Tammy Taylor JJ (Pty) Ltd t/a Tammy Taylor Nails The Marc v Tammy Taylor Nails SA Franchising (Pty) Ltf t/a Tammy Taylor Nails (11786/2020) [2020] ZAGPPHC 95 (3 March 2020)

REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG DIVISION, PRETORIA

CASE NO: 11786/2020

In the matter between:

TAMMY TAYLOR JJ (PTY) LTD APPLICANT

t/a TAMMY TAYLOR NAILS THE MARC

and

TAMMY TAYLOR NAILS SA FRANCHISING (PTY) LTD RESPONDENT

t/a TAMMY TAYLOR NAILS

JUDGMENT

PHAHLANE, AJ

[1] This is an urgent application in which the applicant seeks an interim interdict against the respondent, to release the applicant’s purchased stock pending the finalisation of an audit report conducted by the applicant’s auditors. The terms of the interdict sought are as follows:

“1. That the dispute lodged on 20 December 2019 by the applicant as per the terms and conditions set out in clause 31.1 of the Franchise Agreement entered into between the parties on 27 September 2018 in Pretoria is a valid dispute;

2. Directing that the parties comply with the findings and recommendation of an accountant and/or auditor appointed by the applicant, as agreed between the parties within seven (7) days of receipt of the accountant’s report;

3. That the appointed accountant provides the report within seven (7) days of the order;

4. That pending the determination of the relief sought in paragraph 3 above, the respondent be interdicted from withholding any stock or supplies and/or refusing to process orders for the purchase and supply of products to the applicant as per the terms and

conditions of the Tammy Taylor Nails Franchise Agreement entered into by the parties on 27 September 2018;

5. That the respondent be ordered to immediately deliver the stock processed under order number #3624 which was paid for on the 15th January 2020 for an amount of R 21 295.36”.

[2] The respondent’s answering affidavit was filed and served on the applicant a day after it was due to be served and it was deposed to by a certain Ms. Carla Van der Wath who alleges to be the ‘Director of franchising at the respondent’.

The applicant objected to her affidavit as there was no indication from her affidavit whether she was given authority to depose to the affidavit by the respondent or whether there was a company resolution to that effect.

[3] After submissions were made by both parties relating to urgency, I was of the view that the applicant’s case had to be heard on an urgent basis and the matter stood down for the trial to be proceeded with in two days. On the day of trial, the

respondent brought an application in terms of Rule 6(11) of the Uniform Rules of Court to file a supplementary answering affidavit of Ms Carla. The purpose of this affidavit was to address the omission of not annexing the resolution giving authority to Ms Carla to depose to the affidavit, and to bring new information in support of the objection for the applicant’s matter not to be heard and proceed with on an urgent basis.

[4] This information relates to the allegation that the applicant was in breach of clause 10.1.13 and 10.1.14 of the Franchise Agreement which provides that the applicant may not stock or sell the stock that is not provided for in the agreement. The particulars of the allegation were that the respondent obtained information from two staff members of the applicant who made statements that the applicant was using unauthorised products in her shop and such were taken to be tested by the respondent and found not be products or stock allowed in terms of the Franchise Agreement.

[5] The respondent argued that the affidavit of Ms Carla should be accepted as it relates to the terms and conditions of the Franchise Agreement which has been violated by the applicant and would assist the court in determining whether there was a breach of the Franchise Agreement or not. Counsel on behalf of the respondent submitted that the application in terms of Rule 6(11) should be considered based on the audi alteram partem rule.

[6] Considerations of fairness and the audi alteram partem principle allows the parties to be afforded equal opportunity to present their respective cases. However, the discretion to condone non-compliance and allow the respondent further opportunity to comply with the rules relating to the authority of a declarant to depose to an affidavit lies only with the court.

[7] In my view, this new set of information or allegations by the respondent cannot be entertained, and the application is refused for the following reasons:

7.1 The application is opportunistic as it was only made at a time when the respondent realised that the applicant had raised an objection that Ms Carla does not have the locus standi to depose to the affidavit.

7.2 The respondent does not have forensic proof that the alleged products found at the applicant’s shop were tested and found to be unauthorised products.

7.3 The court cannot rely to information that is contained in statements that is not before it, more particularly because the probative value of such statements [made by the applicant’s employees who reported that the applicant was using unauthorised products] were not tested.

