HARD ROCK CAFÉ, DOL & GOOD FAITH
Advocate Timothy Hanson appeared for the Appellant in the recent appeal of HRCKY Ltd against Hard Rock Ltd & Hard Rock Café International (STP Inc). Pursuant to leave having been granted in  JCA 152 on the issue of dol (loosely to be translated as fraud), the appeal was heard by the Court of Appeal of Jersey on 21st January, 2019.
The complexity of the issues raised has meant that judgment has been reserved. However, the decision will involve a major reconsideration of Jersey’s contract law and, in particular, the role of dol, misrepresentation, good faith and the effectiveness of certain contractual clauses known as “entire contract” and “non-reliance” clauses.
The Facts & Arguments
Hard Rock franchises have been granted through the vehicle of a Jersey registered company called Hard Rock Ltd, granting rights to operate a Hard Rock franchise far beyond the shores of Jersey. In this case, the agreement dates to 1999 and granted rights to operate a franchise in Cayman. Surprising as it may seem for a global operation, Jersey law, however, was specified as the applicable law in the Hard Rock franchise agreement.
It may immediately be apparent that Jersey has never introduced specific statutory protections for those operating a franchise which involves an asymmetric “relational” contract, where the franchisee is reliant upon the knowledge and experience of the franchisor that grants the franchise. Many countries around the world have had to introduce specific statutory protections to prevent abuse by franchisors and to protect those buying a franchise from being misled. Sometimes, the courts have simply had to be ingenious in fashioning the law to meet the particular problems posed.
In this case, it was accepted that HRCKY as franchisee (who “bought” the Cayman café franchise) was never informed by Hard Rock that its restaurants were likely to run at a loss and that overall profit depended upon strong sales of merchandise. HRCKY’s case was that this business model was therefore inherently vulnerable to economic fluctuations; particularly over its non-standard 20 year term granted, and the rigidity with which Hard Rock could (and did) demand performance. HRCKY had understood that the sale of merchandise was merely a “bolt-on,” or a subsidiary, separate stream of revenue. It was not appreciated that were merchandise sales to dip below 50%, a downward spiral of losses ensued, exacerbated by Hard Rock’s royalties taken on revenue rather than profit.
The Royal Court at  JRC 026 had found that the franchisee had been informed of likely overall profit figures and that these were not far from the mark for the first few years. As a result, there was no misrepresentation by Hard Rock and the Royal Court found that there was therefore no fraud or dol on the part of Hard Rock. Moreover, contractual clauses under the franchise operated so as to thwart any claim.
On appeal it was argued that that the Royal Court had not approached the issues correctly and, in particular, that there had been a duty on Hard Rock under Jersey customary law to disclose to HRCKY the loss making restaurant side before the contract, as it was so obviously relevant. Further, that in having provided the allure of overall profit forecasts, it was misleading not to have also revealed the inherent weakness in the Hard Rock business model. As a result, only part of the picture had been conveyed.
Reliance was placed firmly on Jersey customary law; it being observed that principles of English misrepresentation were foreign and inappropriate accretions, that operated under a different statutory framework including the Misrepresentation Act 1967 that simply had no counterpart in Jersey.
In respect of the exclusion clauses relied upon by the Royal Court, Jersey customary law was such that these did not, and could not, exclude dol and were not relevant. Again, reference to English law was not helpful in this area because case law there relied upon statutes such as the Unfair Contract Terms Act 1977 in assessing the reasonableness of such clauses; a statutory check that was not available in Jersey until, arguably, reforms introduced in 2009, and which post-dated the contract under appeal in any event.
Despite the absence of specific statutory protections for those entering a franchise under Jersey law, the central contention was that, nonetheless, Jersey’s customary law offered a vibrant and fertile set of principles that could and should be applied by the Jersey Court of Appeal.
Customary Law Summary
A review of Pothier’s works – considered high authority in Jersey- reveal a coherent and often repeated set of principles in relation to the issue of dol and as to concomitant duty to give disclosure to another contracting party. The principles can be summarised thus:
- In a reciprocal contract of mutual interest, where a contracting party has knowledge relating to the subject matter of the contract, in particular as to some significant defect, and that this knowledge is material to the other contracting person, there is a duty to disclose that knowledge as a matter of good faith;
- Not to do so is a fraud or dol;
- In such circumstances, contractual clauses that seek to exclude or exempt liability are not enforceable and will not be upheld;
- While dol will give rise to a claim in damages (and indeed against a non-contracting party guilty of dol) only dol that induces the contract may furnish ground for its impeachment.
Pothier’s Classification of the Franchise Agreement
The franchise agreement in this case would fall within Pothier’s classification of a perfect reciprocal (bilateral) contract with principal obligations on both sides. . (Obligations at para.9.) Accordingly, the franchise agreement would share such classification with contracts of sale (“de vente”) hire (“de louage”) or partnership (“de société”) being also consensual (para.10) and of mutual interest (“Ies contrats interéssés” para.12.) Indeed, the franchise agreement in this appeal could be said to be made up of elements of partnership, hire and sale.
In his works, Pothier repeatedly draws out similarities in such contractual relationships. For example, in his Traité Du Contrat De Louage at para.2 “Ce contrat convient en beaucoup de choses avec le contrat de vente;” and at para.4 “Le rapport entre ces deux contrats est si grand…” Pothier’s general classification is useful, therefore, because it means that we can better understand his coherent approach when we look at his separate treatise on the topics of contract of sale, hire and so on; each exemplifying broader principles of contract law.
