High Court: Post-termination restrictions in franchise agreement unenforceable

The following case, reviewed by Rooks Rider’s Head of Dispute Resolution, Gemma Newing, serves as a reminder for franchisors and franchisees of the importance of business relationships and the enforceability of post termination restrictive covenants.

Dwyer (UK Franchising) Limited -v- (1) Fredbar Limited (2) Mr Shaun Rowland Bartlett [2021] EWHC 1218 (Ch)

Background

Dwyer (UK Franchising) Limited (“Dwyer”) is a franchisor of ‘Drain Doctor’ plumbing and drain repair services; a business which had been franchised out to a network of franchisees.  One such franchisee was Fredbar Limited (“Fredbar”), who entered into a Franchise Agreement (“the Agreement”) with Dwyer to become a Drain Doctor franchise.  The guarantor to the Agreement was Mr Bartlett, the Director and shareholder of Fredbar.

On 16 July 2020, Fredbar wrote to Dwyer purporting to terminate the Agreement.  Fredbar and Mr Bartlett had become disgruntled at, what they argued, was a lack of support by Dwyer, with unrealistic financial targets that Fredbar was not able to achieve without assistance from Dwyer.  Dwyer held Fredbar’s termination to be a repudiatory breach of the Agreement and, as a consequence, proceeded to terminate the Agreement themselves by way of letter dated 19 August 2020.

It subsequently transpired that Mr Bartlett had set up a new business called “Daily Drains” which was trading in and around the same post code area as contained in the Agreement.  Dwyer sought injunctive relief to restrain Fredbar (and consequently Mr Bartlett) from acting in breach of the restraint of trade covenants contained in the Agreement, as well as damages for breach of the Agreement.

Fredbar’s position was that negligent misrepresentations had been made by Dwyer before the Agreement was concluded, with Dwyer also failing to fulfil various obligations during the course of the Agreement, one of which included an alleged failure of Dwyer to comply with a ‘force majeure’ clause during the Covid pandemic.  Combined, this entitled Fredbar to rescind and terminate the Agreement.  Whilst the Agreement specifically excluded any reliance or liability for representations, Fredbar held these to be unreasonable.  Fredbar’s alternative position being that, if the Agreement was rescinded or terminated by Dwyer, the restraint of trade covenants contained in the Agreement were unreasonable and unenforceable.

Proceedings were commenced by Dwyer against Fredbar and Mr Bartlett, where the Court looked in considerable detail at the events leading to the execution of the Agreement, as well as the parties’ actions during the Agreement, which culminated from events arising from the Covid pandemic.

The Outcome

Whilst the Court was mindful that there was an imbalance of bargaining power between the parties – Dwyer being a large international corporate and Fredbar being a company incorporated purely for the reason of Mr Bartlett taking on the role as franchisee of Dwyer, with Mr Bartlett being an individual with no previous experience of franchising – the Court made it clear that if a franchisee, however small they may be, acts in breach of a Franchise Agreement, the franchisor must take steps to protect itself.

As unfortunately can happen with some parties in litigation, the Court felt that matters ran away with themselves and perspective was lost; this case being an example of such.  Dwyer viewed Mr Bartlett as a ‘rogue’ and threw its full force against him and Fredbar in the proceedings.  Whereas, at Trial, the Court heard how Mr Bartlett had struggled to meet the financial projections imposed by Dwyer, and did not receive much in the way of support from Dwyer to improve matters.  The Court was somewhat critical of the approach adopted by Dwyer against its franchisee, which was further demonstrated by its response to Mr Bartlett over the Covid restrictions imposed by the Government which severely limited the ability for Mr Bartlett/Fredbar to generate an income, let alone meet the financial targets set by Dwyer.

The key question for the Court to determine was whether the restraint of trade restrictive covenants contained in the Agreement were enforceable. 

The Court found the restrictions were unenforceable.  Whilst the purpose behind such clauses is ultimately to protect the goodwill of the business, it appeared that there was a lack of discussion or negotiations of the restrictions, which generated an inequality of arms.

• The first prohibition prevented Fredbar (the company) being used by Mr Bartlett in any capacity, as well as preventing Mr Bartlett from being engaged or concerned in any plumbing or drainage business within the territory, without any exceptions.

• The consequence of this being that Fredbar could not act as a subcontractor, and nor could Mr Bartlett be employed by a plumbing or drainage company.

• Such restriction applied in circumstances where subcontracting and/or employment would in no way affect Dwyer’s goodwill.

The Court found such restriction to be unreasonable. In particular, the Court noted that when the Agreement was entered into, it was reasonably foreseeable that this would put Mr Bartlett at a considerable risk of being unemployed.

• The second prohibition extended the radius of the area where Fredbar/Mr Bartlett would be restrained from operating in.

When the Agreement allowed Fredbar to work outside of the defined territory, albeit in limited circumstances, the Court found it to be unreasonable to prohibit Fredbar/Mr Bartlett in this way.  Whilst it is fair to say Mr Bartlett would gain knowledge from Dwyer in the business of plumbing and drainage, there were no trade secrets that needed to be protected by the prohibitions.

The conclusion reached by the Court was that the restrictions did not strike a reasonable balance between freedom to contract and freedom of trade.  Those contained in the Agreement were far more extensive than what was required by Dwyer to provide reasonable protection of its business.

Note to franchisors

This case highlights the importance for franchisors to ensure the Franchise Agreement correctly reflects the needs of their business, rather than aiming to provide a cast iron gate around the franchisee and its guarantor(s) that would be far too restrictive, and in turn, unenforceable.  Whilst franchisors understandably want to protect their business, being overly restrictive will not necessarily help that cause.

Note to franchisees

For franchisees it highlights the importance of obtaining legal advice on Franchise Agreements before entering into them, to ensure a full and informed decision can be reached.  It also highlights that allegations of misrepresentation and undue influence which are often used by disgruntled franchisees when disputes arise over Franchise Agreements, are unlikely to succeed, other than in exceptional circumstances.

If you are considering becoming a franchisee or you are a franchisor, speak to our Rooks Rider Solicitors specialist Franchising team.

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