[8] It therefore follows that the respondent does not have any opposing affidavit and as such, the matter proceeded only on the papers of the applicant. Having said this, the court must still consider the provisions of the Franchise Agreement in determining whether any of the two parties is in breach.

[9] The crux of the dispute for determination by the court is whether the respondent is entitled to withhold the stock that has been ordered and duly paid for by the applicant.

[10] The applicant is a franchisee whose business is predominantly focused on specialized high-end nail products. On 27 April 2018 the applicant and the respondent (ie. Franchisor) entered into a Franchise Agreement wherein the respondent granted to the

applicant, a licence and the right to operate the Franchise, subject to terms and conditions that the applicant had to pay a monthly

royalty fee.

[11] A dispute between the parties arose towards the end of October 2019 when respondent alleged that an amount of R62 361.27

in royalty fees was immediately due and payable. The applicant did not make payment and raised concerns with the respondent that she has been charged VAT on royalty fees when she was not supposed to. The responded still did not deliver the stock ordered and paid for by the applicant. The applicant lodged an urgent application to this court but on 4 December 2019, the parties concluded a settlement agreement wherein it was agreed that the applicant withdraws her urgent application and that she tenderers to make payment of the said amount of R 62 361.27 by 20th December 2019.

[12] It is common cause between the parties that the applicant laid a formal dispute in terms of clause 31.1 of the Agreement and requested the dispute to be referred to the auditors of the respondent. The respondent failed to appoint auditors as provided for in the Franchise Agreement and after numerous correspondence between the parties, the applicant informed the respondent that she

will be appointing her own auditors.

[13] Advocate Jagganath argued that the applicant does not owe any royalty fees because the applicant has been charged VAT on the royalty fees and taxed double by the respondent. Counsel submitted that there is no amount due and payable by the applicant and further that the applicant has not breached any clause in the Franchise Agreement.

[14] With regards to the requirements for an interim interdict, counsel argued that the applicant has proved that she has prima facie right to the stock which has been paid for and which the respondent refuses to deliver. The applicant contends that refusal by the respondent to release her stock causes prejudice to her as she is not entitled in terms of the Franchise Agreement to order supplies from anyone, save for the respondent. Further that the applicant’s business is completely dependent on the stock. Counsel argued that the applicant is currently suffering apprehension of irreparable harm as she had to cancel all the bookings made by her clients [at her salon] during the peak business period of December; Valentine’s day and the weekends. This has caused and continues to cause a financial strain on the applicant. The applicant submitted that she has no alternative remedy or recourse and that the balance of convenience favours the granting of the interim relief[1].

[15] The respondent on the other hand argued that the applicant is not suffering harm or financial loss as she is currently trading by using unauthorised products. Advocate Jacobs submitted that the respondent is entitled to withhold the applicant’s

stock as provided for in the agreement until the applicant pays the royalty fee which is owed. Counsel insists that the respondent acted lawfully in terms of the Franchise Agreement and that the allegation regarding the charging of VAT by the respondent can be resolved by the auditors appointed by the applicant.

[16] Both parties argued that they rely on the terms of the Franchise Agreement. As stated earlier, the respondent argued that it will not release the stock ordered by the applicant as it is entitled to do so until the royalty fee has been paid. The

applicant stated in paragraph 41 of her affidavit that: “It is therefore clear that a discrepancy as to the calculations and determinations of royalty amounts due and payable are disputed and the applicant may be in a complete credit with the respondent, hence no monies will be payable”.

[17] This accession by the applicant flows from the findings of a report compiled by a firm of accountants named Daniels & Co on 17th February 2020 that all the invoices issued to the applicant were inclusive of VAT and were issued with a vendor registration number belonging to another entity. The report also stated that in terms of clause 4.1 of the Franchise Agreement entered into between the applicant and the respondent, the royalties were zero rated from the Value Added Tax Act.

[18] As much as the applicant is justified in lodging a formal dispute with the respondent with regards to VAT being charged on royalties, in terms of the Franchise Agreement, any dispute between the applicant and the respondent should be referred to the auditors. The applicant has in her affidavit indicated that when it became apparent that the respondent was delaying in appointing auditors, she appointed an auditor.

[19] In my view, I cannot find any reason why the applicant would want the court to issue a declaratory order that a dispute lodged in terms of clause 31.3 of the Franchise Agreement be declared a valid dispute, while it is not the case of the respondent to deny same.

[20] At the same time, clause 4.7.3 specifically state that: “The Franchisee is not entitled to withhold or refuse any payment or part thereof, which may be due by the franchisee to the franchisor in terms of this agreement notwithstanding the fact that there is a dispute with regard to any amount that may be due”.

