Consent of all parties necessary for rights transfer to be effective

South Africa

In Unilever South Africa Ice Cream (Pty) Limited v Jepson (Case 7980/2004, March 14 2007), the Cape of Good Hope Provincial Division of the High Court of South Africa has issued a ruling on the delegation of rights and obligations under franchise agreements.

The decision stems from the acquisition in 2003 by Unilever South Africa Ice Cream (Pty) Limited of the rights in the MILKY LANE franchise business and trademarks owned by Pleasure Foods. Unilever, the licensee of the well-known OLA ice cream brand (known as WALL'S in the United Kingdom, ALGIDA in Italy and LANGNESE in Germany), then required Pleasure Foods' existing franchisees to use the OLA trademark and purchase OLA ice cream.

S R Jepson, who was one of many MILKY LANE franchisees and operated several outlets in the Western Cape, resisted these changes. He disputed that Unilever could, in law, acquire the rights and obligations in the MILKY LANE franchise operation without his consent (which had never been obtained). Therefore, he challenged Unilever's purported cancellation of his franchise agreements.

Unilever sued Jepson for:

  • an order that the various franchise agreements be declared cancelled;

  • payment of damages relating to unpaid royalties (based on a formula in the franchise agreements);

  • return of an operations manual and related documentation; and

  • punitive costs on the attorney and client scale (as provided for in the agreements).

The agreements relating to three of the franchise outlets (referred to as the Sea Point agreements) contained the following clause:

"The franchisor may cede, assign, transfer or make over this agreement or all or any of its rights hereunder whether as security for debt or any other cause to any person at any time as it may in its discretion think fit."

A further franchise agreement relating to an operation in Mitchells Plain contained no such provision.

In finding in favour of Unilever in relation to the Sea Point agreements, but against it in relation to the Mitchells Plain agreement, the court held that it is trite in South African law that a delegation of rights and obligations may be effected only by agreement between all concerned. As far as the Mitchells Plain agreement was concerned (which contained no delegation clause), Unilever had failed to discharge its onus of establishing, on the facts, that there had been an implied consent to the delegation by Jepson. Further, with reference to the Sea Point agreements, the court rejected Jepson's plea that the clause quoted above did not provide for the assignment of the franchise agreements to a competitor of the MILKY LANE business (that is, the OLA franchisor). There was no basis on which to infer such a tacit term in the clear wording of the clause.

The court rejected several other defences raised by Jepson in relation to the Sea Point agreements, including the contentions that:

  • The unfettered and wide discretion in the quoted clause rendered it void and unenforceable;

  • The clause imported a tacit term that the discretion to terminate should be reasonably exercised and Pleasure Foods/Unilever had not done so;

  • Unilever and Pleasure Foods had been under a duty to disclose the likely sale of the MILKY LANE franchise to Jepson;

  • The assignment of the agreements was ineffective in law as it created an individual burden and/or prejudice to Jepson's position; and

  • Jepson was excused from performance under all the agreements because they were synallagmatic (reciprocal) and Unilever had failed to perform its obligations under the MILKY LANE contracts to supply MILKY LANE products.

Accordingly, the court declared the Sea Point agreements cancelled and ordered Jepson to:

  • pay damages in respect of the Sea Point operations;

  • return the operations manual and related documentation; and

  • pay Unilever costs on the attorney and client scale.

Chris Job, Adams & Adams, Pretoria

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