Telestop Pte Ltd v Telecom Equipment Pte Ltd and Another Suit

• Jurisdiction: Singapore
• Judge: Judith Prakash J
• Judgment Date: 30 November 2004
• Neutral Citation: [2004] SGHC 267
• Court: High Court (Singapore)
• Year: 2004
• Published date: 01 December 2004
• Plaintiff Counsel: N Sreenivasan and Valerie Ang (Straits Law Practice LLC)
• Defendant Counsel: Kannan Ramesh, Sean Tan and Christina Choo (Tan Kok Quan Partnership)
• Subject Matter: Contract,Contractual terms,Express terms,Whether franchisor failed to provide proper system for efficient management of franchise outlets,Whether franchisor in breach of franchise agreement,Implied terms,Whether there was implied term of non-competition in franchise agreements,Scope of implied term,Whether franchisor breached narrower implied term in franchise agreement,Franchise contract,Whether breach of duty of good faith a separate cause of action to be specifically pleaded
• Citation: [2004] SGHC 267

30 November 2004 Judgment reserved.

Judith Prakash J:

Introduction

1 Telecom Equipment Pte Ltd, the defendant in these consolidated actions, is a wholly-owned subsidiary of Singapore Telecommunications Ltd and a member of the SingTel group of companies. It was set up in order to retail telecommunication equipment. For this purpose, the defendant established a chain of retail outlets under the brand name “Teleshop”. The defendant itself operated some of these outlets while others were operated by franchisees under a franchise arrangement with the defendant.

2 The plaintiffs in these actions were two of the defendant’s franchisees. They are two companies owned and controlled by the same persons. The plaintiff in Suit No 890 of 2002, Telestop Pte Ltd (hereinafter sometimes called “TPL”), ran two outlets, one in Clementi and the other one first at Bedok and thereafter at Holland Drive, whilst the plaintiff in Suit No 889 of 2002, U-R First Pte Ltd (hereinafter sometimes called “URF”), ran one outlet at Boon Lay.

3 The first franchise agreement was signed in May 1993 between TPL and the defendant. It was for a term of ten years and provided for the running of a Teleshop at Block 443 Clementi Avenue 3. The second franchise agreement, signed in December 1997 between the defendant and URF, was for a term of nearly six years and was in respect of a Teleshop at Boon Lay Way. The third agreement, made in February 1998 between the defendant and TPL was for a term of ten years and was in respect of a Teleshop at the Bedok MRT station. Subsequently the location of the shop covered by this agreement was changed to Holland Drive.

4 On 5 June 2001, the plaintiffs jointly served a notice on the defendant that they wished to terminate the franchise agreements in respect of all three Teleshops without prejudice to either party’s rights and obligations under the agreements. They said that the agreements would terminate 30 days from the date of the letter. The two suits were filed on 30 July 2002 and were consolidated a few months later. The reliefs claimed by both plaintiffs are the same, to wit, damages to be assessed for alleged breach of contract. There are two main heads of claim:

(a) Breaches and continuing breaches of express terms of the franchise agreements.

(b) Breach of the implied term of non-competition.

Background to the disputes

5 The individuals behind the plaintiffs are Mr Kamaluddin s/o Noor Mohamad, Mr Chandra Sehkar s/o Nadaraja and Mr Abdul Sukkoor. All three are directors and shareholders of both plaintiffs and the first two were the plaintiffs’ witnesses in the action. In 1992, the three men were operating a bookshop in Clementi when they received a mailer from the defendant inviting them to consider taking a franchise to operate a Teleshop. They responded positively to the mailer and were subsequently interviewed and briefed on the business. Negotiations went well and they were selected to run a franchise business.

6 TPL was incorporated on 8 May 1993 for the purpose of being the Teleshop franchisee. The first franchise agreement, signed on 27 May 1993, was in respect of the Clementi Teleshop. The subsequent agreements were almost identical in wording.

7 Each franchise taken by the plaintiffs required a substantial investment. The plaintiffs had to pay the defendant a non-recurring licence fee for the grant of each franchise. They also had to incur expenses in renovating premises to meet the defendant’s requirements and to purchase stock and set up a bank guarantee for the purchase of stock. In the case of the Clementi outlet, TPL estimated that its initial expenses, including the payment of the licence fee (which in the case of Clementi was $100,000), amounted to $500,000. In addition, under the franchise agreements, for each outlet the plaintiffs had to pay the defendant a continuing royalty and management fee in a sum equal to 5% of the prior month’s gross monthly sales (for Bedok, the fee was higher) and a marketing levy in the sum of 3% of the prior month’s gross sales.

