TGI FRIDAY'S INC v. PERFECT WAVE LTD

HCA 2376/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2376 OF 2012

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BETWEEN

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D E C I S I O N

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I. BACKGROUND

1.  The plaintiff is a New York company within the Carlson group of companies (“Group”), and is responsible for the restaurant arm of the Group that operates under the brand name “T.G.I. Friday’s” (“TGIF”). The defendant operates a TGIF restaurant in Hong Kong (“Restaurant”) at Titus Square, Tsimshatsui, Hong Kong (“Premises”) pursuant to an agreement dated 6 August 1998 (amended on 10 September 1998) between the defendant as franchisee and the plaintiff as franchisor (“Franchise Agreement”).

2.  Although the Franchise Agreement provides that the 15‑year franchise term will expire on 5 August 2013, the plaintiff claims the Franchise Agreement has been validly terminated on 12 September 2012 and the defendant has wrongfully continued to operate the Restaurant in breach of their post-termination obligations. On 21 December 2012, the plaintiff commenced the present action and issued a summons for interlocutory injunctive relief and order for discovery in terms similar to those found in the Statement of Claim (“Summons”). On 2 January 2013, the defendant applied by summons to refer the remaining reliefs sought in the Statement of Claim and not covered by the Summons to arbitration pursuant to Clause 18.01 of the Franchise Agreement (“Stay Summons”).

II.  SUMMONS

3.  By the Summons, the plaintiff seeks interlocutory injunctions to prevent the defendant from continuing to operate the Restaurant as a TGIF restaurant and to compel them to take measures to de-identify the Restaurant from the TGIF brand name in order, it is said, to protect the plaintiff’s legitimate commercial interests and prevent further wrongdoing by the defendant.

4.  The plaintiff says they have a strong and cogent case on the validity of the termination of the Franchise Agreement on the basis that the Restaurant has been run in an unsatisfactory manner, and pre-trial injunctive relief is required otherwise (a) the present action will probably become academic since any trial is unlikely to take place before 5 August 2013), and (b) the defendant’s continued passing off of the Restaurant as a lawful TGIF franchise will damage the goodwill and reputation attached to the TGIF brand. It is said that damages are not an adequate remedy, and the balance of convenience strongly supports the granting of the injunctions sought.

5.  On the other hand, the defendant claims the merits of the plaintiff’s claim are very much in issue on the basis that the franchise is still subsisting and binding on both parties and the purported termination of the Franchise Agreement is unlawful. In the circumstances, the balance of convenience is to preserve the status quo, especially when the franchise only has 4 more months to run. The defendant further claims the plaintiff is not entitled to any interlocutory injunctive relief due to delay.

III. FRANCHISE AGREEMENT

6.  It is useful to start by setting out some of the relevant express terms of the Franchise Agreement, and references to Clauses in this Decision are references to clauses in the Franchise Agreement:

“Clause 2.03B

If no Event of Default has occurred and is continuing and no event has occurred which with the giving of notice or lapse of time, or both, would constitute an Event of Default, Franchisee may renew the this Agreement for the Renewal Term, subject to the satisfaction of the following conditions:

……

C. Franchisee shall repair or replace Restaurant equipment, signs, interior and exterior décor items, fixtures and furnishings and shall offer such products and services such that Restaurant appearance and operations reflect the current Standards and image of the System;

Clause 4.03

The Developer [as defined in the Development Agreement dated 28 February 1996 between Grantor and Developer relating to the development of the Restaurant in Hong Kong] agrees to appoint at least six (6) managers (general manager, assistant general manager, kitchen manager and other managers) for the Restaurant. ……

7.  RESTAURANT OPERATIONS; MANUALS

Clause 7.01

…… Upon opening and thereafter, the Restaurant shall be operated pursuant to the Standards, the System and this Agreement.

……

Clause 7.03

Franchisee shall designate and maintain continuously during the Term the requisite number of general, kitchen and other managers for the Restaurant, each of whom shall have successfully completed the appropriate training as described herein.

Clause 7.11

Franchisee shall operate the Restaurant in accordance with the System, the Manuals, the Standards, written directives (whether or not such directives are made part of the Manuals or the Standards) and other manuals prepared and supplied to the Franchisee for use in restaurant operations. The Manuals, the Standards, other manuals and such written directives may be revised from time to time.

Clause 1

As used in this agreement the following words and phrases shall have the meanings attributed to them in this Section:

Confidential Information – the System, the Development Manual, the Manuals, other manuals, the Standards, written directives and all drawings, equipment, recipes, computer and point of sale programs (and output from such programs); and all other information, know-how, techniques, material and data imparted or made available by Franchisor which is (i) designated as confidential, (ii) known by Franchisee to be considered confidential by Franchisor, or (iii) by its nature inherently or reasonable considered confidential

Manuals – Franchisor’s United States confidential operating manuals, as amended from time to time

Standards – the standards and specifications, as amended from time to time, contained in, and being a part of, the Confidential Information pursuant to which Franchisee shall develop and operate the Restaurant at the Site

System – a unique, proprietary system developed and owned by the Franchisor for the establishment and operation of full-service restaurants in the United States which includes, without limitation, distinctive exterior and interior design, décor, colour scheme and furnishings; special recipes, menu items and full service bar; uniform standards, products, services and specifications; procedures with respect to operations and inventory and management control (including accounting procedures and policies); training and assistance; and advertising and promotional programs (as further developed from time to time)

Clause 13.07

The Franchisor represents and warrants to the Franchisee and the Principals as follows:

……

(c) following the adoption by Franchisee of the System, the franchisor shall promptly make available to the franchisee all necessary information concerning new processes or improvements in the development, construction, management, operation, supervision and promotion of the restaurants, in the System or in the Confidential Information.

16.  DEFAULTS, REMEDIES AND OTHER

Clause 16.01

The following shall constitute Events of Default by Franchisee: ….. (iv) failure to comply with or perform its covenants, obligations and agreements therein; …… (vii) failure to meet and/or maintain the Standards; ……

Franchisor shall not exercise any remedies available hereunder with respect of the following described Events of Default unless such Events of Default remain uncured after notice from Franchisor thereof and the expiration of the following cure periods:

……

(b) with respect to any Event of Default arising under subsections (i)-(v) inclusive, (vii), (x) and (xi) – thirty (30) days.

Clause 16.02

Upon the occurrence of an Event of Default, Franchisor may exercise one or more of the following remedies or such other remedies as may be available at law or in equity:

……

B. in the event of a material Event of Default, upon notice to Franchisee terminate this Agreement and all rights granted hereunder without waiving any (i) claim for damages suffered by Franchisor; or (ii) other rights, remedies or claims; or

……

C.   …… For purposes of this Section 16, “material” shall mean substantial deviation from the performance required. The parties agree that Events of Default arising under subsection 16.01 …… (iv) …… (without limitation) shall constitute material Events of Default.

Clause 17.02

Upon any termination hereof, all rights granted to Franchisee herein shall terminate and Franchisee shall:

A. immediately cease to operate the restaurant under the System;

B. immediately cease to use (subject to other franchise agreements executed pursuant to the Development Agreement (if then in effect)) (i) any Confidential Information; (ii) the System and the Standards, and (iii) the Proprietary Marks and other distinctive signs, symbols and devices associated with the System;

C. immediately deliver to Franchisor all Confidential Information and all copies thereof, retaining copies thereof only as reasonably required to comply with law; and

D. cancel any assumed name or equivalent registration which contains any of the Proprietary Marks or any other name, service mark or trademark of Franchisor or TGIFM [TGI Friday’s of Minnesota Inc].

Franchisee shall furnish evidence of compliance with these obligations within five (5) days after any termination hereof.”

IV.  TGIF FRANCHISE SYSTEM

7.   I next turn to the TGIF franchise system because the parties’ respective contentions must be viewed through the prism of a franchise relationship as succinctly described in Wadlow, The Law of Passing‑Off (4^th ed) para.7-108 at pp.513-514:

“Franchising is used in English commercial practice to describe a relationship in which numerous legally independent businesses trade under a common style and to common standards as if they were branches of one larger enterprise. The franchisor invariably specifies the manner in which each franchised business is to trade, often in great detail, although the day-to-day running is left to the franchisee. This element of operational control typically distinguishes franchising from simple licensing arrangements. The success of any franchising operation depends on the public relying on the individual outlets of the franchise to provide goods or services of a uniform degree of quality. The public may frequently be unable to distinguish franchised businesses from those run as branches of a single business, and in some cases there may be a mixture of franchised outlets and branches owned and operated by the franchisor.” (my emphasis)

8.  The TGIF brand was established in 1965, and the plaintiff now has more than 930 franchised TGIF restaurants with approximately 355 located outside the United States. By the Franchise Agreement, the plaintiff exercises control over various aspects of the operation of the Restaurant, including food quality, advertising, signage and health/safety requirements.

9.  The Restaurant was/is the only TGIF restaurant in Hong Kong even though the franchise is non-exclusive (see Clause 2.03). The plaintiff’s Managing Director – Asia-Pacific, Ms Tamala Fowler (“Ms Fowler”), says that attempts to find another franchisee have failed due to the poor evaluation of the Restaurant by local residents and the 1km radius protection for the Restaurant which excludes a great deal of prime market area for casual dining. But Mr Richard Poon (“Mr Poon”), a director of the defendant and the person in charge of the Restaurant, says the lack of success in finding another franchisee suggests the TGIF restaurant is not as popular as suggested.

10.  The plaintiff and/or TGIFM were/are the owner/licensee of the Proprietary Marks defined in Clauses 1 and 9.01, which marks have been registered in Hong Kong. Mr Li SC, counsel for the defendant, accepts that the defendant can no longer use such marks if there were a valid termination of the Franchise Agreement (Clauses 9.01, 17.02B(iii) and 17.02D).

V.  LEGAL PRINCIPLES

11.  Undoubtedly, in appropriate cases interlocutory injunctions can be granted to restrain a franchisee from operating a business under the franchisor’s trade name or passing off their business as being connected with the franchisor when the franchise term has yet to expire.[1] What are the relevant legal principles?

12.  It is trite that an applicant seeking an interlocutory injunction has to show a serious question to be tried on the merits, that damages are not an adequate remedy, and if there is doubt on the adequacy of damages, that the balance of convenience favours the granting of the injunction.[2] But here, the plaintiff seeks prohibitory as well as mandatory injunctions that require de-identification of the Restaurant as a TGIF restaurant (“Mandatory Point”), and it is unlikely that the plaintiff will seek any permanent injunctive relief at trial since the contractual franchise term is due to expire in 4 months (“Finality Point”).

