Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 99
CA164/08	OPINION OF LORD HODGE in the cause J. S. SWAN (PRINTING ) LIMITED Pursuers; against KALL KWIK UK LIMITED Defenders: ____________

Pursuers: Munro; Brodies LLP

Defenders: Fairley; Wright Johnston & Mackenzie LLP

8 July 2009

[1] In this action the pursuers, which carry on a printing business, seek declarator that the defenders, which grant franchises to others to conduct the Kall Kwik business, are in material breach of a franchise agreement dated 18 October 2001. The pursuers are a company registered in Scotland. The defenders are a company registered in England and have their domicile in England. I have heard a debate on the question whether the pursuers have pleaded a relevant case that this court has jurisdiction in terms of paragraph 3(a) of Schedule 4 to the Civil Jurisdiction and Judgments Act 1982 ("the 1982 Act").

[2] This provision, which is part of the Schedule of the 1982 Act governing the allocation of jurisdiction within United Kingdom, is modelled on Article 5 of the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters signed at Brussels on 27 September 1968, as amended by the three Accession Conventions referred to in section 1 of the 1982 Act as amended ("the Brussels Convention").

[3] Paragraph 1 of Schedule 4 to the 1982 Act sets out the general rule of jurisdiction, namely that "subject to the rules of this Schedule, persons domiciled in a part of the United Kingdom shall be sued in the courts of that part." Paragraph 3 provides rules of special jurisdiction. For this action the relevant rule is:

"A person domiciled in a part of the United Kingdom may, in another part of the United Kingdom, be sued -

(a) in matters relating to a contract, in the courts for the place of performance of the obligation in question."

[4] Since the enactment of the 1982 Act, EC Regulation 44/2001 of December 2000 on the Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters ("the Regulation") introduced specific rules as to the place of performance unless otherwise agreed in the cases of the sale of goods and the provision of services. The Regulation provides that in relation to a contract for the provision of services, the place of performance, unless otherwise agreed, is the place in the Member State where, under the contract, the services were provided or should have been provided.

[5] Section 16(3) of the 1982 Act provides that the court in determining any question as to the meaning or effect of any provision set out in Schedule 4 shall have regard to any principles laid down by the Court of Justice of the European Communities ("the European Court") in connection with Title II of the Brussels Convention or Chapter II of the Regulation and to any relevant decision of that court as to the meaning and effect of any provision of that Title or that Chapter.

The franchise agreement and the pursuers' averments

[6] In the franchise agreement the defenders gave the pursuers certain rights for a period of ten years. Clause 5 of the agreement imposed certain "initial obligations" on the defenders to assist the pursuers in opening for business and in clause 8 the defenders undertook training obligations. Certain obligations in the sub-clauses in clause 5, such as the provision of assistance in converting premises into a Kall Kwik business and providing a project manager for shopfitting, were by necessary inference to be performed in Scotland. Under clause 8, the defenders were obliged to provide initial training in Texas and in their head office in England and they had a discretion whether to provide other training regionally. Otherwise, neither clause is relevant in this action.

[7] In arguing the special ground of jurisdiction the pursuers found on three sub‑clauses in clause 6 of the agreement which sets out the defenders' continuing obligations. Those sub‑clauses contain the following stipulations:

"The Franchisor shall at all times during the subsistence of this Agreement ....

6.2 provide the Franchisee with reasonable facilities for consultation with the designated officers of the Franchisor in relation to the conduct of the said Business with a view to assisting and enabling the Franchise to maintain the operation of the System

6.3 provide the Franchisee from time to time with advice know‑how and guidance in such areas as management finance marketing and methods of operation to be employed in or about the System

6.4 provide the Franchisee with a continuing service which subject to the provision by the Franchisee to the Franchisor of such information as the Franchisor may require will enable the Franchisor to monitor the performance of the Said Business and to offer guidance to assist in the achievement and maintenance by the Franchisee of standards of operation service and product."

[8] The franchise agreement does not contain any express provision stipulating the place of performance of those obligations. But the pursuers aver in article 7 of condescendence that there is an implied term that the defenders would perform the three continuing obligations quoted in the preceding paragraph in Scotland, where the pursuers, which were the recipients of those services, had their place of business. They aver that it is necessary to imply that term as a matter of business efficacy.

