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Jersey Unreported Judgments |
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You are here: BAILII >> Databases >> Jersey Unreported Judgments >> Hard Rock Ltd and Another -v- HRCKY Ltd [2016] JRC 129 (27 July 2016) URL: http://www.bailii.org/je/cases/UR/2016/2016_129.html Cite as: [2016] JRC 129 |
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Companies - application by the defendant to adduce expert evidence relating to franchise agreements.
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Before : |
Advocate M. J. Thompson, Master of the Royal Court |
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Between |
Hard Rock Limited |
First Plaintiff |
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And |
Hard Rock Café International (STP) Inc |
Second Plaintiff |
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And |
HRCKY Limited (a company incorporated in the British Virgin Islands) |
Defendant |
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Advocate M. P. Boothman for the Plaintiffs.
Advocate N. M. Sanders for the Defendant.
contents of the judgment
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Paras |
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1 |
Introduction |
1 |
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2. |
Background |
2-5 |
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3. |
The Parties' contentions |
6-20 |
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4. |
Decision |
21-37 |
judgment
the master:
1. This judgment represents my decision in respect of an application by the defendant to (1) adduce expert evidence in relation to franchise agreements and (2) to adduce evidence from a Mr Carmen Caruso as the proposed expert in the field of franchise agreements.
2. The general background to this dispute is set out in an earlier decision in this matter reported at Hard Rock Ltd and Another-v-HRCKY Ltd [2013] JRC 244B at paragraphs 3 to 12 which I adopt.
3. The effect of this decision is that the only live issue between the plaintiffs and the defendant is the defendant's counterclaim. The defendant has therefore effectively become the plaintiff in respect of the sole remaining issue although I will continue to refer to it as the defendant.
4. Following on from a second judgment in this matter reported at Hard Rock Ltd and Another-v-HRCKY Ltd [2015] JRC 117, the remaining issues between the parties arising out of the counterclaim are as follows:-
(i) Whether there is an implied term of the franchise agreement that the parties would cooperate with each other in good faith in order to promote the values and purposes express or implicit in the franchise agreement.
(ii) The plaintiffs by reference to following paragraphs of the amended answer are said to have breached the above implied term by: -
(a) refusing to accede to requests to reduce portion sizes and vary the prescribed menu (paragraph 19);
(b) refusing to permit the defendant to reduce its opening hours (paragraph 20);
(c) insisting that the defendant participated in a loyalty programme (paragraph 21); and
(d) requiring the defendant to employ a number of managers whom the defendant claims it was forced to dismiss for dishonesty or incompetence.
(iii) The other dispute between the parties concerns an allegation that the plaintiffs represented that, if the defendant entered the franchise agreement, it could expect to make returns of between 15% to 30% per year and that its outlay/investment could be claimed back within three years, to five years - (see paragraph 24(D) of the amended answer).
(iv) The defendant alleges that this representation was made by the plaintiffs either with knowledge that it was untrue or alternatively the plaintiffs were reckless as to whether the statement was or was not true or made in bad faith. Paragraph 24(F) of the amended answer states "in truth and in fact the plaintiffs were aware at the time of making the representations and thereafter that the restaurant business is only profitable in very few locations and in the majority locations it was unprofitable and loss making. Where the restaurant business outgoings are high as in the Cayman Islands, a matter of which the plaintiffs were well aware - it would be unprofitable if run in accordance with the plaintiffs' business model which it required as a term of the franchise agreement. Had the defendant been aware of this fact it would not have entered into the franchise agreement or expended the very substantial sums it has expended which have been lost."
5. On 21st April, 2016, I gave certain directions including permitting the parties to serve an expert accountant's report and a schedule of loss with the defendant's report being produced by 20th July, 2016, and the plaintiffs' report in reply being produced by 31st August, 2016. I ordered sequential exchange because the plaintiffs, until they saw the defendant's expert's report, beyond what is set out in the pleadings, did not know what observations by way of opinion the expert of the defendant would be making.
6. Advocate Sanders for the defendant argued that expert evidence on franchise agreements generally was required because in Jersey there was no judicial decision on the operation of franchise agreements or any code of practice as to how franchise agreements should operate. This was relevant to the implied duty of good faith. In his bundle he referred me to codes of ethics issued by the World Franchise Council, the European Franchise Federation and the British Franchise Association. He also produced a statement of guiding principles from the International Franchise Association, an Australian regulation on franchising produced in 2014 and guidance issued by the Australian Competition and Consumer Commission as to what is meant by acting in good faith. In the absence of any judicial decision or code of conduct relating to the operation of franchise agreements in Jersey, expert evidence was necessary to assist the Jurats on how such agreements should operate, the standards to be applied, and by reference to those standards what information should have been produced by the plaintiffs.
