 (one hundred and fifty thousand rand) (excluding VAT) simultaneously with the Franchisee's signature of the agreement.

[16] Clause 12 of the franchise agreement caters for advertising. In terms of clause 12.1 thereof, the parties agreed that the first respondent would be obliged to expend amounts on advertising and/or promotional activities, and that the first respondent would be obliged to contribute to that expenditure on a monthly basis as set out in clause 12.2 thereof.

[17] In terms of clause 12.2 the parties agreed that the advertising fee payable by the first respondent to the applicant, and which would be based upon the gross turnover percentage of the first respondent's gross turnover, would be payable in arrears, within five (5) days of the end of each and every month.

THE LEASE AGREEMENT
[18] On or about 28 October 2009 the third respondent, representing the first respondent, and the second respondent, concluded a lease agreement in respect of the business premises. The lease agreement is similarly a lengthy document consisting of somewhat 53 pages.

[19] Clause 16 of the lease agreement, under the heading "Suspensive Conditions", provides as follows:

"16.1 In the event of the tenant being a franchisee, the tenant shall secure a T H Restaurant CC franchise entitling it to conduct a Karoo Cattle & Land business from the premises by no later than 19 August 2009 and the tenant shall furnish the landlord with written proof thereof by no later than 19 August 2009, failing which this offer and agreement shall lapse and be of no further force or effect."
It is for want of fulfilment of the suspensive condition that the first respondent contends the agreement between it and the applicant is not of force and effect. [20] The applicant's cause of complaint arises from the first respondent's alleged failure to pay franchise fees and advertising costs. According to the applicant's founding papers, the first respondent, since the conclusion of the franchise agreement and commencing trade, paid royalty fees and advertising costs only up and until the month of April 2010. The applicant alleges in its founding papers, for the period May 2010 to August 2011 the first respondent became indebted to it in the aggregate amount of R446,750.24 in respect of unpaid royalty/franchise fees and advertising costs.

[21] When the first respondent failed to remedy its default despite demand to do so, the applicant instituted an action out of the North Gauteng High Court under case number 52102/2011 for the recovery of the amount due. Once the summons was served on the first respondent in that action, and an entry of appearance to defend filed, the applicant brought an application for summary judgment which was opposed both by the first and the third respondent, the latter in her capacity as surety and co-principal debtor. That application for summary judgment was heard in the North Gauteng High Court on 13 December 2011, and following argument, the application for summary judgment was dismissed and the first respondent was granted leave to defend the action.

[22] In resisting the granting of summary judgment, the first respondent denied in its opposing affidavit that it is indebted or liable to the applicant in the sum of R446,750.24, whether wholly or in part, together with interest thereon as claimed or at all. The first respondent, in broad terms, states in its opposing affidavit that the rationale for withholding payment of royalty and advertising fees is expressed to be on the basis that the franchise agreement is a reciprocal contract containing reciprocal obligations, and that the applicant failed to fulfil its obligations, thus entitling the first respondent to withhold its counter-performance.

[23] The institution of an action in the North Gauteng High Court did not bring about any change. The first respondent persisted in failing to pay the applicant both franchise fees and advertising costs. For the period September 2011 up until 2 February 2012, so the applicant alleges in its founding papers, the arrears were in the further amount of R207,180.26.

[25] Furthermore, on 2 February 2012 the applicant's attorneys of record addressed a letter to the second respondent's attorney notifying the latter of the termination of the franchise agreement, and of the applicant's election to be substituted as the lessee at the premises in accordance with clause 21 of annexure "I" to the lease agreement.

[26] Once the franchise agreement was cancelled and the applicant elected to be substituted as the tenant at the business premises, and on 22 January 2012, the applicant proceeded to institute these proceedings out of this court for the relief set out in paragraphs 2 to 6 of the notice of motion.

EVALUATION
[27] It is common cause that the first respondent is in occupation of the premises and that it continues to carry on trade of the franchise restaurant at the business premises. It is further common cause that the first respondent is withholding payment of royalty and advertising fees as provided for in the franchise agreement. In paragraphs [2] and [3] of this judgment, I have set out the basis upon which the first respondent resists the relief sought, namely, on the basis that, so the first respondent alleges in its answering affidavit, the applicant has failed to carry out a series of obligations resting on it the counter-performance of which is the payment of royalty and advertising fees; that the suspensive condition contained in clause 16.1 of the lease agreement has not been fulfilled; that arising from the suspensive condition not having been fulfilled, the entire lease agreement has lapsed and is, accordingly, of no force and effect for want of fulfilment of the suspensive condition; and that, in any event, the applicant has not made an election to be substituted as a tenant timeously as provided in clause 21 of annexure "I" to the lease agreement. I shall then proceed to examine these defences in turn.

EXCEPTIO NON ADEMPLETI CONTRACTUS

ARE THE PARTIES' OBLIGATIONS RECIPROCAL?
[31] The parties' obligations are set out in clause 6 under the heading "Initial Obligations of the Parties"; clause 7 under the heading "The Franchisor's Continuing Rights and Obligations"; clause 9 under the heading "Training"; and clause 10 under the heading "Fees and Charges".

[33] Clause 10 of the franchise agreement makes provision for payment of an amount of money by the franchisee on signature of the franchise agreement as well as payment of royalty fees. Payment in consideration for the granting of rights awarded in terms of the franchise agreement is provided for in clause 10.1 which provides as follows:
"In consideration for rights awarded to the franchisee in terms of clause 6.1 above, the franchisee shall pay to the franchisor the sum of R150,000.00 (one hundred and fifty thousand rand) (excluding VAT) simultaneously with the franchisee's signature of this agreement".