[9] The pursuers aver that they operated what the defenders classified as a "key centre." According to the defenders' "Insite" intranet website, the pursuers should have received at least five business support visits per year. They were also entitled to an annual business planning meeting on site and four cash flow analyses per year, which in the past members of the defenders' staff had carried out on site. The pursuers were also entitled to expect invitations to regional meetings and business development workshops, which in practice took place at regional venues and not at the defenders' head office. In the past the defenders had provided those levels of support.

[10] Even if there were no such implied term, the pursuers aver that it was the intention of the parties in entering the agreement that the defenders would provide the pursuers with operational and technical support and assistance at the pursuers' premises or through regionally-arranged meetings. The manner in which the defenders provided those services in the past demonstrated the close connection between the defenders' obligations and the pursuers' place of business, which is in Scotland. The pursuers quote passages from the defenders' website and franchise sales brochure in which the defenders speak of having field-based business development managers, visits to outlets by the defenders' staff, and a business development consultant, who would get to know every aspect of the franchisee's operation, allocated to each franchisee to provide customised support. They aver that in the past they had received assistance from the defenders' business development managers, IT specialists and marketing specialists but that the defenders had ceased to provide such support. After the pursuers complained about the lack of support, senior employees of the defenders had visited their premises in Scotland infrequently to discuss those complaints.

The relevancy challenge and the pursuers' answer

[11] Mr Fairley on behalf of the defenders submitted that the pursuers' averments as to the place of performance of the relevant obligations were irrelevant. He moved that the action be dismissed as the pursuers had averred no relevant ground of jurisdiction. The essential test in relation to the place of performance ground of jurisdiction, he submitted, was whether the pursuers were contractually entitled to insist that the defenders perform the relevant obligations only in Scotland.

[12] He submitted that the law, in addressing place of performance, looked to what an obligee was entitled to enforce as a contractual right and not to mere expectations of how an obligation might be performed, whether or not those expectations were derived from what the obligor had done in the past. The defenders could choose to perform their obligations under the relevant sub-clauses of clause 6 of the franchise agreement by carrying on the activities set out in paragraphs [9] and [10] above, but the pursuers had no right to demand that the defenders fulfil their obligations in those ways. In any event, the law required that a place of performance of an obligation be exclusively in one jurisdiction in order to confer jurisdiction on the place of performance ground. The pursuers' averment of an implied term that Scotland was exclusively the place of performance of the relevant contractual obligations was irrelevant as such a term was not required to give effect to the parties' contract. The pursuers' averments were therefore irrelevant.

[13] In support of his submissions Mr Fairley referred to William Grant & Sons International Ltd v Marie Brizard Espana SA 1998 SC 536, Eddie v Alpa srl 2000 SLT 1062, Besix SA v Wasserreinigungsbau Alfred Kretzschmar GmbH & Co KG (Wabag) [2003] 1 WLR 1113, Bank of Scotland v Seitz 1990 SLT 584 and Montagu Evans v Young 2000 SLT 1083. He also referred to Tottel's Court of Session Practice at para B 53 and to McBryde, The Law of Contract in Scotland (3^rd ed.) paras 9.65 - 9.71.

[14] Ms Munro on behalf of the pursuers accepted that the obligation founded on had to be performed in a single place but submitted that the issue was how that single place was to be identified. It was not necessary for the pursuers to aver an express or implied term that performance was to be in Scotland. It was sufficient that the obligation was capable of being identified with Scotland or of being linked to the Scottish courts which would be particularly suited to determine the dispute related to the obligation. Besix SA, properly understood, supported this view at paragraphs 48 and 49. Montagu Evans was consistent with this approach. Bank of Scotland v Seitz and the cases which followed it addressed the specific problem of where the obligee had a place of business in more than one jurisdiction and did not establish a general rule. The principles of European jurisprudence, and in particular the judgment in Besix SA, favoured the broader approach which she advocated. All the pursuers had to aver was a good arguable case that the special ground of jurisdiction applied. She referred in addition to Bitwise Ltd v CPS Broadcast Products BV 2003 SLT 455, Crucial Music Corporation v Klondyke Management AG [2008] Bus LR 327, Canada Trust Co v Stolzenberg (No 2) [2002] 1 AC 1 and Morrison v Panic Link Ltd 1993 SC 631. In relation to the latter case Ms Munro helpfully provided the court with the pleadings and the franchise agreement in question. I was also referred to Ets A. de Bloos v Société en commandite par actions Bouyer (Case 14/76) [1976] ECR 1497, Industrie Tessili Italia Como v Dunlop AG (Case 12/76) [1976] ECR 1473, Shenavai v Kreischer (Case 266/85) [1987] ECR 239 and Leathertex Divisione Sinteteci SpA v Bodetex BVBA (Case 420/97) [1999] ECR 1-6747.