7. He drew my attention to the fact that the information that the plaintiffs had provided to the defendant was that required by the Federal Trade Commission of the United States. This was because part of the Hard Rock Group was based in the United States. I note that the second plaintiff is a New York Corporation. The Jurats will therefore need the assistance of an expert to set out what the standard of good faith requires for franchise agreements.
8. In support of the above approach Advocate Sanders referred me to the Yam Seng Pte Limited v International Trade Corporation Limited [2013] EWHC 111 (QB) 1321. This authority had been recited in the earlier decision in 2013 in this matter. At paragraph 59 I stated in relation to it as follows:-
I also referred to the Yam Seng decision at paragraph 85 as follows:-
9. In addition to paragraph 134 of Yam Seng, Advocate Sanders also drew my attention to paragraphs 137 to 142 and 144 all of which he contended justified adducing the expert evidence sought. These paragraphs state as follows:-
10. As part of the supporting material relied upon Advocate Sanders had included a speech given by Mr Caruso entitled "Expert Witnesses In Franchise Cases" to the American Bar Association in 2002. Within the speech that Mr Caruso observed "a franchisee might want to call an expert to testify that in his own opinion there was no legitimate business reasons for the franchisor's conduct and that his implied conduct was in bad faith."
11. Advocate Sanders also referred me to Mr Caruso's experience as an expert witness which meant he could help define industry standards for the Royal Court and provide his opinion as to whether or not those standards had been met.
12. Advocate Boothman in response firstly referred me to the terms of the franchise agreement itself which at clause I on page 50 provided the applicable law on jurisdiction was that of Jersey and in clause H on page 54 stated "it is the intention of the parties that the negotiation, execution delivery and performance of this Agreement and the other agreements, instruments and documents to be executed and delivered in connection herewith and the consummation of the transactions contemplated hereby and thereby not trigger or be subject to franchise laws and regulations of any jurisdiction." In other words any laws or regulations of any other country did not apply to this franchise agreement by the terms of the agreement itself. Only Jersey law was relevant.
13. Secondly, he argued that expert evidence was not necessary to decide whether or not there had been a breach of an implied term of good faith (assuming one applied). Assessing a breach was a straightforward matter. He pointed me to a section found in the Competition and Consumer Commission code of conduct cited by the defendant in its skeleton argument that outlined the questions to be asked in assessing a lack of good faith as follows:-
"(i) Have you been honest with the other party;
(ii) Have you considered the other party's interests;
(iii) Have you made timely decisions;
(iv) Have you consulted with the other party regarding issues/proposed changes?;
(v) Do you have a contractual right to act in that way?;
(vi) Are you imposing any conditions on the other party? Are these conditions necessary to protect your interests?;
(vii) Where a dispute has arisen have you attempted to resolve the dispute (either directly or with another party, or through mediation)?
(viii) Are you acting for some ulterior purpose?"
14. Advocate Boothman contended that the Jurats were perfectly capable of answering these questions in the context of this dispute and they did not need or require the assistance of a franchise expert.
15. He also referred me to Nott v Strzelecki [2014] JRC 155A which concerned an application for permission to adduce expert evidence in the field of road accident investigation which was permitted albeit with the report being limited. At paragraph 20 of Nott I stated as follows:-
16. He could not see what Mr Caruso could add to the matters the Royal Court had to decide. There was no issue of any technical terminology being raised on the pleadings, there was nothing in the pleadings raising any custom or industry practice to deal with ambiguous terms or what the parties intended, and the expectations of the parties was a matter of evidence and cross-examination.
17. He also expressed concerns that introducing expert evidence would delay matters in respect of an action that had already gone on for too long due to the defendant's delay in progressing its counterclaim to trial.
18. Advocate Sanders in reply firstly indicated that trial dates had been fixed for February. Therefore there was time to adduce expert evidence without prejudicing the trial dates.
19. Secondly, the proposed expert would be able to assist the Jurats with what duties the plaintiffs had not adhered to, by reference to what a reasonable person should do. He could therefore give his opinion, but it was ultimately for the Jurats to decide.
20. It was necessary for the Jersey Court to work out a code as to what the implied term of good faith meant in relation to the operation of franchise agreements. Expert evidence would assist the Court in this task.
21. In terms of the approach to be taken, this was set out in the decision of AG v Bhojwani [2009] JRC 207A which I applied in the Nott case. The relevant part of Bhojwani is as follows:-
22. In order to follow this approach, I consider the starting point is to review what is in issue in these proceedings. In my judgment there are three issues:-
(i) Whether the term pleaded at paragraph 2 of the amended answer and counterclaim should be implied into the franchise agreement;
(ii) Whether the plaintiffs have breached any such implied term by reference to the matters which appear at paragraphs 19 to 22 of the amended answer and counterclaim set out above; and
(iii) Whether the plaintiffs misrepresented the profitability of the franchise agreement either knowingly or being reckless as to whether or not statements made to the defendant were true.