13.  On the Mandatory Point, Mr Li SC submits that the plaintiff has to show good prospects of success on the merits, but the plaintiff cannot do so since the court at this stage should not try to resolve difficult questions of law and/or complex conflicts of evidence. But Mr Pao says that even though the court will need to be satisfied on a preliminary consideration there is sufficient merit in the underlying claim, it is strictly unnecessary for the plaintiff to demonstrate a high degree of assurance that they will succeed at trial. However, the plaintiff here does have a strong case on the merits.

14.  The leading authority is Music Advance Ltd v Incorporated Owners of Argyle Centre Phase I.[3] The guidance by Ma J (as he then was) has been helpfully summarised by DHCJ Lisa Wong SC in Wu Wei v Liu Yi Ping[4] in para.80 as follows:

“(1) The difference between the grant of a mandatory interlocutory injunction and a negative interlocutory injunction is not one of principle.

(2) The ultimate question is: what is the course to adopt which involves the least injustice in case of the grant or refusal of interlocutory relief, as the case may be, turns out to be wrong.

(3) The balance of convenience test is in reality a balance of the risk of doing an injustice ……

(4) The more “assured” the court is on the merits of the applicant’s case, the less will be the risk of injustice.

(5) However, if the circumstances are that justice requires the grant of the mandatory injunction at an interlocutory stage, then such an injunction should be granted irrespective of whether the court has a “high degree of assurance” as to the merits of the applicant’s case.

(6) Nor does the court lose sight of the practical realities of the situation to which the injunction will apply.”

15.  Much depends on what interlocutory mandatory injunction is sought (see Wu Wei at paras.81-82), but for an interlocutory mandatory injunction the risk of injustice (ie the grant or refusal of such injunction turning out to be wrong) can be quite acute, which is why generally the court will have to feel a high degree of assurance on the strength of the applicant’s case. But if he cannot demonstrate more than a serious question to be tried, he will have to show the balance of convenience tilts so much in his favour that justice requires the injunction to be granted.

16.  But the court should not premise its approach on whether the defence contentions on the merits are “arguable” or whether a trial is necessary for resolving the disputed issues. In Emagist Entertainment Limited v Nether Games (Hong Kong) Limited & ors,[5] DHCJ Woo expressly disapproved of such approach:

“45. I am afraid I do not accept an analogy with rules relating to summary judgment in the sense that only the plaintiff’s case is so strong as entitling it to succeed in obtaining summary judgment or that the defendant’s defence is such that no unconditional leave to defend is given that a mandatory injunction should be ordered. It all boils down to whether it is just and convenient for an injunction to be granted, prohibitory or mandatory. The court must be prudent to always bear in mind that it should only take a course that appears to carry the lower risk of injustice if its decision, to grant or refuse the injunction sought, should turn out to be wrong.

46. I am here concerned with the principle that the court only grants a mandatory injunction at the interlocutory stage with great caution before the court has heard viva voce evidence adduced by the parties, and is reluctant to make an order against a party who has not had the protection of a full haring at trial. However, I consider it important that the court should not and should not be seen to countenance a party taking the law into its own hands and taking advantage of a situation created by its own fault or blameworthy conduct. ……”

17.  On the Finality Point, Mr Pao says where the granting of an interlocutory injunction will have a finality effect in that it is not possible to hold a trial before the period for which the applicant claims to be entitled to an injunction has expired, justice requires “some consideration” or “some assessment” of the applicant’s prospects of success,[6] but the court is not to embark on a mini-trial on the affidavits. Chu J (as she then was) in Fortune Realty Co Ltd v Chan Hiu Yeung Dick said that at the interlocutory stage the court “need only form a tentative view on the evidence and legal arguments”.[7]

18.  But Mr Li SC refers me to Abbott GmbH & Co KG v Pharmareg Consulting Co Ltd,[8] in which Sakhrani J, after citing inter alia Lansing Linde Ltd and Fortune Realty Co Ltd, accepted that the plaintiffs would need to show more than merely a serious question to be tried where the interlocutory injunction sought had a finality effect. The learned judge said “[it] seems to me proper to have regard to the plaintiffs’ prospects of success at trial. In my view, the plaintiffs must show that it has at least good prospects of success at trial”. Further, Anthony Chan J in Chinaplus Wines Limited v Berry Bros & Rudd Limited said “…… if the court agrees that the interlocutory injunction will have a finality effect, then a high burden has to be discharged by [the plaintiff]”, ie the higher threshold of good prospects of success.[9]

19.  Indeed, in The Body Shop International Plc v Rawle & ors,[10] a case where the franchisor sought to restrain the franchisee from operating a business under their brand name or from passing off such business as being in any way connected with them when “there are only three weeks to run until the contract runs out anyhow”, Sir Peter Pain at p 261 followed Lansing Linde Ltd and held that “a rather higher burden of proof rests upon the plaintiff”.

20.  In my view, the general approach of the court in respect of an application for an interlocutory injunction that has a finality effect is to have some consideration or some assessment as to whether the plaintiff will likely succeed at trial. It is for the court to control the extent of such consideration or assessment. But the combination of the Mandatory and Finality Points in the present context does call for a higher threshold on the merits, ie the plaintiff should show they have good prospects of success on the merits. But it does not follow that if this threshold is not satisfied the court will necessarily withhold the granting of the injunctions sought. Rather, this brings into focus the balance of convenience, and the plaintiff will need to show that the balance tilts so much in their favour that justice requires the granting of the injunctions sought, even taking into account the Mandatory and Finality Points.

21.  I should add that Mr Pao also seeks to persuade the court the plaintiff need not show actual damage to their goodwill and reputation in order to obtain the injunctive relief sought. He refers to JH Coles Proprietary, Limited (in liquidation) v JF Need, in which Lord Wright gave the following classic statement on the post-termination franchise relationship:[11]

“…… all the right that the respondent ever had in regard to the user of the appellant’s trade name was a revocable licence to use these names so long as the business arrangement continued between the appellant and the respondent. From these conclusions it follows that prima facie the appellant is entitled on well-recognized principles to an order restraining the respondent from unauthorized use of the appellant’s trade names after the licence was revoked, since the continuance thereafter of such user necessarily involves a passing off by the respondent …… and in this way there would be practiced a deception of the public to the prejudice of the appellant’s business reputation and goodwill.”

Mr Pao also refers to New Horizons Education Corporation & anor v Best Alliance Worldwide Limited & anor[12] in which DHCJ Seagroatt granted injunctive relief in favour of the franchisor against a franchisee that operated a business by “masquerading under a name or names which they were not entitled to use” after the franchise had been terminated.

22.  But it must be remembered that JH Coles Proprietary, Limited (in liquidation) and New Horizons Education Corporation & anor are final judgments after trial in which the balance of convenience does not play any significant role. The principles elicited from these decisions do not necessarily inform the exercise of court’s discretion on whether it is just and convenient to grant or refuse interlocutory injunctive relief when dispute over the validity of any termination of the franchise has yet to be determined.

VI. MERITS OF THE CASE

(a)  Issues

23.  The question of the merits of the plaintiff’s case raises the following issues:

(a) whether the defendant has breached the Standards and hence the Franchise Agreement;

(b) whether such breaches amount to Events of Default under Clause 16.01;

(c) whether the defendant has cured such breaches;

(d) if not, whether the plaintiff is entitled to terminate the Franchise Agreement pursuant to Clause 16.02;

(e) whether the defendant has wrongfully continued to operate the Restaurant as a TGIF restaurant after 12 September 2012 in breach of Clause 17.02.

24.  Additionally, the defendant has raised the following issues :

(a) what are the Standards that are said to have been contravened by the defendant (and in relation thereto, whether the plaintiff is entitled to amend/revise the Standards over time);

(b) whether the Standards have been provided to the defendant;

(c) whether the Standards themselves are uncertain (and in relation thereto, what are the yardsticks by which it is said the Standards have been contravened).

(b)  Concession by the defendant?

25.  Whilst the defendant denies any contravention of the Standards that justifies termination of the Franchise Agreement, Mr Poon accepts that the plaintiff has “an arguable case” that the defendant has been in breach of the Franchise Agreement and/or the Franchise Agreement has been lawfully terminated by the Notice of Termination. Mr Pao argues in effect this is a concession that the plaintiff’s claim has real prospects of success since in other juridical context it is well-established that the “arguability” threshold is equivalent to a “realistic prospect of success”.[13]

26.  In my view, Mr Poon’s “concession” is nothing more than an acknowledgment that there is a serious question to be tried. After all, Mr Poon in his 1^st affirmation expressly qualifies his “concession” by saying that the plaintiff does not have a strong case to the extent of giving the court the necessary degree of assurance of success at trial or to entitle it to obtain the injunctions sought.

(c) Breach/termination of the Franchise Agreement?

27.  The discussion under this sub-Part deals with the issues listed in paragraph 23 above and is without prejudice to the issues listed in paragraph 24 above (see Part VI(d) below). So for the discussion herein, it is assumed that the applicable Standards include the 2010 International Food Safety Guide (“2010 FS Guide”) and the 2010 International Brand Standards (“2010 Brand Standards”). It is strictly unnecessary for the plaintiff to rely on the Non-Negotiable Brand Standards (“2012 Brand Standards”) for present purposes, but I note that they contend the 2012 Brand Standards are part of the current Standards.

28.  For the purpose of the Summons, the plaintiff essentially relies on the Restaurant audits/reports in April and August 2012 (especially the food safety and sanitation (“FSS”) violations and the understaffing problem identified therein) to establish breach of Clauses 7.01 and 7.11 (which require the defendant to operate the Restaurant in accordance with inter alia the Standards, the System, the Manuals (all defined in Clause 1) and the Franchise Agreement) that justify the Notice of Default followed by a cure period under Clause 16.01 and the Notice of Termination under Clause 16.02. But Mr Pao does not disavow reliance on the other Restaurant audits/reports, so I will start with the audit/report made in July 2011.

29.  On 6 July 2011, Ms Fowler and a representative of NSF‑CMi Limited (a food assurance company contracted by the plaintiff to conduct audits on their franchisees, “NSM-CMi”) attended the Restaurant to carry out an audit (“July Audit”). A copy of the audit report was sent to Mr Poon by email on 11 July 2011 (“July Report”).