Discussion

[15] In approaching the questions raised by a claim of jurisdiction based on the place of performance of a contractual obligation the court starts by ascertaining the law which governs the contract. This, as parties agreed, is determined by the private international law rules of the lex fori, in this case Scots law: Industrie Tessili at paragraphs 13 and 15, William Grant & Sons International Ltd at p.538 G-H. This would normally involve the court applying The Contracts (Applicable Law) Act 1990. But as neither party has pleaded that any system of law other than Scots law should be applied to the contract, the court must apply Scots law as the governing law in deciding what is the place of performance of the obligation in question. It appears to me that nothing turns in this case on any distinction between English law and Scots law in reaching that decision.

[16] There is no question in this case of there being a principal obligation to which other obligations are ancillary, a circumstance which the European Court discussed in Shenavai at paragraph 19 and to which it applied the maxim accessorium sequitur principale. The court therefore has to ascertain whether Scotland is the place of performance of the obligation or obligations which form the basis of the claim in this action: Ets A. de Bloos at paragraphs 11 and 13, and Leathertex at paragraphs 39 to 42. See also Custom Made Commercial Limited v Stawa Metallbau GmbH (Case C-288/92) [1994] ECR 1-2913, in which the European Court at paragraph 23 repeated its ruling that the "obligation in question" was

"that which corresponds to the contractual right on which the plaintiff's action is based."

Because that is the established approach of the European Court, it is recognised that in some cases reliance on this ground of jurisdiction may cause a party to enforce certain provisions of a contract in one jurisdiction and other provisions in another jurisdiction: Leathertex at paragraph 42.

[17] The first question therefore is: what is the obligation or are the obligations in question? In this case the pursuers have answered that question in their summons by identifying the three sub-clauses, the alleged breach of which, they submit, entitles them to the declarator which they seek.

[18] The second question is: what is the place of performance of those obligations? It is on this question that the parties take up arms and the defenders assert that the pursuers have not pleaded a relevant case. Lord Eassie has helpfully articulated the test for relevancy in this context in Eddie v Alpa srl at p.1067 I-K where he stated:

"a pursuer seeking to rely on the special and derogative provisions of Art 5(1) of the Brussels Convention should be able to set out, in averment, a sufficient exposition of contractual terms wherefrom it can be seen that there is an intelligible and statable basis for maintaining that the location of the place of performance of the contractual obligation in issue is within the territorial jurisdiction of the court before which the action has been brought.

...

[A]n inquiry would be appropriate only where a pursuer relying upon the special jurisdiction has set forth a prima facie relevant case that the obligation at the base of the action required to be performed within the territorial jurisdiction of the court before which the action has been brought."

It appears to me that this test, that there be a prima facie relevant case that the obligation required to be performed in Scotland, is the one which I have to apply and that the "good arguable case" test in Canada Trust Co to which Ms Munro referred me is of no assistance. I recognise that Lord Eassie's test entails there being a contractual requirement of performance and that parties were at issue on whether there was such a requirement. I must therefore explain why I accept the defenders' view that paragraph 3 of Schedule 4 to the 1982 Act and Article 5(1) of the Brussels Convention have such a requirement.