23. The issue I have to decide is whether expert evidence is relevant to any of these three issues.
24. In relation to the first issue, this is a question of law (see paragraph 16 of Sutton v Insurance Corporation Channel Islands Limited [2011] JLR 80). The various codes of practice to which I was referred in different jurisdictions may assist in relation to this argument because a number recognise obligations consistent with implying a term of good faith. By way of example clause 9 of the International Franchise Association statement of guiding principles states that "clarity and transparency is essential for establishing and maintaining positive franchise relationships and for the goal of continuous improvements in the franchising environment". The Australian code of conduct sets out in clause 6 an obligation to act in good faith. The Australian Competition Consumer Commission defines good faith as requiring "parties to an agreement to exercise their powers reasonably and not arbitrarily or for some irrelevant purpose. Certain conduct may lack good faith if one party acts dishonestly or fails to have regard to the legitimate interests of the other party". The European Code of Ethics of Franchising at clause 24 states "parties shall exercise fairness in their dealings with each other."
25. All these materials are pointers in favour of the Royal Court either implying a term of good faith generally into a contract or in relation to franchise agreements as part of its decision. It is also open to the Royal Court to consider whether it wishes to apply or have regard to the extracts in the Yam Seng case set out above. However, this legal issue does not require expert evidence. The various codes of conduct to which I was referred are documents in the public domain and can be placed before the Royal Court to persuade the Royal Court to imply the term argued for in this case. The materials put forward also did not contain a detailed analysis of what an obligation of good faith meant, or how it applied to any factual scenario. That is not surprising; franchise agreements can cover a whole host of businesses. The legal issue for the Court is whether it wishes to imply the terms sought by the defendant. This will be based on an analysis of existing principle (as explored in Sutton); I accept that a party's submissions may include developments in other jurisdictions whether by judicial decision or by reference to the types of materials referred to me by Advocate Sanders but that does not require expert evidence of the kind suggested.
26. In relation to the issue of whether or not the parties have breached any implied term, the breaches are clearly set out. They are also not complex. Ultimately the Jurats will be required to understand the running of a single restaurant business and the effect of the matters complained about. They will have the benefit of evidence from any witnesses the defendant chooses to call. This would clearly include Mr Kevin Doyle who has already filed a number of affidavits in relation to this dispute. I was also informed that the defendant's accountant who maintained the financial records of the defendant would give evidence. I would expect their evidence to set out the impact of the refusal of the requests and what would have happened had the requests been granted. They will also be able to give evidence as to the viability of the franchise arrangement.
27. I have also already permitted expert evidence to be adduced by both parties from an accountant. Such evidence does not just go the quantum of losses but also an independent analysis of the impact of the arrangements required by the plaintiffs on the defendant's business. I made this order because I was satisfied that the tests in Bhojwani were met and in particular that an accountant's analysis of the financial records of the defendant and any financial disclosure provided by the plaintiffs would assist the Jurats to determine whether or not a breach had taken place.
28. However, I have not reached the same view in respect of the evidence of Mr Caruso. I do not consider it necessary for the Royal Court, in deciding whether or not breaches of any implied term found to exist have occurred, to have to formulate a code of conduct on the operation of franchise arrangements. The case is more straightforward. The Court will have to decide whether or not as a matter of law the franchise arrangements were subject to the implied term relied upon. Secondly, the court will have to decide whether or not there has been a breach. The categories of evidence I have referred to will enable the Court to perform this task. Ultimately this case is about the operation of a single restaurant business over a number of years, the reasons why that business was not profitable and whether that was due to breach of contract on the part of the plaintiffs or whether the defendant simply entered into a bad bargain.
29. The same analysis applies to the misrepresentation claim. It is a question of fact whether a misrepresentation was made or not which is solely a matter for the Jurats and does not require any expert evidence.
30. The question of what the plaintiffs knew is a matter of analysis of the plaintiffs' own records, involving, if the defendant so chooses, its expert accountant, cross-examination of any witnesses the plaintiffs choose to call and submissions. Again, I am not persuaded how Mr Caruso can assist.
31. Insofar as the information provided to the defendant was required to accord to the practices required by the Federal Trade Commission, the case is not pleaded on the basis that any such obligations applied or that the plaintiffs breached them. Rather the case is pleaded either as breach of an implied term of good faith in a manner that is clearly set out, or alternatively on the basis of a clear misrepresentation as to profitability. Even if such standards were relevant that would simply lead to Mr Caruso adducing evidence of those standards. It would still be a factual question for the Jurats as to whether they had been breached. I should add that while the standards were not produced to me, they are publically available on the Federal Trade Commission website and only appear to relate to disclosure obligations prior to a franchise agreement being entered into. There does not appear to contain any ongoing obligations of good faith. They also appear only to apply to franchise agreements operating within the United States.