30.  According to Ms Fowler, the July Audit reveals several contraventions of the Standards (including shortage of staff, inadequate training, breach of FSS procedures, poor upkeep of the Restaurant, and poor presentation of the branding). The July Report not only documents the areas of contravention of the Standards, it also sets out the requirements in the Standards and provides guidance on how to remedy the contraventions. Ms Fowler says that some of the issues she discussed with Mr Poon in meeting on 6 July 2011 include insufficient front- and back-of-house staffing (particularly kitchen staff), inadequate team member training, general cleanliness, disorganisation and clutter in back-of-house, improper temperatures being maintained, and cooling procedures not being followed/documented. Ms Fowler says that Mr Poon did not deny these breaches, but claimed ignorance, made excuses and suggested difficulty in hiring enough staff in Hong Kong.

31.  According to Mr Poon, Ms Fowler in meeting did not mention any specific breaches other than not having enough staff and the Restaurant being in a rundown condition. Her main complaint appeared to be the aged appearance of the Restaurant, which Mr Poon says was an attempt by the plaintiff to pressurise the defendant to remodel the Restaurant. He says Ms Fowler’s email of 11 July 2011 did not give particulars of the alleged FSS contraventions or understaffing (although it is said that the managers were busy). Mr Poon doubts whether it is possible to say on the basis of 1 visit that the managers were too busy for tasks which could be done at other times when the Restaurant was not busy.

32.  I do not think Mr Poon’s assertions are persuasive. Ms Fowler’s email of 11 July 2011 refer to the 6 July 2011 meeting during which “we discussed some things that were in need of improvement in the restaurant in order to bring the operation up to meet the standards of the [TGIF] brand” (my emphasis), and she specifically highlighted 3 problem areas (ie staffing, FSS procedures and general upkeep of the Restaurant) for the defendant to inform her “if significant progress has already been made in each area” (my emphasis). The email further asks the defendant “[please] make this critical area (staffing) your highest priority ……” (my emphasis). Plainly, the plaintiff was most concerned with the problem of understaffing, and specific examples were given of managers spending a great majority of their time working in hourly positions and thus unable to complete their duties as managers, and of guests being turned away because of insufficient manpower to accommodate them. In my view, the plaintiff has a strong basis for saying that the July Report spells out the applicable FSS and brand Standards, and details the corresponding breaches.

33.  On 20 October 2011, NSF-CMi wrote to Ms Fowler referring to the July Audit, and noting that upon additional documentation review in September 2011 non-conformances had been corrected between June and September 2011. However, NSF-CMI stated that continuous improvements were still required (particularly in areas of knowledge and certification, food handling equipment in back-of-house, food labelling, temperature testing, and chemical usage), and a second audit would be arranged in October/November 2011.

34.  On 16 November 2011, NSF-CMi conducted another audit of the Restaurant (“November Audit”), and a report dated 18 November 2011 was produced (“November Report”). Notwithstanding NSF-CMi’s letter of 20 October 2011, the November Audit notes that breaches of the Standards identified in the July Report had not been cured, and there were further breaches in areas of food presentation, staff training, and presentation of the Restaurant. The November Report details the criteria in the Standards, the corresponding breaches, and the applicable corrective actions.

35.  On 1 December 2011, Ms Fowler wrote to Mr Poon noting the improvement from the November Audit and Mr Poon’s report of increase in staffing level, and indicating that a further audit would be conducted in January 2012 “[to] validate this progress and help identify remaining improvement needs” required to bring the Restaurant “up to Friday’s International operation standards”.

36.  On 21 January 2012, the plaintiff’s Mr Ben Clayton (“Mr Clayton”) conducted an audit of the Restaurant (“January Audit”). The report of the January Audit (“January Report”), which was sent to Mr Poon by email on 1 February 2012, sets out the criteria in the Standards, the review results and the plaintiff’s comments on an item-by-item basis. Overall operations under the restaurant review were assessed at 60.1% (including 54.0% for guest excellence measure). The Restaurant failed the FSS review with 10 “critical” and 8 “major” violations. These FSS failures detailed in 6 pages of the January Report include food washed in the same sink as dirty utensils, mold in ice machine, chicken wings sitting at room temperature for more than 6 hours before being served, and refrigeration units with broken thermometers.

37.  The January Audit/Report caused Mr Clayton to write to the defendant on 31 January 2012 (“Clayton Letter”) to advise that the January Report identified multiple failings in the execution of the TGIF brand and to ask for a corrective action plan. Mr Clayton noted (a) the approximately 18 full-time or part-time staff was inadequate to provide the Friday’s Guest Experience, (b) the food quality did not achieve the brand Standards in several respects, and (c) there were concerns over food safety. Mr Clayton stated that “[as] we talked through on the day, there is a significant body of work and expenditure needed to get the Restaurant back to the correct operating standard”, and warned of a future unannounced audit with the possibility of a formal notice of default “[unless] significant improvements were made in staffing, employee knowledge and execution of brand standards, front-of-house condition, and back-of-house equipment”.

38.  Mr Poon complains that (a) the Clayton Letter fails to detail how the Restaurant’s 18 staff would not be able to provide Friday’s Guest Experience and what Friday’s Guest Experience entailed, and (b) the allegations of contravention of the FSS Standards were devoid of particulars.

39.  But in my view, the defendant’s complaint of lack of particulars is not persuasive. Not only does the January Report set out the criteria in the Standards on an item by item basis, it identifies each corresponding violation with observations on the breach. The Clayton Letter further clarifies the deficiencies noted in the January Report. For example, the Clayton Letter explains what was not Friday’s Guest Experience, ie “unacceptably long periods that waiting guests awaited service, the General Manager spending the whole of the evening shift working broiler rather than managing operations, the lack of dish wash team member, and the lack of a bar tender. Moreover, the limited staff members lacking the minimum necessary training and brand knowledge. Greater support to train and resource them is obviously required”. On FSS violations, the Clayton Letter expressly refers to the condition of the ice machine, the incorrect operating temperature of the dish washer, the lack of sanitising hand soap, the significant failing of the post cook cooling protocols “that carry significant risk to the well being of our Guests”, and the significant amount of redundant equipment that should be removed, replaced or rectified. In respect of food quality, the Clayton Letter informs the defendant that the Restaurant was operating in breach of the “Brand standards”, including “recipe execution (or lack thereof) [that] adversely affected the quality of what was being served to the guest”, and the huge range of temperature of the broiler with large areas being a long way from the correct operating temperature.

40.  The defendant’s understanding of the details of the plaintiff’s complaints is borne out by Mr Poon’s email to the plaintiff’s Mr Marty Ritson (“Mr Ritson”) on 11 February 2012. In the email, Mr Poon confirmed that improvements had been made in back-of-house equipment, that the defendant’s Assistant General Manager Ms Jeane Galvez Rafanan (“Ms Galvez”) would be sent to Malaysia for training to improve knowledge and execution of brand standards, that efforts would be made to hire more employees to properly serve the volume of guests, that workers would be trained “on appropriate SOPs and food safety procedures” and monitored to ensure compliance, and all food would be made to “Friday’s recipe and up to standard”. He annexed a FSS corrective action plan, which refers to the Standards’ criteria and the auditor’s comments for each “critical” and “major” FSS violation identified in the January Report, without any query or objection as to the source or applicability of such Standards, and without complaint of there being insufficient particulars. Rather, Mr Poon’s email stated that the defendant would “achieve Friday’s Brand Standard” with the continued support of the plaintiff’s Brand Protection Team.

41.  On 7 March 2012, the defendant’s Dennis Ng sent an email to Mr Ritson annexing a list of actions said to have been taken by the defendant since the January Audit in relation to equipment, manpower, manager’s training, food safety, recipe and product adherence, and furniture. It is interesting to note that one of the proposed corrective actions was to send Ms Galvez to Philippines to observe their operation and management for at least 2 weeks “to improve our knowledge and execution of brand standards”, and there was no query over what constituted “brand standards”.

42.  Such email accords with Ms Fowler’s contemporaneous note of her meeting with Mr Poon on 7 March 2012. At the meeting, Ms Fowler and Mr Ritson made clear that the January Audit was unacceptable and that all issues must be corrected by the time of their next unannounced visit. They also stated that the defendant’s hire of new staff did not come close to meeting the plaintiff’s requirement that the Restaurant should be fully staffed, and that the defendant had to do whatever it took to get team members onto the staff and have them properly trained.

43.  On 14 April 2012, Mr Clayton conducted a follow up audit of the Restaurant (“April Audit”), and prepared an audit report (“April Report”). The April Report set out the criteria in the Standards, the review results and the plaintiff’s comments for each audit item. Overall operations under the restaurant review were assessed at 59.9% (including 41.6% for guest excellence measure). The Restaurant failed the FSS review with 14 “critical” and 11 “major” violations.

44.  As forewarned in the Clayton Letter, the plaintiff issued a Notice of Default to the defendant on 19 April 2012, and re-issued such notice on 26 April 2012 for compliance with the notice provisions under the Franchise Agreement (“Notice of Default”).

45.  The Notice of Default specified, without limitation, a number of “critical” violations revealed in the April Report, including (a) severe understaffing and inadequate training in all positions, (b) no line checks conducted since 20 March 2012, (c) improper hand washing and glove use, (d) no soap in the employee restroom, and (e) significant risks due to improper holding temperatures of hot/cold food, and enclosed the November, January and April Reports.  The Notice of Default also expresses disappointment in seeing the number of “critical” and “major” violations (labelled as “C” and “M” in the January and April Reports) increased by 40% from 10 to 14 for “critical” violations and from 8 to 11 for “major” violations, and the performance in guest service excellence measure “worsened from a 54 to a 46”, and demands as follows:

“…… Franchisee to materially cure the critical and major violations described in the attached Audit within 30 days’ of receipt of this notice, including without limitation, the above violations and each “critical” and “major” violation described in the attached reports [ie the November, January and April Reports]. Franchisee’s failure to materially cure the critical and major violations contained in the attached audit reports within 30 days may result in termination of the Franchise Agreement ……” (my emphasis)

46.  By a letter dated 4 May 2012 to the plaintiff (“Defendant’s Reply”), the defendant’s solicitors asserted that the breaches identified in the Notice of Default had been cured, and enclosed a schedule on the action taken to address such breaches (“Defendant’s Schedule”). Several things are of note in respect of the Defendant’s Reply:

(a) Such letter focuses on the breaches expressly referred to in the Notice of Default (see paragraph 45(a)-(e) above) but not the other breaches in the November, January and April Reports. Mr Li SC submits an issue arises as to what are the relevant breaches of the Standards that turns on the proper construction of the phrase “without limitation” in the Notice of Default. But, in my view, it is plain on the wording of the Notice of Default that it requires all “critical” and “major” violations in the November, January and April Reports (being FSS violations not mentioned or covered in the Defendant’s Reply and Schedule) to be cured. More importantly, it is clear from Mr Poon’s email to Mr Ritson dated 10 May 2012 (see paragraph 47 below) that the defendant clearly knew the Notice of Default required them to remedy the FSS violations.