[19] In Bank of Scotland v Seitz the First Division addressed a problem which arose where the creditor of an obligation of payment had places of business in more than one jurisdiction. But while Ms Munro is correct that that was the context of the decision, the reasoning of the Division, and in particular that of the Lord President (Hope) and Lord Prosser, addressed the basis of the ground of jurisdiction and foreshadowed the decision of the European Court in Besix SA eleven years later. At p.588 H-I Lord Hope stated:

"In my opinion, however, the language of the English text and also of the original French suggests strongly that the assumption which underlies art. 5(1) is that the obligation in question is to be performed in only one place. But the words, 'doit être exécutée' in the French text indicate that what we are concerned with here is not the place or places where the obligation may be performed should the parties wish to give and accept payment or performance of the obligation, but rather with the place where this must take place in order to discharge the obligation if the parties are in dispute."

Similarly at p.593 G-H Lord Prosser stated:

"'Place of performance' in such a context appears to me to signify the place where an obligation has been performed, or, if not yet performed, must be performed. Such a reading is confirmed by the rather fuller expression used in the French text, 'lieu où l'obligation a été ou doit être exécuté'. If at the time when jurisdiction is invoked the obligant could choose, as of right, to fulfil his obligation at a place in some other jurisdiction, then it does not appear to me that a pursuer could establish jurisdiction in the Scottish courts, even if the obligant could also, as of right, choose to fulfil his obligation in Scotland."

[20] Lord Hamilton adopted a similar approach in 2000 in Montagu Evans v Young, holding (at paragraph [12]) that to invoke the special jurisdiction in the Court of Session,

"there must, at the time when it is invoked, be in Scotland a place of performance at which and at which alone the creditor in the obligation is entitled to insist that the obligation be discharged" (my emphasis).

Again this is consistent with the subsequent judgment of the European Court in Besix SA, in relation to both the need for a single place of performance and that place being a matter of obligation.

[21] In Besix SA the European Court dealt with an assertion of an article 5(1) jurisdiction in relation to a negative obligation, namely an exclusivity obligation by which joint tenderers for an overseas water supply project undertook to act exclusively and not to commit themselves to other partners. The court held that article 5(1) envisaged that one single place of performance of the obligation in question had to be identified and that, because the obligation was not subject to any geographical limit and could not be identified with any specific place, article 5(1) could not be applied. Accordingly, jurisdiction was to be determined by reference to the general rule in article 2 of the Brussels Convention, namely the defendant's domicile.

[22] In its reasoning the European Court emphasised the importance of the principle of legal certainty, which required that jurisdictional rules which derogated from the domicile ground in article 2 should be interpreted

"in such a way as to enable a normally well-informed defendant reasonably to foresee before which courts, other than those of the state in which he is domiciled, he may be sued" (paragraph 26).

Secondly, it referred to its case law on the need to avoid, so far as possible, creating a situation where a number of courts had jurisdiction in relation to the same contract (paragraph 27). It continued:

"28. It follows from the foregoing that article 5(1) of the Brussels Convention is to be interpreted as meaning that, in the event that the relevant contractual obligation has been, or is to be, performed in a number of places, jurisdiction to hear and determine the case cannot be conferred on the court within whose jurisdiction any one of those places of performance happens to be located.

29. Rather, as is clear from the very wording of that provision, which, in matters relating to contract, confers jurisdiction on the courts 'for the place' of performance of the obligation in question, a single place of performance for the obligation in question must be identified."

[23] Ms Munro referred to Besix SA at paragraphs 48 and 49 and argued that all that European law required was the identification of a specific place or a link to a court which would be particularly suited to hear and determine the dispute relating to the obligation. I consider that that argument is incorrect as it seeks to bypass the place of performance and thereby to escape the restrictive interpretation which the courts have placed on that ground of jurisdiction. The Brussels Convention has laid down special grounds of jurisdiction, such as article 5(1), each of which is a means by which to identify the court with the closest connection with the dispute. It is incorrect to set aside the specified ground of jurisdiction and to appeal to other facts as making a court particularly suited to hear and determine a dispute. As the European Court stated in paragraph 31 in Besix SA, the justification for article 5(1) is as follows:

"The court of the place where the contractual obligation giving rise to the action is to be performed will normally be the most appropriate for deciding the case, in particular on the grounds of proximity and ease of taking evidence."

That is the reason for the ground of jurisdiction; it is not the ground.