32. I am also not persuaded that it would be appropriate to permit Mr Caruso to give his observations on the evidence of factual witnesses. That is the function of the Jurats. As noted in Nott, (at paragraph 40) the English Court of Appeal Smith v Fordyce [2013] EWCA Civ 320, warned as follows:-
33. While that observation was made in the context of an accident reconstruction expert, I consider the same approach applies to this application. Any opinions Mr Caruso might give are his attempts to interpret the evidence and should be viewed with extreme caution.
34. Mr Caruso in a speech given to the American Bar Association called "Expert Witnesses in Franchise Cases" a copy of which was referred to me, himself recognised that arguments might arise in relation to whether or not expert evidence was permitted. He stated "for example, where there is a claim for breach of the implied covenant of good faith and fair dealing, a franchisee might want to call an expert to testify that in his or her opinion, there was no legitimate business reason for the franchisor's conduct, and impliedly the conduct was in bad faith. This type of testimony approaches the giving of an opinion on an ultimate issue. The party opposing the admissibility of this opinion but argue that the expert would literally be instructing the trier of fact how to decide the case. The proponent will attempt to push the envelope in framing the questions posed to the expert in order to suggest the desired resolution of the case without purporting to decide the case."
35. In my judgment the present application seeks to 'push the envelope' and to introduce Mr Caruso to give an opinion on an ultimate issue. Such an approach is not justified by reference to Bhojwani and is not necessary in this case which concerns the operation of a franchise agreement for one restaurant. I accept that in other cases e.g. allegations of medical negligence, expert evidence may well be necessary because expert medical opinion is required to assist the Jurats on the conduct of a doctor. However, this case is very different and the Court will have the benefit of expert evidence from an accountant who can make observations on the financial implications of the actions of each of the parties. Mr Caruso although I am satisfied he is an experienced lawyer in the area of franchise agreements, would only be giving his view on the evidence generally. The conclusion I have reached is that for the issues in this case the Jurats, who are experienced judges of factual matters in a wide variety of cases some far more complex than this one, will be able to form a sound judgment on the basis of the other evidence that will be adduced and do not need the assistance of Mr Caruso to do so.
36. I am also not satisfied that Mr Caruso is qualified to assist as an expert in respect of the factual issues in this case. While he has acted as an expert witness according to his resume, the only specific example given relates to the standard of care applicable to lawyers engaged in the practice of franchise law or litigation which franchise laws were implicated or should have been recognised by the attorneys handling the case. I quite understand in a case of negligence against a legal adviser in a specialist field why another legal adviser might be permitted to give evidence on the failings of the lawyer being pursued. However, that is not the present application. The present application is for Mr Caruso to give evidence on the operation of a franchise agreement not on the practices of a lawyer. I am not satisfied from his resume that he is qualified to do so. As Mr Caruso notes in his own speech referred to above in the section heading "finding the best expert", he states "the expert's qualifications should match the case to the extent possible. Specifically, franchising covers a diverse series of industries, and to the extent possible, the expert should have relevant experience with the specific type of business that was franchised (retail, hospitality, restaurant, etc.)." No evidence has been produced to show that Mr Caruso has relevant experience to comment on the operation of a restaurant under a franchise agreement.
37. In conclusion, expert evidence is not required to resolve the question of law in dispute in this case. In relation to the questions of fact in issue in this case I am not satisfied that the expert evidence the defendant wishes to adduce would assist the Jurats so that without it they could not form a sound judgment on the matters in issue by reference to the other evidence that will be before them. While I accept that Mr Caruso is experienced in US franchise law, I am not satisfied that Mr Caruso has the relevant qualifications to provide an opinion on the operation of a franchise agreement of a restaurant in the Cayman Islands. The defendant has already had permission to adduce evidence from an accountant on the financial issues arising in this case. I do not consider that Mr Caruso will add anything to such evidence and that of the factual witnesses. Finally, if I were to have permitted his involvement, this would only add to cost and might delay adjudication of a dispute, which has not been progressed by the defendant (as plaintiff to the counterclaim) in accordance with timeframes expected by the Court. Accordingly, for all these reasons, the defendant's application is refused.
Hard Rock Ltd and Another-v-HRCKY Ltd [2013] JRC 244B.
Hard Rock Ltd and Another v HRCKY Limited [2015] JRC 117.
Yam Seng Pte Limited v International Trade Corporation Limited [2013] EWHC 111 (QB) 1321.
Nott v Strzelecki [2014] JRC 155A.
Sutton v Insurance Corporation Channel Islands Limited [2011] JLR 80.
Smith v Fordyce [2013] EWCA Civ 320.