Disclosure & Good Faith
In his Traité du Contrat de Vente Pothier provides an important explanation for the need for disclosure by one contracting party to another at para.234.
“…in contracts of mutual interest, of the number of which is the contract of sale, good faith prohibits not only falsehood, but all suppression of everything, which he, with whom we contract, has an interest in knowing, touching the thing which makes the object of the contract.
The reason is that justice and equity, in these contracts consists in equality. Everything which tends to diminish this equality is therefore contrary to equity. It is evident, that every suppression, on the part of one of the contracting parties, of anything which the other has an interest in knowing, touching the thing which makes the object of the contract, diminishes this equality; for, when one of them has more knowledge than the other concerning the thing, he has an advantage over him in contracting, he knows what he is doing better than the other; and, consequently, there is no longer equality in the contract.
In making an application of these principles to the contract of sale, it follows, that the seller is obliged (“est oblige”) to declare all that he knows touching the thing sold to the buyer, who has an interest in knowing it; and, that by omitting to do so, he offends against the good faith which ought to govern in this contract.”
Accordingly, Domat asserts a party must not be tricked by dol or something unexpected: “c’est un autre caractère essentiel à toutes les conventions, que l’on y traite avec sincérité et fidélité : et c’est un vice dans une convention, si l’un trompe l’autre par quelque dol et quelque surprise.” The sentiment is also seen in an earlier passage at p.17 “Qu’en toute sorte d’engagemens, soit volontaires ou involontaires, il est défendu d’user d’infidélité, de duplicité, de dol, de mauvaise foi et de toute autre manière de nuire et de faire tort.”
Exclusion of Liability & Dol
At para.211 of his Traité du Contrat de Vente when dealing with attempts to exclude liability, Pothier makes clear why an exclusion clause will have no effect where there is dol:
“But if the seller, at the time of the contract, has full knowledge of the defect, and instead of declaring it, stipulates that he does not warrant against it, such concealment is a fraud on his part (“cette dissumlation du vendeur est un dol”), which renders him subject to warranty, notwithstanding the clause.”
Both Domat and Le Gros are clear that obligations of sincerity, good faith and acting without dol cannot be “contracted out of” in agreements :-
- Domat thus notes in one of his early sections that : “Ainsi, les lois qui ordonnent la bonne foi, la fidélité, la sincérité, et qui défendent le dol, la fraude, et toute surprise, sont des lois dont il ne peut y avoir ni de dispense ni d’exception.”
- This is also reflected in Le Gros’ statement that : “C’est un principe en quelque sorte sacré que la convention fait la loi des parties, mais la bonne foi est une condition essentielle et sine quà non de la convention.” Traité du Droit Coutumier de l’Ile de Jersey, 1943, p.350.
The appeal in the Hard Rock case raised a number of other interesting issues which it is hoped that the Court of Appeal might further explore:
- Is dol properly translated into English as “fraud” or is this apt to mislead by comparison to the English tort of common law fraud? Pothier does not use the word “fraude” but dol (emanating from “dolus.”)
- Is dol a convenient & flexible label of simply what happens when someone does not act in good faith pre-contract or post? In West v Lazard Bros 1991 JLR 165 the Royal Court emphasized the comparison between dol with equitable fraud; the importance of the particular relationship involved and “unconscionability.” (See Howard, “Positions de Confiance” 1997 J & GLR & consider Steelux Holdings v Edmonstone 2005 JLR 152.)
- Could dol vary as between relationships: perhaps “dishonesty” needed between hard bitten experienced commercial parties, but only “unconscionability” needed in other situations such as in a fiduciary relationship? Alternatively, is the label “bad faith” sufficient to describe the abuse of such relationships, but with varying levels/factors depending upon the circumstances of each case?
- Do different principles apply to dol that leads to the annulment of a contract to dol that leads just to damages? For example, Pothier speaks of dol emanating from the other party in order to annul a contract, but if from a third party the remedy is damages only against that third party. (Modern French law is also interesting in this analysis.)
- Does dol incorporate concepts of fair dealing more generally and therefore provides a means to control objectionable exclusion clauses for which no statutory protection exists?
I have to end by this confession: it is rare to have the privilege of researching a case with so many interesting customary law issues but the process has changed my view on the future development of Jersey’s contract law. Hitherto, I had adopted the pragmatic view that Jersey law must be accessible and in a constant state of review and development. That necessarily meant that any judicial “tussle” as to future direction was to be deprecated because it was the litigant that bore the expense and uncertainty. Moreover, the paucity of Jersey contractual cases; the delay in the States passing legislation to update Jersey Law; and (until the creation of the Institute of Law) the lack of an educational establishment to assess and debate Jersey contract law, were all aspects that favoured us harnessing the labours of others. That did not necessarily mandate developing Jersey contract law along English lines, but given the shared language and existing relationships, this would not have been an untenable view. I had, in fact, expressed the preference for adopting the Principles of a European Contract Law (PECL) as a suitable framework; placing Jersey at the forefront of contractual development and also on an international stage. The Law Commission in fact suggested an Indian Contract Law model, which has not otherwise received support.
The change in my view is that the material is there for the development of Jersey contract law, according to the writings of Pothier and others, but it seems to me that we should be more ready to look to modern day French law that used such works as its inspiration, and so as as to assess how such principles have developed. The work particularly of Duncan Fairgrieve, formerly of the Institute of Law, has provided me with the reassurance that I have needed that Jersey can develop Jersey contract law in a reasonable period. However, we will be heavily reliant on academics, judges and practitioners of his stature in any such endeavour.