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Ross Systems v. Linden Dari-Delite Inc.

Decided: July 6, 1960.


Conford, Freund and Haneman. The opinion of the court was delivered by Conford, J.A.D. Haneman, J.A.D. (dissenting).


[62 NJSuper Page 442] Plaintiff is a partnership consisting of three brothers named Levin residing in Illinois. It is in the business of "franchising and selling" equipment to retail ice-cream stores to be operated under the trade name "Dari-Delite." In 1952 Charles R. Dann was appointed

plaintiff's exclusive agent in New Jersey. Plaintiff brings this action to enforce compliance by the defendant Linden Dari-Delite, Inc. ("Linden" hereinafter) with a franchise agreement dated April 12, 1954, under which Linden was authorized by plaintiff to sell Dari-Delite ice cream from a location at 446 Wood Avenue in the City of Linden. Dann was designated a "Third Party" in the agreement, with the right to supervise compliance with its terms by Linden and to "take over" the contract in the place of Linden upon default by the latter. By an amended complaint plaintiff also seeks reformation of the agreement so that it will be declared intended and effective for a term of ten years. Dann is not an individual party to this action. An understanding of the defense and counterclaim, and of the disposition of the matter by the trial court, from which both sides have appealed, requires detailing the somewhat complicated factual background of this controversy.

On March 8, 1954 Dari-Delite of New Jersey, Inc., a corporation apparently owned and controlled by Dann, entered into a lease as tenant for certain store premises at the Wood Avenue, Linden, location above referred to for a term of ten years. The property was subleased April 2, 1954 to Linden at the same rent as the principal lease and for the balance of the same term. At the times of all the transactions thus far mentioned the proprietary interest in Linden was vested in Dann and one Winfield R. Scott. However, no ice-cream business was actually conducted by Linden at the Wood Avenue location until the defendant Samila came into the picture, as about to be related.

On March 31, 1955 Samila purchased the stock of Linden from Dann and Scott for the sum of $10,500, intending to conduct the Dari-Delite ice-cream business under the franchise and lease aforementioned through the instrumentality of the Linden corporation. He did so until May 21, 1958, when Linden, through counsel, notified plaintiff by letter of its termination of the franchise agreement and advised it to remove its personal property from the premises. It appears

from the complaint and pretrial order that defendants' basic grievance against plaintiff was that Dann, who as plaintiff's agent had the function under the agreement of designating local suppliers of the ice-cream mix which Linden was required to use, had made a side-agreement with the supplier for a rebate or commission to Dann which caused the price to Linden to be inflated correspondingly and beyond the contemplation of the agreement. The only payments to or on behalf of plaintiff stipulated in the agreement were 25 cents per gallon of mix and 3 cents per gallon as dues to the National Dari-Delite Association. But by Dann's side-agreement with Farmland Dairies, made February 15, 1957, Farmland paid him $500 in cash and agreed to pay him a commission of $1 per can (ten gallons) and 25 cents per can "to be used to help increase the output of cans of mix in the Dari-Delite Stores of New Jersey." This extra $1.25 per can (or $1 -- the proofs are not clear) was added to the basic price and included in the gross price for which Farmland billed Linden. Linden claimed to have overpaid about $1,000 for ice-cream mix to Farmland because of the Dann commissions.

It was Linden's position in its answer that this conduct by Dann entitled it to terminate the agreement, and the counterclaim sought recovery of the excess payments thus exacted from it.

At the conclusion of the testimony of the defendant Samila at the trial, the trial judge, on his own motion, raised the question, not theretofore made a point of issue by defendants, as to whether plaintiff had not violated the franchise agreement in the material respect of failure to provide ice cream of an "exclusive" formula. He finally held that there was such a breach by plaintiff and that the plaintiff was therefore not entitled to enforce the agreement, thus eliminating the issue of reformation. He intimated the view that the evidence would have warranted reformation if the agreement were to be held enforceable. The court dismissed the matter of the excessive payments by defendant on the basis that they were made knowingly, and, therefore, voluntarily.

It went one step further, however, holding that since the franchise agreement was terminated the lease from Dari-Delite of New Jersey, Inc. to the corporate defendant must also be terminated, as the "franchise and the sublease are part and parcel of the same transaction and are inseparable." Plaintiff was given leave to join Dari-Delite of New Jersey, Inc. as a party to effectuate a judgment to the stated effect in respect to the lease.