(b) Although such letter claimed that the breaches in paragraph 45(a)-(e) above had been cured and/or rectified, it is silent on whether all “critical” and “major” violations in the November, January and April Reports had been cured.

(c) Such letter did not raise any query over the applicable Standards, but in fact went on to say that the specific breaches in paragraph 45(a)-(e) above “can only constitute breach under Section 16.01(vii) …… i.e. failure to meet and/or maintain the Standards  as defined in Section 1 ……”

47.  The Defendant’s Reply is supplemented by Mr Poon’s email to Mr Ritson dated 10 May 2012 (with the Defendant’s Schedule annexed thereto):

“ We apologize for disappointing some customers, and we doing our best to live up to their high expectations.

We are doing everything we can to prevent this from happening again.

Attached, please find the note of the things we have done to rectify Breaches and the corrective action plan of the areas we failed from [the April Report].”

A FSS corrective action plan was also annexed setting out the criteria in the Standards and the plaintiff’s comments for each “critical” and “major” FSS violation noted in the April Report with the corresponding corrective action. Again, Mr Poon’s email did not raise any query as to the Standards adopted in the April Report or any objection to the violations identified in such report.

48.  In June 2012, the plaintiff prepared a report to inform the defendant of the remodelling works required to be done to the Restaurant for possible renewal of the franchise (“Remodel Report”).

49.  A further audit was conducted at the Restaurant on 14 August 2012 (“August Audit”). A copy of the audit report was sent to the defendant by email on 22 August 2012 (“August Report”). The August Report set out the criteria in the Standards, the review results and the plaintiff’s comments for each audit item. Overall operations under the restaurant review were assessed at 40.9% (including 42.5% for guest excellence measure). The Restaurant failed the FSS review with 26 “critical” and 30 “major” violations of which 18 previously identified in the April Report had not been cured (including, according to Ms Fowler, severe understaffing, inadequate training and improper holding temperatures for food) (“Uncured FSS Items”) and fresh deficiencies were revealed. Ms Fowler says that despite clear notice given in the Notice of Default the situation worsened.

50.  On 12 September 2012, the plaintiff’s solicitors issued a Notice of Termination to terminate the Franchise Agreement and to demand the defendant to immediately cease to operate the Restaurant as a TGIF restaurant and to comply with their post-termination obligations under Clause 17.02 (“Notice of Termination”). The Notice of Termination claims that the Events of Default detailed in the Notice of Default (including but not limited to severe understaffing, inadequate training and improper holding temperatures of hot/cold food) had not been cured, and the August Report identified further breaches of the Franchise Agreement which constituted Events of Default pursuant to Clause 16.01(iv) and (vii).

51.  After the issuance of the Notice of Termination, on 18 September 2012 NSF-CMi conducted a previously scheduled audit of the Restaurant (“September Audit”) and produced an audit report (“September Report”) which set out the criteria in the Standards and the review results for each audit item. There were 11 “critical” and 8 “major” violations. Ms Fowler claims the September Report demonstrates that the operation of the Restaurant continued to be highly unsatisfactory and unsafe.

52.  The defendant disputed the termination of the Franchise Agreement and continued to operate the Restaurant. On 24 September 2012, the defendant’s solicitors wrote to the plaintiff’s solicitors denying any breach of the Franchise Agreement and raising questions on the plaintiff’s case on breach of the Franchise Agreement. On 8 October 2012, the plaintiff’s solicitors replied in support of the plaintiff’s claim as to breach and termination of the Franchise Agreement. On 11 October 2012, the defendant’s solicitors replied denying the plaintiff’s assertions, and saying that the defendant was entitled to treat the Franchise Agreement as valid, subsisting and binding on the parties.

53.  Mr Pao submits that the significant number of violations noted in the August Report even after expiry of the cure period following the Notice of Default constituted substantial deviation from the performance required under the Standards (including, say, the 2010 FS Guide and the 2010 Brand Standards) to which the Restaurant operated, and hence material Events of Default that entitled the plaintiff to terminate the Franchise Agreement under Clause 16.02.

54.  But Mr Li SC argues that since the Events of Default under Clauses 16.01(iv) and (vii) relied on by the plaintiff to terminate the Franchise Agreement are not defined as “material” Events of Default under Clause 16.02C, an issue arises as to the proper construction of the meaning of “substantial deviation from the performance” for rendering such Events of Default “material”. In this respect, Mr Poon claims the plaintiff’s allegations of breaches of the Standards lack particulars, and he denies the reliability of the August and September Reports since the plaintiff failed to disclose the corroborative evidence (eg auditor’s working papers, size of the sampling, samples and photographs taken etc) or the benchmark/yardstick employed in compiling such reports to support the markings given by the auditors. Mr Poon accepts that some of the complaints may be legitimate (eg he agrees one may say there was understaffing), but says they were not serious enough to entitle the plaintiff to terminate the Franchise Agreement. He points out that the defendant had tried to address the questions raised by the plaintiff, and their action plans had been implemented. Mr Li SC says these matters are “in the least arguable” and can only be resolved at trial upon taking into account the plaintiff’s complaints and the defendant’s remedial efforts.

55.  On FSS deficiencies, the 2010 FS Guide differentiates “critical” items as crucial to operational safety and excellence and “major” items as essential to operational safety and excellence, and specifies that zero “critical” violations are required for successful passing of a food safety audit whilst up to 3 “major” violations can still net a passing score. A schedule of the 10 “critical” and 8 “major” Uncured FSS Items with cross-references to the relevant criteria in the 2010 FS Guide (which criteria is also spelled out in the April and August Reports) is annexed to this Decision (“Schedule”). Given the differentiation for “critical” and “major” FSS violations specified in the 2010 FS Guide, the number of “critical” and “major” Uncured FSS Items despite repeated remedial opportunities and warnings (including the Notice of Default which expressly demands the defendant to cure the “critical” and “major” violations), and the September Report which still shows “critical” and “major” FSS failures, I agree with Mr Pao that upon consideration of the totality of the available evidence but without any mini-trial on affidavits, there is a strong prima facie case that notwithstanding the Defendant’s Reply and Mr Poon’s email of 10 May 2012 there had been substantial deviation from the performance required under the 2010 FS Guide being part of the Standards to support the plaintiff’s case of there being material Events of Default for terminating the Franchise Agreement.

56.  In my view, it is telling that the defendant’s affirmations in opposition do not condescend to factually refute any of the 18 Uncured FSS Items found in the August Report, and do not address on remedial action taken after mid-May 2012 (see paragraph 47 above). Further, the complaint that the FSS violations lack particulars is belied by (a) the detailed FSS corrective action plan annexed to Mr Poon’s email dated 10 May 2012 (see paragraph 47 above) and the examples of uncured “critical” and “major” FSS violations in the Schedule.

57.  As regards the complaint of understaffing, the Standards for staffing can be seen in Clause 7.03 and in the 2010 Brand Standards as follows:

PEOPLE STANDARDS
Category	Standard Details
Server staffing	· Lunch-4 is the maximum number of active tables; Dinner-4 is the maximum of active tables

Mr Poon accepts there was some understaffing (since difficulty in recruiting people to work in catering was a common phenomenon in Hong Kong). But in my view, notwithstanding Mr Poon’s claim that the problem was not severe and the defendant’s attempt to address the problem by employing part-time staff and by continuously placing advertisements to recruit staff, I am persuaded the plaintiff has good prospects in establishing breach of and substantial deviation from the staffing criteria in the Franchise Agreement and in the 2010 Brand Standards.

58.  I note that Mr Poon informed Ms Fowler at meeting on 7 March 2012 that the defendant had just hired 3 new staff, but Ms Fowler made clear to Mr Poon that this still did not meet the plaintiff’s requirement as to staffing, that it was necessary to hire/train enough staff to meet staffing requirements and to maintain standards, and that he would need employ bold and creative strategies to find staff since a difficult labour market did not excuse short-staffing (see paragraph 42 above). Ms Fowler’s observations are not without foundation for previously on 18 February 2011 Ms Galvez had sent an email to her reporting on “a very tough situation” as the Restaurant “lost most of our employees in the kitchen”, and acknowledging that “[manpower] is a big problem of our restaurant. We’ve tried and tried to hire people but because of the low salary that they offer it’s impossible to find someone. ……” (my emphasis)

59.  It is worth noting that although the defendant had several action plans that suggest the deficiencies identified in the November, January and April Reports were being addressed, the January, April and August Reports revealed the same and/or new deficiencies, which lends support to Mr Fowler’s contention that such action plans were either poorly executed or at the expense of other operational requirements. In my view, a strong prima facie picture emerges that despite repeated opportunities given to and attempts by the defendant to address the “critical” and “major” FSS contraventions in the various audits, there is repeated pattern of failure and non‑compliance. Indeed, Ms Fowler says the Restaurant is the worst performing TGIF restaurant worldwide in terms of audit compliance.

60.  Ms Fowler says that the plaintiff’s case is bolstered by over 20 customer complaints received in 2011-2012, which represents an uncommonly high number of complaints for an Asia-Pacific TGIF restaurant which normally would receive no more than 5 guest complaints. Many such complaints refer to disappointment that the standards at the Restaurant did not live up to those of other TGIP restaurants in terms of food presentation, customer care and presentation of the Restaurant, which Ms Fowler says strongly indicate deteriorating standards and ongoing breaches of the Standards.

61.  But the defendant disputes the authenticity of the plaintiff’s spreadsheet summary of the customer complaints (without any disclosure of the primary documents save for 1 guest email), and claims the burden falls on the plaintiff to show these complaints (if proved) relate to breaches of the Standards. Mr Poon denies the breaches set out in the customer complaints, and says the defendant had addressed about 5-6 complaints (and definitely not over 20) that had been relayed to them by the plaintiff.

62.  In my view, for the purpose of the Summons, I do not think the above defence contentions undermine the prospects of the plaintiff’s case as discussed above. Indeed, the major customer complaints (albeit in summary form) as to poor service dovetail nicely with the understaffing problem which to a certain extent has been admitted by Mr Poon.

63.  Mr Li SC refers to 3 other considerations which he says detract from the strength of the plaintiff’s case on the merits. First, he submits that notwithstanding customer complaints, allegations of material breaches of the Franchise Agreement are belied by 32% and 22% growth in guests and revenue for the period from April to December 2012 (57,364 guests and HK$10,659,316.00 revenue) as compared with a like period in 2011 (43,332 guests and HK$8,652,499.00 revenue), and corresponding growth in royalties received by the plaintiff for the period from April to December 2011 (HK$243,725.00) as compared with a like period in 2012 (HK$297,629.00).