[21] This clause makes it clear that despite any disputes which might arise between the parties, the applicant as the franchisee is not entitled to refuse to pay royalties owed simply because the respondent is charging VAT on them, while he was not supposed to. The applicant was however correct in insisting on the appointment of auditors to resolve their disputes, as provided for in

the Franchise Agreement.

[22] The following clauses are material terms of the Franchise Agreement which are relevant to the dispute between the parties.

Clause 4.1: ‘monthly royalties are payable at 7% on the gross turnover of the Franchise with a minimum of R5 000.00 (excluding VAT) calculated on the total turnover of the Franchise Business of the Franchise

Clause 4.7.3: The Franchisee is not entitled to withhold or refuse any payment or part thereof, which may be due by the franchisee to the franchisor in terms of this agreement notwithstanding the fact that there is a dispute with regard to any amount that may be due.

Clause 4.7.5: All payments which are required to be made by the franchisee to the franchisor in terms of this agreement will be made without any

conditions, without deduction of any part thereof, without any demands, without applying any set off and are not subject to issuing

of an invoice, and shall be paid free of bank charges to the franchisor’s account.

Clause 9 titled :- What the franchisor may do or not do, stipulates that:

9.2 The franchisor may:

9.2.1 Suspend the performance of all or any of its obligations under this agreement while all or any amounts payable by the franchisee in terms of this agreement, are and remain overdue;

9.2.2 Suspend the performance of all or any of its obligations under this agreement while the franchisee is in breach of any of its obligations in terms of this agreement.

Clause 31 – Value Added Tax

31.1 Unless the context of the clause concerned clearly indicates that the amount concerned is inclusive of value added tax, all amounts payable by the franchisee to the franchisor under this agreement are quoted and/or provided for exclusive of VAT.

31.2 All or any VAT arising from the supply of any goods and/or services (as defined in the VAT Act No 89 of 1991, as amended) by the franchisor to the franchisee in terms of this agreement shall become due for payment and shall be paid by the franchise forthwith upon presentation of relevant invoice by the franchisor to the franchisee.

31.3 Any dispute which may arise between the franchisor and the franchisee as to the liability for and/or payment of VAT(or the amount thereof) in terms of the preceding provisions of this clause shall be referred to the auditors of the franchisor for the time being for decision and their decision shall be final and binding between the parties and carried into effect’.

[23] The dispute which relates to failure by the applicant to pay royalty fees is with regards to VAT, and the provisions of clause 31.1 makes it clear that if such a dispute arises, it has to be determined by the auditors. The applicant has appointed auditors to deal with the complaint and in my view, it is premature for the applicant to seek an interdict while the matter is still being entertained by an auditor which she has appointed herself.

[24] The test to be applied in assessing whether the applicant has past the hurdle for obtaining an interim interdict is set out in Reckitt & Colman SA (Pty) Ltd v S C Johnson & Son (SA) (Pty) Ltd[2] that:

“When the applicant cannot show a clear right, and more particularly where there are disputes of fact relevant to a determination of the issues, the Court’s approach in determining whether the applicant’s right is prima facie established, though open to some doubt, is to take the facts set out by the respondent which the applicant cannot dispute , and to consider whether, having regard to the inherent probabilities, the applicant should (not could) on those facts, obtain final relief at the trial in the main action. The facts set out in contradiction by the respondent must then be considered and if serious doubt is thrown

upon the case of the applicant it cannot succeed.”

[25] In Spur Steak Ranches Ltd v Saddle Steak Ranch[3] the court stated that:

“The proper approach is to take the facts set out by the applicants together with any facts set out by the respondents, which the applicants cannot dispute, and to consider whether having regard to the inherent probabilities the applicants should, not could, on those facts obtain final relief at the trial.

It is also necessary to repeat that although normally stated as a single requirement, the requirement for a right prima facie established, though open to some doubt, involves two stages. Once the prima facie right has been assessed, that part of the requirement which refers to the doubt involves a further enquiry in terms whereof the Court looks at the facts set up by the respondent in contradiction of the applicant’s case in order to see whether serious doubt is thrown on the applicant’s case and if

there is a mere contradiction or unconvincing explanation, then the right will be protected. Where, however, there serious doubt then the applicant cannot succeed. See Webster v Mitchell 1948 (1) SA 1186 (W) at 1189; Gool v Minister of Justice and Another 1955 (2) SA 682 (C) at 688.”

