Jani-King (GB) Ltd v Pula Enterprises Ltd & Ors

Contractual construction requires consideration of the factual background reasonably available to the parties, even where the wording appears clear. The contract’s own language remains the primary source of meaning. Specific, case-specific provisions prevail over inconsistent general wording. Earlier contracts may form part of the background, but their relevance must be approached cautiously where the later contract supersedes or changes them.

A contractual discretion does not ordinarily carry an implied obligation of general reasonableness. It must be exercised honestly, in good faith, for its proper purpose, and without capricious, arbitrary or perverse conduct. Terms are implied only where necessary, not merely because they are reasonable or fair. In a fixed-term commercial contract, a right to terminate on reasonable notice cannot ordinarily be implied contrary to detailed express termination provisions.

The claimant operated a commercial cleaning franchise system. The defendants entered a first franchise agreement in 2003 and later incorporated the first defendant, which entered a replacement corporate franchise agreement with the claimant in November 2004. A second addendum was agreed in April 2005.

The defendants alleged that the claimant had breached obligations concerning initial business, training, assistance, advice, cash flow and trust and confidence. They also alleged implied rights to reasonable exercise of contractual discretion and termination on reasonable notice. The claimant sought determination of preliminary construction and implication issues. The defendants did not appear at the hearing.

1. Preliminary issues 1 and 5. The second franchise agreement did not require further initial business or initial training. The specific wording of Schedules 1 and 2 recorded that the initial franchise fee and initial business had already been supplied, and that the initial training had been satisfactorily completed. Those provisions prevailed over the standard-form wording in clauses 9.1 and 13.1. The factual background confirmed that the second agreement modernised the existing arrangement and did not restart it.
2. Fallback settlement point. Any claim for breach of the initial business, training, assistance, advice or cash-flow obligations existing by 28 April 2005 had been fully and finally settled by clause 1.3 of the second addendum.
3. Discretion and advice. Clause 9.2 did not contain an implied obligation to exercise discretion reasonably in the broad sense alleged. The claimant had to act honestly, in good faith, for the purpose of the discretion, and avoid capricious, arbitrary or perverse conduct. The pleaded allegations did not meet that standard. An alleged July 2004 breach of clause 9.5 could not breach an agreement made in November 2004, and was alternatively settled by the second addendum.
4. Trust and confidence. No term requiring preservation of trust and confidence was necessary in this detailed commercial franchise agreement. The relationship was closer to an ordinary commercial arrangement, and to a lessor-lessee or vendor-purchaser relationship, than to employment. The alternative allegations also pre-dated the second agreement and were settled in any event.
5. Termination on notice. A term allowing termination on reasonable notice could not be implied into this fixed-term agreement. It was unnecessary, inconsistent with clause 4.1, and inconsistent with the detailed termination machinery in clause 26. Questions of fairness could not replace the requirement of necessity.
6. Disposition. The court answered the preliminary issues in the claimant’s favour on the stated primary and alternative bases.