64.  The plaintiff is not in a position to contradict the above data, which is not verified or supported by any documents. In any event, as Mr Li SC fairly accepts, trade increase may be due to reason(s) (eg general market circumstances) that have nothing to do with compliance with the Standards or goodwill/reputation. I am not persuaded it necessarily undermines the plaintiff’s case that there has been material breach of the Standards.

65.  Secondly, Mr Poon accepts that the Restaurant is a bit rundown after having been in use for over 14 years. He says that from June 2011 until the Remodel Report in July 2012, there were concomitant discussions between the parties on the remodelling of the Restaurant as a condition for possible renewal of the franchise for another 5 years (see Clause 2.03B) whilst the plaintiff liaised with the defendant on the Restaurant’s underperformance. The defendant did not commit themselves to the remodelling because the landlord probably might not renew the lease of the Premises when it expires on 13 September 2013 and despite efforts the defendant had not been able to secure suitable alternative premises. Mr Poon says the plaintiff used to conduct annual restaurant review, and it was only when the defendant failed to commit on the remodelling that the plaintiff self-generated 5 audits between July 2011 and August 2012 to find fault with the Restaurant so as to obviate any renewal of the franchise, which motive Mr Poon says is borne out by (a) the plaintiff’s advertisement for recruitment of franchisees in Hong Kong placed on their website over the same period, and (b) the fact that some franchisees in other localities did not receive any audit over the same period (ie 168 audits performed worldwide in 2012 for 350 franchisees outside the United States).

66.  For the present purpose, I am not persuaded that Mr Poon’s speculation of a sinister crusade against the defendant undermines the good prospects of the plaintiff’s case:

(a) Under the requirements of Clause 2.03B, I see nothing untoward in the plaintiff starting to discuss remodelling of the Restaurant in mid-2011 with an eye to possible renewal of the franchise. The defendant was receptive to the remodelling proposals (see Mr Poon’s email to the plaintiff’s Mr Simon Reyes dated 15 November 2011). In fact, pending clarification on the renewal of the lease of the Premises, Mr Poon was willing to carry out some immediate renovation for the Restaurant, which led to further discussions on remodelling (see Mr Poon’s email to Mr Ritson dated 11 February 2012).[14]

(b) As Ms Fowler explains, there are more restaurant reviews for the Restaurant because of the identified non-compliances and the need for follow up reviews to validate alleged improvements and to monitor progress to ensure that the Restaurant is up to standard. Indeed, these follow-up audits had been forewarned (see paragraphs 33, 35, 37 and 45 above), yet each audit revealed the same and/or new breaches of the Standards.

(c) Despite the contractual 30-day cure period, the plaintiff allowed the defendant 4 months after the Notice of Default to effect remedial measures before the review audit in August 2012, which does not sit well with the suggestion of an ulterior intent on the part of the plaintiff to get rid of the defendant.

(d)        In any event, evidence of non-cure was only available in August 2012, so it does not follow that the Remodel Report prepared in July 2012 during the “extended” cure period following the Notice of Default is necessarily non‑commercial. I note that the remodelling negotiations ceased after the Notice of Termination.

(e) I find Mr Poon’s suggestion (ie that the plaintiff engineered 5 audits as part of a fault-finding scheme to forestall any renewal of the franchise on the basis that either they had found a replacement franchisee or they wanted to make the franchise more attractive by offering an exclusive franchise to any interested party) speculative and difficult to support on the available evidence. The plaintiff’s advertisement does not look for a replacement or exclusive franchisee, and despite past difficulty in looking for another franchisee for Hong Kong the plaintiff is well within their rights in looking for another franchisee (as explained in the letter by the plaintiff’s solicitors to the defendant’s solicitors dated 8 October 2012).

(f) Finally, the question of the plaintiff’s motive does not really bring the defendant’s case much further. If the Standards had been materially breached and such breaches had not been cured, it matters not whether remodelling negotiations were on foot because the plaintiff would still be entitled to terminate the Franchise Agreement.

67.  Thirdly, Mr Poon says that notwithstanding the Notice of Termination the plaintiff unreservedly continued to accept the defendant’s payment of franchise fees and royalties up to December 2012. Mr Li SC says there is an “arguable” case of waiver of breach (if any) and affirmation of the Franchise Agreement by the plaintiff. Ms Fowler explains that the acceptance of such payments was due to administrative oversight. Such payments were ordinarily made to the plaintiff’s parent company Carlson Inc and not to the plaintiff, but when the plaintiff realised the error upon sight of Mr Poon’s 2^nd affirmation they caused Carlson Inc’s accounting department to reverse the transactions and return the payments to the defendant by 30 January 2013.

68.  Mr Pao says this is a forensic point that seeks to capitalise on the plaintiff’s administrative error. Mr Li SC fairly accepts there is a non-waiver clause in the Franchise Agreement (Clause 15.02) and the court can take on board and consider Ms Fowler’s explanation. In my view, given the clear stance of the plaintiff in relation to the termination of the Franchise Agreement (see the Notice of Termination and subsequent letters by their solicitors up to mid-October 2012) and the absence of any other unequivocal conduct suggestive of waiver, I am not persuaded that the defendant’s arguments in this respect diminish the good prospects of the plaintiff’s case on the merits.

69.  In the circumstances, I conclude that the plaintiff has good prospects on the merits (which is appreciably over and above the threshold of a serious question to be tried) to the effect that the Franchise Agreement was validly terminated by the Notice of Termination and that the continued operation of the Restaurant was therefore wrongful. However, Mr Li SC has other more fundamental challenges to the viability of the plaintiff’s claim based on various arguments in relation to the Standards to which I now turn.

(d) Revision of the Standards over time

70.  The definition of the Standards and the System in Clause 1 specifically say “…… as amended from time to time ……” and “…… as further developed from time to time ……” Further, Clause 7.11 expressly provides that the Standards “may be revised from time to time”.

71.  Mr Li SC says that notwithstanding such definition, “it is at least arguable” whether legally the plaintiff has a unilateral right to amend and develop the Standards and the System, and if so whether the purported exercise of such unilateral right would be effective as it would lead to uncertainty in respect of the criteria for compliance with the Standards and the System.

72.  In my view, the right to amend, revise or develop the Standards and the System under the Franchise Agreement is plainly not an agreement to agree.[15] Instead, the Franchise Agreement has laid down a machinery for changes to the Standards and the System, and as a matter of law it is perfectly acceptable for a contract to have machinery whereby it expressly leaves matters open for one party to decide. In Chitty on Contracts, it is said that:[16]

“An agreement is not incomplete where it provides machinery for resolving matters originally left open. Perhaps the most striking illustration of this possibility is provided by cases in which such matters are to be resolved by the decision of one party: for example a term, by which interest rates are expressed to be variable on the notification by the creditor, is in principle valid, though the creditor’s power to set interest rates under such a contract is limited by an implied term that he must not exercise it “dishonestly, for an improper purpose, capriciously or arbitrarily.” ……”[17]

Mr Li SC seizes on this to say there is “an arguable case” that the plaintiff’s introduction of the 2010 FS Guide and the 2010 Brand Standards being an exercise of their right to amend/revise the Standards and the System was done “capriciously or arbitrarily” because the plaintiff has failed to disclose changes and updates to the Standards and the System throughout the years for comparison.

73.  Mr Li SC’s arguments must be viewed through the prism of the franchise relationship under the Franchise Agreement. As explained in Wadlow, The Law of Passing Off (see paragraph 7 above), a franchisor needs to exercise operational control to ensure common style/standard and uniform degree of quality of goods/services amongst its franchisees. Further, the underlying commercial reality of the 15-year restaurant franchise under the Franchise Agreement supports the need for changes to the Standards. It therefore makes practical commercial sense for the plaintiff as franchisor to reserve to themselves the power to introduce new Standards to keep up with changing times and circumstances (eg new recipe or new equipment), and conversely impractical to precisely define a static set of the Standards, System and Confidential Information in the Franchise Agreement which cannot be varied even when circumstances warrant. I think there is a strong case for saying that the defendant must have realised this when they entered into the Franchise Agreement, and indeed until the issuance of the Notice of Termination they have not raised any objection to the definition of the Standards and the System or the power of the plaintiff to vary, amend or develop them, or raised any query as what constituted the Standards and the System.

74.  In light of the above analysis, and the defendant’s copious references to the Standards (in particular the FSS and staffing criteria in the 2010 FS Guide and the 2010 Brand Standards drawn from the various reports of the Restaurant audits) and in their correspondence in 2011‑2012 with any demur or complaint, Mr Li SC has a uphill task in contending that the plaintiff’s introduction of the 2010 FS Guide and the 2010 Brand Standards is an arbitrary, capricious or unreasonable exercise of the right under the Franchise Agreement to amend the Standards from time to time.

75.  To illustrate his arguments, Mr Li SC refers to the distinction between “critical” and “major” FSS requirements, which he says is arbitrary. However, as seen in paragraph 55 above, the 2010 FS Guide explains the distinction in the following terms:

“Each section of the following Food Safety Audit details actions each food handler must take to ensure high quality and safe food is delivered to our Guests.

……

These standards/actions are graded by the following criteria:

· Critical - crucial to operational safety and excellence. Zero “Critical” violations are required for successful passing of a Food Safety Audit.

· Major – essential to operational safety and excellence. The goal is zero “Major” violations; up to three can still net a passing score.

· Standard; not scored – very important to operational safety and excellence. The goal is zero “Standard; Not Scored” violations; however, these standards are not included in scoring calculations. ……”

Although the above guidance is qualitative in nature, it must not be forgotten that the subject matter is quality of food services which is not amenable to strictness and precision, and the guide itself actually gives narrative guidance and itemised criteria that explain the grading. I do not begin to see how a case can be made out that the grading is arbitrary or capricious or unreasonable.

(e) Standards provided to the defendant?