[24] I was also referred to the decision of Bernard Livesey QC sitting as a deputy High Court Judge in 2007 in Crucial Music Corporation which concerned the identification of the place of performance of a warranty. His approach in paragraphs 23-27 of his judgement, in looking for a single place of performance and in asking whether there is a place where compliance with the warranty is required by the contract (my emphasis), is consistent with the view which I have reached.

[25] In this case the three sub-clauses impose obligations on the defenders to provide the specified services. On the pursuers' pleadings some of those services have been provided in Scotland in the past. The pursuers aver an implied term that the services would be provided in Scotland and that that term is necessary to give the contract business efficacy as the obligations are otherwise unintelligible. But it is not clear why such a term is necessary and Ms Munro did not seriously seek to defend it. I consider the averment of an implied term that all of the services under those sub-clauses were to be provided in Scotland to be irrelevant. Apart from that averment of an implied term, it is not suggested that the pursuer has a right to require the defenders to provide within Scotland all of the services listed in any one of the three sub-clauses.

[26] It appears to me that at best for the pursuers they might argue that the parties envisaged that the defenders would provide many of the services listed in the three sub-clauses in Scotland by the use of field staff. The defenders' website and their past practice seem to support that view. But it was not argued that the court could extract from a wider contractual obligation a part which was to be performed in Scotland and treat it as "the obligation in question." It appears to me that the principle of legal certainty, which the European Court discussed in Besix SA, militates against an approach which seeks to sub-divide a contractual obligation so as to separate out services which were to be provided in a particular jurisdiction. In my opinion a court has to consider the contractual obligation as it is stated in the written contract and ask whether the obligor is required to perform that obligation exclusively within its jurisdiction. Otherwise a contracting party would be able to sue in respect of some services in one jurisdiction while pursuing a claim in relation to other services under the same obligation in another jurisdiction. This would be inconsistent with the aim of the European Court in its interpretation of the Brussels Convention to avoid as far as possible a situation where different courts have jurisdiction in relation to the same contract. I recognise that the focus on "the obligation in question" makes unavoidable some duplication of article 5(1) jurisdiction in relation to the same contract. But it would be contrary to the principles laid down by the European Court to extend such duplication.

[27] In addition, the European Court has held that the article 5 grounds of jurisdiction are to be construed restrictively as they derogate from the general ground of jurisdiction of the defender's domicile in article 2: see Advocate General Alber in Besix SA at p.1126, paragraph 59 and the cases to which he refers, namely Kalfelis v Bankhaus Schröder, Münchmeyer, Hengst & Co (Case 189/87) [1988] ECR 5565, paragraph 19 and Six Constructions Ltd v Humbert (Case 32/88) [1989] ECR 341, paragraph 18.

[28] Setting aside the implied term, on the pursuers' pleadings the defenders could, as of right, provide certain of the services set out in each of the sub-clauses in Scotland, England or elsewhere. That is fatal to the pursuers' claim to jurisdiction under paragraph 3 of Schedule 4 to the 1982 Act.

[29] For completeness I should mention Morrison v Panic Ltd to which Ms Munro referred me. That case involved a franchise agreement which imposed some obligations on the franchisor which were not dissimilar to those in the agreement in this case and others, such as the delivery of parcels within the franchise territory, which were more clearly to be performed in Scotland. The pursuer sued on the basis of the place of performance of a number of contractual obligations which fell into one or other category. But the issues which Lord Sutherland decided were (i) whether a clause in the franchise agreement conferred exclusive jurisdiction on the courts of England and (ii) forum non conveniens. The Extra Division on a reclaiming motion in relation only to the first issue upheld his judgment. The defenders in that case appear to have conceded that there was otherwise a ground of jurisdiction in Scotland based on the place of performance of the relevant contractual obligations. The court was not referred to Bank of Scotland v Seitz; and the other United Kingdom cases on article 5(1) to which I have been referred and Besix SA were decided later. Accordingly, while Morrison v Panic Ltd proceeded on a basis which appears to be inconsistent with the view which I have reached, it is not authority for a contrary proposition.

Conclusion

[30] I am satisfied that the pursuers have not relevantly averred that this court has jurisdiction on the basis of the place of performance of the contractual obligations on which they found. I shall therefore sustain the first plea in law for the defenders and dismiss the action.