I don’t often write about case law. Mainly because it’s interesting to us legal folk, but not so interesting to the lay person. However, I felt this one deserved a little airtime as it’s relevant to lots of our clients here at HooperHyde.
For those that are interested, the case is Dwyer (UK Franchising) Limited v Fredbar Limited (1) and Shaun Rowland Bartlett (2)  EWCA Civ 899. (You can read the judgment here).
What’s interesting about this particular case is that the Court of Appeal has decided that a “non-competition” clause in a franchise agreement was unreasonable and therefore unenforceable. This ultimately means that parties to a franchise agreement (and potentially other commercial contracts) may be able to challenge the “restrictive covenants” in certain circumstances.
What is a restrictive covenant?
A restrictive covenant is a clause in a contract that restricts what a party can do both during the contract but also after termination. They are typically found in employment contracts but can be found in any commercial contract, including franchise agreements and contracts for the sale/purchase of a business.
The purpose of a restrictive covenant is usually to restrict one party’s ability to compete with the other, to poach clients, to poach staff, or to take/use intellectual property and/or confidential information.
The law is generally wary of such clauses, as they tend to be contrary to public policy in that they restrict parties from exercising their general freedoms, often to do the only thing they are good at.
The general approach is that they can typically be challenged, and to do so, the court will take into account all of the relevant circumstances of each case.
Challenges usually focus on the duration of the restrictive covenant post-termination of the contract, and the geographical scope of it. Clearly the longer the clause lasts, and the wider area it covers, the more likely it is to be capable of being challenged.
In this particular case, the relevant restrictive covenant stated that the franchisee could not be "engaged, concerned or interested in a business similar to or competitive with" the claimant's plumbing franchise within a specific area for 12 months after termination.
When considering the reasonableness of the clause, the court needed to assess the parties' background circumstances, and what they objectively had in mind when the contract was made. In this case, the claimant was a major business, whereas the defendant was a "man with a van" with no prior plumbing experience (a key factor in determining the enforceability of the agreement).
In addition, the franchise agreement was long and was presented as ‘take it or leave it’. The “non-competition" restrictions were not discussed with the franchisee, and no opportunity was given to negotiate. The court felt this demonstrated inequality of bargaining power between the parties thus destroying any argument the claimant had that the restrictions were reasonable because the parties’ interests were aligned. It also meant that the contract was more like an employer/employee relationship than a business agreement.
The court also took into account that there had been no previous franchise in the area or nearby, and also felt that both parties knew there would be much less goodwill to protect if the contract ended early (as it did) than if it ended after several years of operating successfully.
As a result, the court felt the relevant clause was unnecessary to protect the claimant’s legitimate interests where there was early termination. Had the franchise been or become well-established and successful, and therefore with substantial goodwill to protect, the same restriction might have been seen to be reasonable. Of course, this demonstrates that the clause itself can’t be looked at in isolation, but must be considered in the light of all of the surrounding circumstances. The same clause may be reasonable in one case and not in another.
The court pointed out that that whilst using a standard form contract may be understandable, not all franchises are equal and therefore each agreement should have restrictive covenants that reflect how long the agreement lasted before termination.
What’s clear from the judgment in this case, is that challenging a restrictive covenant is possible, but not straight-forward. Each case is fact specific and should be considered on individual merit. Always carefully read a contract before you sign it to satisfy yourself that you are happy to commit to that which is being asked of you. And if in doubt, challenge it before signing.
If you need any help with a contract before you sign it, or one that you’ve already signed but you believe to be unfair, get in touch!