76.  Ms Fowler says that:

(a) at/around the date of the Franchise Agreement, the plaintiff provided to the defendant their confidential operations manual which detailed the Standards and the System;

(b) prior to December 2007, the revised/renewed sections/versions of the operations manual setting out the Standards and the System were mailed to the defendant;

(c) as from December 2007 to July 2009, updates to the Standards and the System were made available on TGIF’s website called “M.E.N.U.” (“MENU”) with passwords given to Mr Poon and Ms Katherine Kwong (“Ms Kwong”) of the defendant, and many of such updates were provided at global meetings and via mail;

(d) as from July 2009 onwards, updates to the Standards and the System have been placed on a TGIF webpage called “FTP” or “ShareFile” (“ShareFile”);

(e) Mr Poon never logged onto either MENU or ShareFile and Ms Kwong left the defendant, but Ms Galvez did access ShareFile since May 2010;

(f) on 13 October 2010, the plaintiff sent email to inter alia all regional Managing Directors attaching the International Food Safety Training Plan and links to applicable instructional documents on ShareFile, and within a few days thereafter Ms Fowler forwarded such email to inter alia Ms Galvez;

(g) Ms Galvez downloaded the 2010 FS Guide on 8 November 2010, the 2010 International Food Safety Audit form (which mimics the audit checklist and report card used by the auditors) on 20 November 2010, and the 2010 Brand Standards on 9 May 2011;

(h) on 11 February 2012, Ms Galvez asked Ms Fowler for copies of the playlist, cooling log sheet sample and new line checklist;

(i) on 14 February 2012, Ms Fowler replied by attaching the current programme and labelling standards document sent out the year before (which form part of the Standards and the System), and advising the release of a new and updated food safety programme later that month;

(j) in mid-February 2012, the plaintiff released the 2012 Brand Standards (which form part of and updated the Standards) at the TGIF Global Business Conference at Dallas, but the defendant did not attend such conference although urged to do so;

(k) the plaintiff uploaded the 2012 Brand Standards to ShareFile in March 2012, but the defendant did not download this document until 12 September 2012 (ie the date of the Notice of Termination);

(l) Ms Glavez downloaded virtually all ShareFile documents regarding food safety on 6 May 2012 presumably in response to the Notice of Default, including the International Food Safety Manual 3.0 which is similar to the 2010 FS Guide.

77.  Ms Fowler further says the defendant had been told exactly what the Standards were. First, the 2010 FS Guide painstakingly set out the criteria and guidelines essential for achieving FSS. Secondly, each Audit Report specified the criteria in the Standards for each audit item. Thirdly, on each visit to the Restaurant she personally told Mr Poon, Ms Galvez and others in Hong Kong to refer to the online materials, and kept on telling them the Standards could be found on ShareFile. Indeed, on her first visit in April 2010, she told Mr Poon to start using ShareFile to stay abreast of the Standards and to obtain the support he needed, but it transpired he had been automatically locked out for not accessing the website. Fourthly, for the past 14 years until the Notice of Termination the defendant never raised any issue or concern about what the Standards were.

78.  Mr Poon does not dispute that he, Ms Kwong and Ms Galvez had passwords to MENU/ShareFile, that he knew the plaintiff had a website which contained information about TGIF restaurants, that he had never logged on to the plaintiff’s website/webpage, or that Ms Galvez downloaded the 2010 FS Guide, the 2010 International Safety Audit form, the 2010 Brand Standards and the 2012 Brand Standards. But he claims the plaintiff  failed to bring the Standards and the System with revisions/updates to the defendant’s attention such that they were at a loss to know which were the applicable Standards and System for compliance:

(a) When the Restaurant started operations, the defendant received a manual called the “TGI Friday’s Office Procedures” as revised in January 1994 (“1994 Manual”) which gives no clue as to what were the Standards or the criteria for meeting the Standards.

(b) Even though he had undergone training in the United States, Mr Poon was never told what the Standards that the defendant as franchisee had to meet were.

(c) The defendant did not receive any new version of the operations manual setting out the Standards and the System by mail apart from some marketing material and franchise support in 2008.

(d) The plaintiff never told Mr Poon he could obtain or download updated information on the Standards and the System by accessing MENU/ShareFile. He would contact Ms Fowler’s predecessor Mr Hughes Carroll whenever he needed support.

(e) The 2102 Brand Standards appeared to be intended by the plaintiff for compliance in 2015 given the “AMBITION 2015” stamp on the front page and the email from the plaintiff’s Mr Ian Saunders to Mr Poon dated 25 July 2012 about building on the “AMBITION 2015” goals for TGIF. But I note with interest that such email refers to an upcoming conference to “improve the execution of FRiDAY’S Guest Experience” and to focus on “FRiDAY’S Brand Standards …… and FRiDAY’S Guest Experience”.

(f) Ms Galvez was promoted to Assistant General Manager in 2010, but Mr Poon gave her the password to access ShareFile to satisfy her interest in learning about the operation of a TGIF restaurant “for her own career advancement”. She liaised with Ms Fowler to resolve her problem of not being able to access the website with such password.

(g) Ms Galvez did not download the food safety guides/form to ascertain the Standards because she was unaware of any legal obligation on the part of the defendant to keep abreast of the Standards and the System on ShareFile. Further, the plaintiff had not done anything to cause Mr Poon to realise he should obtain materials from MENU or ShareFile.

79.  Mr Li SC submits that contractually the relevant manual is the 1994 Manual, and there is no absolute documentary evidence to prove the revisions/updates to the Standards and the System had been mailed to the defendant. He refers to Clause 13.07(c) and says it is “at least arguable” whether the plaintiff has not discharged their duty under such provision so as to impose the 2010 FS Guide and the 2010 Brand Standards on the defendant by merely inviting them to attend conferences/meetings or to access ShareFile, especially in view of the confusing volume of materials at the website.

80.  It is not for the court at this stage to resolve conflicts in evidence, but I am not persuaded that Mr Poon’s contentions detract from the good prospects of the plaintiff’s case on the merits. For present purposes, I shall focus on the 2010 FS Guide and the 2010 Brand Standards, which the plaintiff claims to be the applicable Standards adopted in the July, November, January, April, August and September Audits/Reports.

81.  Ms Galvez’s downloading of the 2010 FS Guide must be put in context. In her email to Ms Fowler dated 6 September 2010, she complained as follows:

“By the way Ms. Fowler, we would like to know what supports you could provide for us. I will tell you what the problems that we are encountering right now. We do not have access for all the materials that Carlson Restaurants worldwide has provided (e.g. Materials on M.E.N.U.) we’ve tried to asked help but we didn’t get answers. ……”

Plainly she was writing to Ms Fowler in context of operating the Restaurant and not in respect of her private interest of career advancement. What followed was a email from Ms Fowler on 13 October 2010 on FSS with links to instructional documents on ShareFile (see paragraph 76(f) above), and Ms Galvez downloaded the 2010 FS Guide and the corresponding food safety audit form on 8 and 20 November 2010 (see paragraph 76(g) above). The Clayton Letter dated 31 January 2012 and the January Report emailed to Mr Poon on 1 February 2012 raised issues with line checks and cooling issues, which was closely followed by Ms Galvez’s request on 11 February 2012 to Ms Fowler for inter alia cooling log sheet sample and new line checklists (see paragraph 76(h) above). On 14 February 2012, Ms Fowler actually sent the 2010 FS Guide and the labeling standards documents to Ms Galvez by email (see paragraph 76(i) above). Against such history, the plaintiff clearly has good prospects in establishing that the 2010 FS Guide was brought to the attention of the defendant as the applicable Standards for FSS. To say that Ms Galvez downloaded such document for her private career advancement when it is plainly a TGIF operational guide is, as Mr Pao says, unconvincing.

82.  As regards the 2010 Brand Standards, which Ms Galvez downloaded in May 2011, the suggestion that she downloaded it for her personal consideration is also not convincing. As early as on 18 June 2009, the plaintiff sent a letter to Mr Poon detailing various breaches of “the Standards (as defined in the Franchise Agreement) applicable to T.C.I. Friday’s restaurants” in relation to the operation of the Restaurant, and requiring the defendant to “bring the Restaurant into compliance with the Standards”. Mr Poon relies on this letter in his 1^st affirmation without raising any query about the applicable Standards. Throughout 2011 and 2012 before the Notice of Default, both the plaintiff (see paragraphs 32, 35, 37 and 39 above) and the defendant (see paragraphs 40, 41, 46 and 47 above) referred to Brand Standards in their correspondence with query or demur. The defendant’s FSS corrective action plans (see paragraphs 40 and 47 above) cite the Standards in detail, and not a single query was raised over the criteria set out in the various Audit Reports (including the April and August Reports) against which the restaurant reviews were done. 

83.  Bearing in mind the specific reference to the Standards in the Franchise Agreement and their importance (see Clause 7.02), the defendant’s suggestion that they have no idea about the Standards for the past 14 years of operation notwithstanding the aforesaid correspondence, audits/reports, awareness and availability of access to MENU/ShareFile, and actual download of operational guides rings hollow. In my view, the plaintiff has a strong prima facie case that the defendant was provided with the applicable Standards being the 2010 FS Guide and the 2010 Brand Standards.

(f) Certainty of the Standards

84.  Mr Li submits there is an issue as to the certainty of the criteria for meeting or failing the Standards. He says that the criteria are not clearly spelt out in the 1994 Manual, the 2010 FS Guide, the 2010 Brand Standards and the 2012 Brand Standards or in the Reports.

85.  Mr Li SC says that despite the differentiation between “critical” and “major” grading in the 2010 FS Guide, one gets no clue as to what would be regarded as pass or failure. I repeat my observations in paragraphs 55 and 75 above, and agree with Mr Pao that for food services it is highly arguable that the guidance provided to franchisees is naturally intended to be of a qualitative nature, and the courts will endeavour to find practical meaning in commercial documents between businessmen (eg the Franchise Agreement and the Standards referred to therein) and will not lightly strike them down as too vague and uncertain.[18]

86.  Again, as explained in paragraph 75 above, every section in the 2010 FS Guide sets out a narrative guide, and for each specific “critical” or “major” audit item the relevant standard and checkbox(es) for non-compliance(s). Mr Li SC says the FSS standards are fastidious and the 18 Uncured FSS Items do not fall within the non-compliance(s) in the 2010 FSS Guide. In my view, the fact that the Standards are detailed is no bar to their applicability. In any event, for the 18 Uncured FSS Items, the relevant thresholds in the 2010 FS Guide relied upon in the April and August Audits/Reports are spelt out clearly, eg for cold holding requirements it is clearly stated without ambiguity that all cold well and drawer products must be held at 5C or below (see the Schedule). Further, it must be commercial common sense that the 2010 FS Guide can only set out the usual or common contraventions and cannot be meant to be exhaustive when there are more than 930 franchisees worldwide.

