A recent case involving post-termination restrictions in franchise agreements highlights the importance of getting your agreements right.
In Dwyer (UK Franchising) Ltd v Fredbar Ltd and another  EWHC 1218 (Ch), the High Court found that a 12 month restraint of trade covenant on the franchisee was unreasonable.
The restraint of trade covenant provided that the franchisee should not, for a period of 12 months after termination of the franchise agreement, be engaged in a business similar or competitive with the franchisor’s “Drain Doctor Business” within Cardiff or an extended 5 mile radius.
The High Court’s decision, delivered by Insolvency and Companies Court Judge Jones, found in favour of the franchisor on various issues arising out of the termination of the franchising agreement by the franchisee. However, it held that the restraints of trade on the franchisee were unreasonable and unenforceable in the circumstances. It was not a case where the unreasonable part could be severed.
The term “Drain Doctor Business” was not defined in the franchise agreement. However, the High Court held that the term must refer to the business of plumbing and drains, as that was the business carried out under the “Drain Doctor” trade name. This construction was consistent with the other terms of the franchise agreement.
The first restriction would prevent the franchisee from engaging in any plumbing or drainage business within Cardiff without exception (even where such engagement wouldn’t have any effect on the franchisor’s goodwill). The circumstances of the parties were relevant in determining the unreasonableness of this restriction; it was clear the franchisor knew that its application would seriously increase the risk of unemployment for Mr Bartlett (who had set up the franchisee company for the purposes of this project) and might lead to mortgage possession proceedings for him and his family.
The second restriction extended the restraint of trade to an unreasonable range. There was no goodwill to protect insofar as the franchisor had never provided plumbing or draining services within the extended range.
The Judge held that the restrictions therefore failed to strike “a reasonable balance between the freedom of contract and the freedom of trade”, and “were far more extensive than was required to provide reasonable protection”. Mr Bartlett’s lack of experience within the sector and as a company director was a significant contributing factor (not least because the franchisor was aware of the fact).
This case is fairly singular on its facts, with the Judge noting that the reasonableness of post-termination restrictions will depend on the specific circumstances of a franchise agreement when it was made. Nevertheless, there are important take away points from this judgment.
- The first is an appreciation for the importance of defining the asset which restrictive covenants are protecting. Whilst the Judge was able to construct the meaning of the “Drain Doctor Business” in this case due to the business carried out under the associated trading name, there may well be circumstances where the courts would not be willing to do so. If the business of a franchisor is not properly defined (and such business could not be defined as a matter of interpretation), any restrictive covenants designed to protect that business would clearly amount to an unenforceable restraint on trade. Such unenforceability could have serious implications for a franchisor.
- The second is that this case reinforces the fact that cases in this area will turn to their specific facts and circumstances. It is therefore crucial that franchisors always consider the reasonableness of restrictive covenants from the outset of any project, and seek expert advice to ensure they get it right.
If you have any questions regarding a franchising agreement, post-termination restrictions, or projects more generally, please do get in touch with our franchising experts who shall be pleased to help.
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