In the view we have taken as to certain of the issues in this matter it will be necessary to resolve the reformation issue. We do not propose to recite the pertinent proofs. We are satisfied that the evidence clearly indicates that the intent of the parties, both original and subsequent, was that the franchise agreement was to run for ten years and that the omission of the figure "ten" from one or two copies was an inadvertence. There is no doubt that in paying $10,500 for stock in the corporate defendant Samila was expecting to get the benefit of the nine-year balance of a ten-year franchise and lease.


We are unable to agree with the trial judge's holding that there was a requirement in the franchise agreement for the plaintiff to furnish the licensee with an "exclusive" mix, or that Samila justifiably entertained any such impression when he took over Linden. The opinion of the trial court states that this defense, although pleaded, was not set forth as an issue in the pretrial order, but that it had concluded during the trial, nevertheless, that this question was material, and therefore had directed that it be made an additional issue and that proofs be taken thereon. The court found that such an agreement for an exclusive formula was a part of the arrangement between the parties and that, since the evidence indicated that the plaintiff

designated suppliers of the ice-cream mix who supplied exactly the same kind of ice cream to retailers other than members of the Dari-Delite chain, there was a violation of the agreement for exclusiveness of the mix.

We find nothing in the franchise agreement requiring the plaintiff to supply to the defendant "an ice-cream mix of an exclusively uniform high quality which would be sold exclusively only (sic) by members of the Dari-Delite chain," as held by the trial court (emphasis ours). An examination of the agreement indicates that the only mention of the ingredients of the ice cream to be used at the franchised premises is in paragraphs 3 and 7. In paragraph 3 the licensee agrees that it will "use only uniformly high quality ingredients, according to the formula adopted by the first party" (emphasis ours). Paragraph 7 provides that the second party will use "only mix, flavors, cones, cups, cartons, and all other ingredients and materials of uniform high quality * * *. To insure this uniform quality the second party agrees to use only the mix furnished and sold by specified agents designated by Ross Systems * * *" (emphasis ours). It will be noted that the word "exclusive" or other similar characterization of the product to be used is absent from the agreement, as is any representation or undertaking by the plaintiff that no similar product would be made available by designated suppliers to others than the Dari-Delite chain. Since the alleged defense, noticed by the court upon its own initiative, deals only with alleged representations by Dann as to what the agreement provides, it is not established by anything in the testimony, since there is no proof that Dann represented to Samila that the agreement was to the effect stated. As a matter of fact, Samila was represented by a highly qualified lawyer, and a copy of the franchise agreement was furnished to him at the closing of the sale of stock in Linden. A reading of the agreement would clearly indicate to Samila and his counsel that no such representation

was contained therein. His counsel was a witness herein and did not testify to any contrary understanding on his part.

Moreover, the pleaded defenses, as set forth in the answer, do not charge a violation of the agreement in the respect held, but solely on the basis that the defendants were defrauded by Dann's entry into the side-agreement with Farmland Dairies aforementioned, "so that independent contractors were able to secure the same mix at a price which was minus this additional charge to defendant Dari-Delite, Inc." Thus the defense, as expressly pleaded in the answer to the amended complaint, was not that the franchise agreement should not be enforced because plaintiff violated an undertaking to supply defendants with an exclusive, special formula, but because the plaintiff, through Dann, its agent, fraudulently exacted an extra $1 per 40 quarts from the defendant by the means stated. And the fact that a defense of failure to supply an exclusive formula was not stated in the pretrial order is further indication that the notion of such a defense was never entertained by the defendants until called to their attention by the trial judge. What Samila was primarily interested in was obtaining the right to sell ice cream under the trade name Dari-Delite. His failure to object at any time to the non-exclusiveness of the mix constitutes a practical construction of the agreement, in harmony with its language and over-all purport, negativing the now asserted defense.

There is, of course, no objection to a trial judge's suggesting, on his own motion, the expansion of the issues from those stated in the pretrial order where he deems it necessary in order to accomplish justice, and adequate opportunity to defend is afforded the parties. Our only difficulty is that the defense developed by the court here was not, in our judgment, justified by the facts.


Our conclusions under Point II herein make it necessary to consider whether defendants' ...

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