87.  As regards the 2010 Brand Standards, Mr Li SC as illustration refers to the item for server staffing under “People Standard” (see paragraph 57 above) and says there is uncertainty in the criteria of “Lunch – 4 is maximum number of active tables, Dinner – 4 is the maximum number of active tables” as to whether “4” refers to the number of staff serving the active tables or the number of active tables. I find such argument strained. It is difficult to think of any restaurant operational guide that would specifically limit the restaurant to have only 4 active tables during lunch or dinner. This criteria deal with “server staffing”, so “4” plainly refers to the each server handling a maximum of 4 active tables at either lunch or dinner. Likewise, there is no evidence that the defendant has expressed any ignorance or concern as to the meaning of the staffing Standards when attempting to increase staffing prior to the Notice of Termination.

88.  Mr Poon complains that the pass or failure benchmark is not clear. He refers to the plaintiff’s letter to the defendant on 18 June 2009 alleging breaches of the Standards and Ms Fowler’s email to the defendant on 6 September 2010 saying that things in the Restaurant were in good order, and suggest that the plaintiff may have different yardsticks on determining whether there are breaches of the Standards at different times. The short answer is that the 2010 FS Guide and the 2012 Brand Standards were introduced after the plaintiff’s letter of 18 June 2009 (such that the letter may not have much bearing on the present circumstances), and there is no evidence to say that the deficiencies noted in 2009 had not been cured by 2010.

89.  In my view, the plaintiff has good prospects in establishing that in relation to the Uncured FSS Items and the problem of understaffing, the Standards are quite clear as to minimum requirements that ought to be met.

VII.  DAMAGES AN ADEQUATE REMEDY?

90.  I proceed to consider whether, if the plaintiff were to succeed at trial, they would be adequately compensated by an award of damages for the loss they would have sustained by the defendant’s continued operation of the Restaurant. Normally the plaintiff should not be entitled to interlocutory injunctive relief if damages would be an adequate remedy and the defendant would be financially able to pay such damages. If damages are not an adequate remedy, then I should go on to consider whether, if the defendant were to succeed at trial, they would be adequately compensated under the plaintiff’s undertaking as to damages for the loss they would have sustained by grant of the injunctions sought. But if there is doubt as to the adequacy of the respective remedies, then the question of balance of convenience arises.

91.  Ms Fowler says that over the years the TGIF brand and its distinctive signage, logo, advertising and menu have been associated with TGIF restaurants worldwide including the Restaurant in Hong Kong, and it is important that the goodwill and reputation of the TGIF brand be enhanced and protected. Although Mr Poon says the TGIF brand is not as successful and well-known in Hong Kong as in the United States or other parts of the world, I am of the view there must be local goodwill and reputation to the TGIF brand with the Restaurant having a presence in Hong Kong for over 14 years.

92.  The contractual franchise term under the Franchise Agreement is due to expire on 5 August 2013 so realistically speaking any application for permanent injunctive relief at trial would likely be academic. Ms Fowler says that if the defendant continues to run the Restaurant as a TGIF restaurant for the next 4 months with repeated pattern of sub-standard service, it is a form of real and serious prejudice because such unlawful operation of the Restaurant will tarnish and damage the goodwill and reputation of the TGIF brand as borne out by the customer complaints referred to in paragraphs 60-62 above. Ms Fowler also says that the Restaurant is the worst non-compliant TGIF restaurant worldwide, and such past performance is indicative of future performance which poses too much of a risk to the plaintiff’s brand, goodwill and reputation to allow the defendant to continue to operate a TGIF restaurant and use the plaintiff’s proprietary System and trademarks until 5 August 2013.

93.  Mr Pao submits that the plaintiff’s concerns cannot be compensated by an award of damages. He says that 4 months is not a short period of time for adverse opinion to spread. Mr Pao further submits that if the court declines to grant the interlocutory injunctions sought, there is a real risk of effectively sanctioning (and depriving the plaintiff of any meaningful remedy in respect of) the passing off of the Restaurant as being lawfully franchised when in fact the franchise had been terminated.

94.  Mr Li SC submits that it is the plaintiff’s case that the defendant has performed badly for the past few years as evident from the plaintiff’s letter to the defendant dated 18 June 2009 stating that they had breached the Standards (see paragraph 82 above). In such circumstances, any action to address the alleged damage to the TGIF brand name as a result of poor operation of the Restaurant should have been taken years ago, and bearing in mind that the defendant has operated the Restaurant for the past 14 odd years he fails to see how the goodwill and reputation of the TGIF brand can be further damaged by the defendant continuing to do so up to 5 August 2013.

95.  Whilst it is true that Ms Fowler says that the Restaurant was on a downward spiral, it is not right to say that the plaintiff delayed their application for injunctive relief for years. In fact, Mr Poon was at pains to point out that notwithstanding the plaintiff’s letter dated 18 June 2009, Ms Fowler’s email dated 6 September 2010 suggests that all was well by that time (see paragraph 88 above). In fact, it was the defendant who encountered problems in accessing the materials with MENU (see Ms Galvez’s email to Ms Fowler dated 6 September 2010 in paragraph 81 above), and opportunities were given for the defendant to access the operational materials on ShareFile and after every Restaurant audit for them to remedy the problems. It was only in 2012 that the plaintiff regarded it necessary to issue the Notice of Default and eventually the Notice of Termination.

96.  In my view, the recent spate of increased customer complaints that sit well with the understaffing problem which Mr Poon has admitted to some extent (see paragraph 57 above) reflects an escalation of the problems that lend support to the plaintiff’s claim that continued operation of the Restaurant at the Premises being a prime casual dining location  over the next few months will cause irreparable damage to the goodwill and reputation to the TGIF brand generally and will prejudice the plaintiff in looking for a reputable operator interested to become a new TGIF franchisee (now that the defendant’s franchise is not going to be renewed).

97.  Mr Li SC also suggests that the suspicion that the plaintiff carried out fault-finding Restaurant audits to obviate renewal of the franchise because of the defendant’s failure to commit themselves to the remodelling of the Restaurant (see paragraphs 65-66 above), the remodelling negotiations that continued even after the issuance of the Notice of Default (see paragraphs 65-66 above), the concern over the authenticity of the customer complaints (see paragraphs 60-62 above), the Restaurant’s increase in guests and revenue (see paragraphs 63-64 above) all raise issue as to whether there is any irreparable damage to  the TGIF brand. I repeat my discussions above on these matters and say that they do not detract from real likelihood of irreparable damage to the reputation and goodwill of TGIF brand.

98.  Mr Li SC goes on to argue that the plaintiff, well knowing the defendant would continue to operate the Restaurant as a TGIF restaurant and without any plausible good reason, delayed for more than 3 months after the Notice of Termination before issuing the Summons, which reflects there would not be any irreparable damage to the goodwill and reputation of the TGIF brand even if interlocutory injunctive relief is not granted.

99.  Mr Li SC submits it is trite law that when interlocutory injunction is sought, the applicant must show he has acted promptly and without delay for delay can mean there is no irreparable damage. He says that a rule of thumb (which he accepts should not be mechanically applied) is that unexplained delay for 6 weeks and explained delay for 3 months may be accepted, but any period longer than that is not acceptable. In King Fung Vaccum & ors v Toto Toys Ltd & ors,[19] where the 1^st defendant delayed for almost a year after becoming aware of the factor of which they then complained before applying for interlocutory injunction without any explanation for such delay, Rogers VP at pp.792-793 said:

“20. There has traditionally been a strong requirement when interlocutory injunctions have been sought, that the plaintiff must show that it has acted promptly and without delay. Promptly in the circumstances of interlocutory injunctions has been commonly understood to be a period of six weeks or so of unexplained delay and three months with an explanation given for the delay in making application for an injunction. Since the American Cyanamid decision the importance of irreparable damage in an application for an interlocutory injunction is paramount. If there is no irreparable damage demonstrated the need for an interlocutory injunction has not been shown. This is important because of the approach of the courts take to interlocutory injunctions. They are not the trial of the action and the court is concerned with whether irreparable damage will occur before a trial can take place. It stands to reason that if a party is prepared to allow matters to proceed and takes no action with respect to matters which have been extant for lengthy periods, it lies ill in their mouth to say that there is likely to be irreparable damage and that is the case here.”

In Dorshare Limited v Shun Pong Limited,[20] which concerns an application for interlocutory injunction that was delayed for more than a year in the absence of irreparable damage, Anthony Chan J says that unexplained delay can be fatal to an application for an interlocutory injunction because it can reflect the lack of irreparable damage, cause prejudice to the person who will be affected by the injunction, render it unreasonable or unjust to grant an interlocutory injunction, and “in a bad case of unexplained delay …… constitute an abuse of process”.

100.  Mr Pao says that the aforesaid rule of thumb is not to be applied with any rigidity, and much turns of the circumstances of each case. He refers me to cases on passing off in which the court granted injunctions notwithstanding delays. In Ariaans v Hastings,[21] the respondent did not issue the writ until July 1991 even though he knew of the appellant’s misuse of the brand name after termination of the franchise in December 1989. Heenan J at pp.218-219 held that as there was no evidence of acquiescence or estoppel, bearing in mind the deceptive conduct of the appellant, it would be unjust to deny the respondent injunctive relief in respect of the appellant’s misuse of the brand name:

“The delay by the respondent in commencing these proceedings was considerable. …… the respondent’s solicitors gathered a great deal of evidence and presumably had been engaged in that task well before issuing the writ. The evidence falls short of showing the circumstances from which the court might conclude that the delay was unreasonable. Further, the court’s attention has not been drawn to any position taken by the appellant as a result of the delay which has resulted in prejudice to him of such a nature that it would be unjust to grant relief to the respondent. The balance of justice is in favour of the latter.”

In Mr Submarine Ltd v Bikas (cob First Shop Submarine),[22] interim injunction was granted to restrain the defendant from presenting his shop in such a way as to cause confusion with those of the plaintiff. The plaintiff became aware of the defendant’s shop in mid-January 1974 and only commenced legal action on 10 July 1975. Some explanation was put forward, and the court held that the delay ought not prevent the plaintiff from obtaining the relief that it sought:

“16. …… However, the decision of Cavendish House (Cheltenham) Limited v Cavendish-Woodhouse Limited, [No. 15] Reports of Patent, Design and Trade Mark cases [1968] 448, is most helpful. In that case on a motion for interlocutory relief in a passing off action the plaintiffs had established a strong prima facie case but they had delayed in applying for interlocutory relief from October, 1967, when they first became aware of the defendants’ activities until the writ was issued in July, 1968. The plaintiff’s explanation for this delay was unsatisfactory. It was there held that the question of delay had to be balanced against the likelihood of the plaintiffs ultimately succeeding in the action. In all the circumstances of that case it was held that it would be better to grant rather than to withhold an interlocutory injunction.”