8 Up to about 1998, the franchised businesses operated fairly well. TPL encountered some problems in the initial operation of the franchise and complaints were made to the defendant from time to time. On the whole, parties managed to work out their differences. In January 1997, the Clementi outlet moved to a new location in the Clementi area. In mid-1997, the defendant approached TPL with a proposal that it operate another outlet at Boon Lay. This proposal was accepted and URF was incorporated for the purpose of taking the Boon Lay franchise and running that outlet. In the case of Boon Lay the licence fee amounted to $57,900. The Boon Lay outlet commenced operation in October 1997.

9 The difficulties between the plaintiffs and the defendant really started with the third franchise agreement that was in respect of a Teleshop to be operated by TPL at Bedok. TPL had secured a lease of shop premises at the Bedok MRT station and proposed to the defendant that a Teleshop be established there. The defendant already had a Teleshop in Bedok that it operated itself. The defendant said that it was not keen on a competing outlet being established nearby and tried to dissuade TPL from proceeding. TPL, however, was adamant. Eventually, the defendant agreed but imposed a higher royalty of 9.5% instead of the royalty of 8% applicable to the other two outlets. The licence fee was $100,000. The Bedok outlet commenced operation in February 1998 and was an immediate failure. Within three months of opening it, the plaintiffs wished to close the outlet and sought approval from the defendant to do so. In August, the defendant consented to relocation but insisted that the Bedok outlet be closed only when the plaintiffs were ready to move to the new location. The plaintiffs were not happy about this but they carried on operations in Bedok. In December 1998, operations at Bedok ceased and TPL took over the operation of a Teleshop at Holland Drive that had previously been operated by the defendant itself. The plaintiffs complained that they could have saved over $90,000 in operating costs alone had the defendant acceded to their initial request to close the Bedok outlet in June 1998.

10 The plaintiffs stated that their relationship with the defendant started to deteriorate thereafter. They complained that they were handicapped in the operations of the retail outlets by the failure of the defendant to implement a proper “System” to take care of all the operational needs of the outlets. They also suffered from the defendant’s practice of competing with the outlets run by franchisees by differentiating between those outlets and the defendant’s own Teleshops and its “Hello!” and “POD” shops. The defendant allegedly did this by carrying out special promotions that were available only in the defendant’s Teleshops. Further, the average margins given by the defendant continued to drop while sales volumes also dropped or remained flat.

11 According to the plaintiffs, by the second half of 2000, the situation was very critical with the plaintiffs’ average margins (after royalties) dropping to as low as between 4% and 6%. The plaintiffs were incurring heavy operational losses and they approached the defendant and presented their plight. There were several meetings with the defendant but no satisfactory solution was arrived at.

12 In the meantime, the defendant had established a new method of retailing telecommunication equipment in the form of the “Hello!” shop and had also established a “POD” shop aimed specifically at young consumers. The plaintiffs were under the impression that their Teleshops would eventually be converted to “Hello!” shops. In April 2001, however, they were informed by the defendant that the defendant did not intend to proceed with the conversion of the retail outlets to “Hello!” shops and that the defendant intended to let the plaintiffs complete the franchise terms with no change to the existing arrangements. The defendant also stated that it did not intend to renew the franchise agreements as it had decided not to continue with the franchise scheme beyond the contracted period. In June 2001, the plaintiffs terminated the various franchise agreements.

First head of claim: breaches of the express terms of the franchise agreements

13 The plaintiffs have alleged that the defendant has breached the express terms of the franchise agreements. Their main complaints are that the defendant failed to:

(a) implement a proper method for conducting, marketing and promoting the business of the franchised Teleshops;

(b) implement a proper point-of-sale (“POS”) accounting system;

(c) give advice and guidance; and

(d) conduct performance reviews.

The defendant has denied committing any of the breaches alleged by the plaintiffs. Its position is that it had fully complied with its obligations under the agreements and those contracts did not require it to do the matters of which the plaintiffs complained.

Relevant terms

14 Various terms of the three agreements are relevant to the submissions regarding the alleged breaches. Some of these clauses are worded identically in each of the agreements. Others are worded somewhat differently. For convenience, I set out below the various clauses that the parties rely on, identifying which agreements they come from.

Recitals of the Agreements

(A) The Franchisor [the defendant] as a result of extensive research and practical business experience has developed a successful business of shops retailing telecommunication and other related products and services (hereinafter called “the Business”) which is carried on under the name of “Teleshop” (hereinafter called “the Trade Name”).

(B) The Franchisor has achieved extensive public awareness and acceptance of, and a favourable reputation and extensive good will throughout Singapore in the Trade Name which is associated with the highest standard of quality and...