[26] In my view, the applicant has not established a prima facie right as she is in breach of the Franchise Agreement. It is also my view that directing the respondent to release the stock purchased

while the Agreement is very specific that the applicant is not entitled to withhold any moneys due to the respondent, irrespective

of any disputes which might be available, is tantamount to making the parties enter into a new Franchise Agreement. The applicant entered into an agreement freely with the respondent and being fully aware of the terms and conditions of the Franchise Agreement.

[27] In Mohamed’s Leisure Holdings (Pty) Ltd v Southern Sun Hotel Interests (Pty) Ltd[4] the court stated that:

“[22] Before these arguments are considered, it is necessary to place the issue in its proper perspective with regard to the legal principles governing contractual obligations. This court in Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (AD) said:

‘The power to declare contracts contrary to public policy should, however, be exercised sparingly and only in the clearest of cases, lest -uncertainty as to the validity of contracts result from an arbitrary and indiscriminate use of the power. One must be careful not to conclude that a contract is contrary to public policy merely because its terms (or some of them) offend one’s individual sense of propriety and fairness.’

[23] The privity and sanctity of contract entails that contractual obligations must be honoured when the parties have entered into the contractual agreement freely and voluntarily. The notion of the privity and sanctity of contracts goes hand in hand with the freedom to contract. Taking into considerations the requirements of a valid

contract, freedom to contract denotes that parties are free to enter into contracts and decide on the terms of the contract. This court in Wells v South African Alumenite Company 1927 AD 69 at 73 held as follows:

‘If there is one thing which, more than another, public policy requires, it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts, when entered into freely and voluntarily

[24] Parties enter into contractual agreements in order for a certain

result to materialise. The fact that parties enter into an agreement gives effect to their constitutional right of freedom to contract,

however, the carrying out of the obligations in terms of that contractual agreement relates to the principle of pacta sunt servanda. In Brisley v Drotsky [2002] ZASCA 35, 2002 (4) SA 1 (SCA) Cameron JA held that judges must exercise ‘perceptive restraint’ lest contract law becomes unacceptably uncertain. Cameron JA noted that the judicial enforcement of terms, as agreed to, is underpinned by ‘weighty considerations of commercial

reliance and social certainty’. In the majority judgment in Barkhuizen, Ngcobo J endorsed Cameron JA’s broader conception

of the law of contract as reflected in Brisley and affirmed that the Constitution requires parties to honour contractual obligations that were freely and voluntarily undertaken. The court further went on to say:

‘While it is necessary to recognise the doctrine of pacta sunt servanda, courts should be able to decline the enforcement of … a clause if it would result in unfairness or would be unreasonable.’

[27] Counsel on behalf of the applicant submitted that failure by the respondent to deliver the stock to the applicant causes a financial strain and constitutes irreparable harm suffered by the applicant. It may very well be that the applicant experience financial prejudice, but the terms and conditions of the Franchise Agreement still had to be complied with. The applicant had an obligation to honour the agreement which she entered into with the respondent. The agreement caters for a remedy in case a dispute arises between the parties and such remedy relates to the appointment of auditors, whose decision is binding on both parties.

[28] Having considered all the circumstances of this case as well as the arguments and submissions made by both counsels, I am of the view that an interdict should not be granted. The issues raised by both parties regarding other disputes which I have not dealt with in my judgment, have also been taken into consideration. Only the crux of the dispute to which the applicant sought remedy for, were the focus of this judgment. I therefore find that the applicant failed to satisfy the court that an interim interdict should be granted in her favour.

In the circumstance, the following order is made:

1. The application is dismissed with costs.

P. D PHAHLANE

Acting Judge of the High Court

Gauteng Division, Pretoria

For the Applicant

: ADV. P. JAGGANATH

Instructed by

: MUTHRAY AND ASSOCIATES INCORPORATED

VALHALLA, CENTURION

For the Respondent

: ADV. C. JACOBS

Instructed by

: KRUGER & CO

MENLO PARK, PRETORIA

Date of Hearing

: 28 February 2020

Date of Judgment

: 03 March 2020

[1] Setlogelo v Setlogelo, 1914 AD 221 at 227

[2] 1995 (1) SA 725 (T) on 730B

[3] 1996 (3) SA 706 (CPD) at 714D-H

[4] (183/17) [2017] ZASCA 176 (1 December 2017)