101.  In fact, the above approach is echoed in Re Wako Giken (HK) Co Ltd (cited in Dorshare Limited at para.15):[23]

“24. I of course accept that applications for interlocutory injunctions should be made promptly and that there are authorities that suggest that mere delay can be fatal to an application, but as Spry observes in The Principles of Equitable Remedies (8^th ed., 2010) p. 488, ‘Statements such as these, however, are in several respects misleading and do not reflect the actual practice of the courts of equity.’ In my view, the correct approach is summarised by Eichelbaum J in Monsanto Co v Stauffer Chemical Co (NZ) [1984] FSR 599, 571:

Further, and without wishing to detract from the proposition that equitable relief needs to be sought promptly, it is not sufficient for a defendant to show that the applicant has delayed unreasonably. It must be shown that because of the delay, it would be unreasonable to grant the remedy; that it has become practically unjust to do so. As Megarry J said in: Legg v Inner London Authority [1972] 1 W.L.R. 1245:

What seems to me important is not so much the length of the delay per se, but whether the delay has in come ways made it unjust to grant the injunction claimed. (pp. 1259-1260).

And see Lindsay Petroleum Co v Hurd (1873-1874) LR 5 PC 221, 240 and Spry, Equitable Remedies, (2^nd ed.) pp. 405, 454-455.

25.    I do not think that because of the delay in bringing this application, it would be unreasonable or unjust to grant the order sought by the petitioners.”

102.  I respectfully adopt the principles in the above authorities. Here, I have found that the plaintiff has strong prima facie case on the merits. There is no evidence that the defendant has been prejudiced or has altered their position because of the time lapse between the Notice of Termination on 12 September 2012 and the Summons on 21 December 2012. The plaintiff has all along made clear that they regard the franchise as having been validly terminated.

103.  Ms Fowler denies any undue delay. The Notice of Termination was followed by correspondence between the parties’ respective solicitors between 24 September and 11 October 2012. When the defendant’s solicitors wrote to the plaintiff’s solicitors on 24 September 2012, they raised a host of questions about the Standards. In my view, it is not unreasonable for the plaintiff to respond to such queries by their solicitors on 8 October 2012 and then wait to see if the defendant would persist in their opposition to the termination of the franchise. The defendant’s solicitors confirmed their client’s opposing stance on 11 October 2012. The question is therefore whether the period of about 2½ months until 21 December 2012 amounts to such delay as to make it unjust to grant the interlocutory injunctive relief sought.

104.  Ms Fowler explains that the present action and the Summons were last resort efforts, and the plaintiff has taken time to seek and obtain further legal advice, to brief counsel for further advice, to draw up court documents for the present action and the Summons, and to collate substantial documentation/evidence (eg access logs, audit reports, operational guides, brand Standards, and history of non-compliance). Mr Pao says that care and time are enquired for such exercise given the Mandatory and Finality Points. Ms Fowler says this process was made difficult due to the plaintiff’s headquarters being located in the United States and the travel schedules of their relevant officers (including Ms Fowler who is the deponent of the supporting affirmations).

105.  I accept that after 11 October 2012 the time required to bring the present action and to issue the Summons could have shortened by a few weeks. The plaintiff operates on an international dimension and there should not be difficulty in seeking legal advice and preparing for the injunction application. Mr Li SC says it lies ill in the mouth of the plaintiff, who claims that urgent interlocutory injunctive relief is required due to the imminent expiry of the Franchise Agreement, to delay their application. But the ultimate question is not the length of the delay per se, but whether the delay (and here we are talking about a few weeks) has made it unjust to grant the interlocutory injunctions claimed. Balancing the delay against the likelihood of the plaintiff ultimately succeeding in the action, and the damage to the reputation and goodwill of the TGIF brand, which is difficult to estimate and which cannot really be expressed in monetary terms, I am not persuaded that it would be unreasonable or unjust to grant the interlocutory injunctions sought by reason of any delay in bringing this application.

106.  Given my view that the plaintiff will suffer irreparable damage, in all the circumstances the risk of injustice is greater if the interlocutory injunctive relief is not granted and this is proven to be eventually wrong, in which case the plaintiff will be left without remedy since the franchise will expire in any event on 5 August 2013. On the other hand, should the grant of the injunctions turn out to be wrong, what the defendants have lost by being deprived of several months of trade is a matter which, by comparison with earlier business accounts, should not be very difficult to estimate. On this basis, there is no need for me to consider the balance of convenience. However, in case I am wrong, I will deal with it briefly.

VIII.  BALANCE OF CONVENIENCE

107.  The effect of the mandatory elements of the injunctions sought reflects essentially what has been contractually agreed by the defendant when they cease to operate a TGIF restaurant at the Premises. Even without the Notice of Termination, the defendant would have to take steps to de-identify the Restaurant as a TGIF restaurant by 5 August 2013, and such costs will have to be incurred in any event.

108.  Does the balance of convenience favour the plaintiff if the de-identification measures take place a few months before 5 August 2013? Mr Pao says the interlocutory injunctions sought do not seek to prevent the defendant from operating a de-identified restaurant at the Premises, eg by removing or covering the external signage with TGIF trademarks, replacing paper products, menus and other interior design cues that contain TGIF trademarks or are distinct to TGIF’s brand image (eg red and white stripes awnings), and removing from their menu proprietary recipes and/or product names specifically connoted with TGIF. Ms Fowler claims that in her experience de-identification to the plaintiff’s satisfaction can be done within a week.

109.  Mr Poon disagrees, and says that setting up a new business requires at least 9 months to line up food suppliers, re-train existing staff, redecorate the premises and advertise the new business. Further, the defendant has yet to find alternative premises, and Mr Poon expects it will at least take 6 months to locate suitable replacement premises to set up its catering business and relocate staff. So if the injunctions sought are granted, Mr Poon says it will mean that the defendant will have to close the Restaurant, lay off their 25 staff and keep on paying rent at least until 13 September 2013. Mr Li SC submits that the status quo should be preserved.

110.  In my view, since the defendant no longer seeks to renew the franchise, they will be required in any event to cease operate the Restaurant as a TGIF restaurant by 5 August 2013, so there can be no suggestion that the obligations imposed by the interlocutory injunctions sought are unduly onerous or unexpected. Further, whether the defendant is able to relocate their catering business to alternative premises is irrelevant since they have chosen not to renew the franchise. Any prejudice to the defendant is likely to be limited to financial loss (eg loss of profit or wasted expenditure), which can be dealt with by the undertaking as to damages and fortification thereof. The defendant has not suggested it would suffer any prejudice which cannot be compensated by damages. They do not enjoy any goodwill which will be adversely affected by the injunctions since the Restaurant is identifiable only as a TGIF restaurant. According to Mr Li SC, even the defendant reckons that the de-identification measures in contra-distinction to relocation of the Restaurant to other premises or re-styling the Restaurant into a new restaurant will only take 2 months (although I am not persuaded it will take this long). Presumably the defendant may have to pay rent during the de-identification process when there is no viable business operating at the Premises, but such loss (if any) caused by the injunctions can be covered by an award of damages. As regards the restaurant staff, they will become redundant sooner or later, and redundancy payments translate to possible financial loss on the part of the defendant.

111.  It follows from the above analysis that the balance of convenience strongly supports the grant of interlocutory injunctive relief. In all the circumstances, I consider it just to grant such relief in favour of the plaintiff since it will cause the least injustice in the event that the decision is ultimately held to be wrong.

IX. FORTIFICATION OF UNDERTAKING AS TO DAMAGES

112.  The plaintiff is prepared to give the usual undertaking as to damages. But it is an overseas company with no evidence of any assets in Hong Kong, and they have put forward HK$500,000.00 as security for costs. In the course of Mr Pao’s reply submissions, an offer was made to fortify the undertaking by putting up HK$1.5 million by suitable bank guarantee or payment into court. Given the lack of evidence of the plaintiff’s financial position and their overseas status, I consider it appropriate to order fortification.

113.  But there is no evidence before the court of the possible loss that the defendant may suffer as a result of the granting of the injunctions sought. There is no evidence at all in respect of staff salaries, possible redundancy payments, monthly rental of the Premises, and/or average net profits of the Restaurant. Given such lack of evidence as to possible loss that the defendant may suffer and the fact that the offered sum is not insubstantial, I accept that HK$1.5 million is a fair sum. This amount is to be paid into court within 7 days from the date of the order.

X.  CONCLUSION

114.  I therefore grant the following orders in favour of the plaintiff:

(a) an order in terms of paragraph 1 of the Summons;

(b) an order in terms of paragraph 2(a), (b) and (c) of the Summons save that “forthwith” shall be replaced by “within 28 days of the date of this order” whenever it appears;

(c) an order in terms of paragraph 2(d) of the Summons save that (i) “forthwith” shall be replaced by “within 28 days of the date of this order” and (ii) “to distinguish it from other TGIF restaurants operating in other jurisdictions, including those referred to” shall be replaced by “as specified”;

(d) an order in terms of paragraph 2(e) of the Summons save that (i) “forthwith” shall be replaced by “within 28 days of the date of this order” and (ii) “all confidential information” shall be replaced by “to the plaintiff all written directives, restaurant operation manuals, brand standards and food quality plans and guidelines relating to the operation of the Restaurant, and any copies thereof, which are”;

(e) the plaintiff shall pay into court within 7 days of the date of this order the sum of HK$1.5 million as fortification of their undertaking as to damages that may be suffered by the defendant as a result of the injunctions granted herein.

115.  Mr Pao asks that the defendant should comply with the mandatory aspects of the injunctive relief within 14 days whilst Mr Li SC asks for 2 months. In my view, the appropriate and reasonable time should be 28 days. The purpose is to de-identify the Restaurant as a TGIF restaurant as part of the interlocutory relief. Full remodelling into a new Restaurant is not required, and TGIF signage, trademarks, and product names can be removed or covered as appropriate.

116.  In the course of his reply submissions, Mr Pao has narrowed down the scope of paragraph 3 of the Summons by asking for an order for an affirmation to be made by a director of the defendant to verify compliance with the mandatory aspects of the injunction orders sought within 14 days of such compliance. Mr Li SC opposes such application. I am not prepared to grant such application at this interlocutory stage. As shown by the previous Restaurant audits, the plaintiff has little difficulty in ascertaining compliance or otherwise by site visit, and they should know what operational guides and materials have been given to or downloaded by the defendant.

117.  As to costs, I make a costs order nisi that the costs of the Summons (including all costs reserved, if any) shall be the plaintiff’s costs in the cause to be taxed if not agreed.

Schedule