Clause 6.1 referred to in clause 10.1 of the agreement relates to those multiple obligations which the franchisor undertakes to make available to the franchisee and these, amongst others, relate to advice as to location; advice to trading styles; advice on initial opening; advertising and promotional campaign and so on. The once-off payment of an amount of R150,000.00 is in consideration of these services.

[34] Paragraph 10.2, which provides for payment of royalty and advertising fees, reads as follows:
"In consideration for the grant to it of the license, and in consideration of the continuing services to be provided by the franchisor, the franchisee shall pay to the franchisor a monthly royalty specified in annexure "S9" of schedule A on each and every month during the term of this agreement, which monthly royalty is based on the previous month's gross turnover..."

The continuing services referred to in clause 10.2 invariably include those services which the franchisor, in terms of clause 7.2 of the agreement, undertakes to perform at all times.

[35] Thus, in very clear and unambiguous terms, the payment contemplated in clause 10.2 is payment in consideration for the granting to the franchise of a licence and those continuing obligations which the franchisor undertakes to perform at all times during the term of the agreement.

[42] Shakenovsky AJ (as he then was) concluded that the parties' obligations were collateral as a consequence of a detailed interpretation of the contract there at issue coupled with consideration of such other factors relating to exclusion of warranties as well as the adjustment mechanism provided for in the contract. Shakenovsky AJ reasoned as follows in arriving at the conclusion that the parties' obligations were collateral as opposed to being reciprocal:

[43] Shakenovsky AJ, having regard to clause 4.2 of the agreement prohibiting deduction or set-off of the parties' respective claims and the various provisions relating to adjustment mechanisms, concluded that the respondent cannot rely on set-off to avoid payment of portion of the purchase price.

[48] In the matter before me the point at issue is the franchisor's obligations which he undertook to perform at all times and the franchisee's obligation to pay royalty and advertising fees in consideration of those services which the franchisor undertook to perform at all times and, arising therefrom, whether the parties' obligations, in the circumstances of this matter, are reciprocal. In my view, the parties' obligations with regards to the issue of rendering services contemplated in the franchise agreement and payment for such services, based on the interpretation of the franchise agreement, are reciprocal despite there being a "without deduction or set-off clause contained in the franchise agreement.

EVALUATION OF EVIDENCE
[49] It can be accepted as common cause that at a certain point the first respondent withheld payment of royalty and advertising fees. In paragraph [21] of this judgment I referred to an action instituted by the applicant against the first respondent out of the North Gauteng High Court under case number 52102/2011 for the recovery of an amount allegedly due and payable in respect of royalty and advertising fees. In resisting an application for summary judgment in that matter, the first respondent alleged in its opposing affidavit that the parties' obligations, arising from the contract which constituted the basis of a claim against it, were reciprocal; that the applicant in those proceedings had failed to fulfil its obligations in terms of the agreement, in that, amongst other obligations that the applicant has failed to fulfil, the applicant, and contrary to clause 7.2.1 of the agreement, failed to supply the first respondent with sales and marketing literature; directives; updates to the operations manual; bulletins; product and pricing information; details of any improvement in or to the system; no regular visits to the premises were ever conducted by the applicant and that the applicant failed to give the first respondent assistance in the development of a marketing plan for the franchise and took no steps to promote good relations between itself and the first respondent. The first respondent, in resisting the relief sought in this application, reiterates the basis on which it resisted the applicant's claim in the summary judgment proceedings instituted in the North Gauteng High Court.

[50] In its founding affidavit in these proceedings the applicant merely contented itself with the bald denial of the allegations advanced in the affidavit deposed to in resisting summary judgment. It is only in its replying affidavit that the applicant, for the first time, seeks to assert that it has carried out its obligations under the franchise agreement. Even in its attempt to seek to assert that it has carried out its obligations, the applicant does not produce the barest minimum of evidence in the form of either a balance sheet or a statement of source and application of funds in an attempt to demonstrate how funds paid in respect of advertising fees were received and applied or, with regards to the general body of the franchisees, how funds received in respect of advertising fees are generally applied.
[51] Based on the belated assertion by the applicant in its replying affidavit that it fully complied with its obligations in terms of the franchise agreement a dispute of fact obviously does arise. In my view, and based on those facts averred in the applicant's affidavit that have been admitted by the first respondent, together with those facts alleged by the first respondent, such dispute should be resolved in favour of the first respondent.

[52] In the light of the conclusion I reach in paragraph [48] of this judgment I, accordingly, cannot confirm and declare that the franchise agreement concluded between the applicant and the first respondent has been validly terminated as prayed for in paragraph 2 of the notice of motion. It, therefore, follows that the remainder of the relief sought in paragraphs 3 to 5 of the notice of motion have to fall on the way side. I was informed by counsel for the applicant in the course of argument that the relief sought in terms of paragraph 6 of the notice of motion is no longer being pursued in these proceedings.

[53] I was similarly informed during the course of argument when the matter was argued before me, and indeed so it appears on basis of the papers, that the first respondent still conducts and carries on with the franchise restaurant at the leased premises. The conclusion I have reached with regards to the issues raised in this matter does not preclude the applicant in pursuing its remedies arising from such circumstances in the same manner it did by way of proceedings instituted out of the North Gauteng High Court. In short, therefore, the applicant is not left without a remedy.

[55]       In the result, the following order is made:

 N J Yekiso, J