In our earlier article about post-termination restrictive covenants we mentioned the Excessive Court docket case of Dwyer (UK Franchising) Restricted v Fredbar Restricted [2021] EWHC 1218 for example of covenants being discovered unreasonable and due to this fact unenforceable. Since then, the Claimant has appealed the judgment and the Court docket of Attraction has as soon as once more present in favor of the Defendant. So what does this imply for these making an attempt to implement, or keep away from, restrictive covenants?
The Information
The info of the case are set out in our earlier article (hyperlink above). Nonetheless, briefly, the Claimant (Dwyer) is the franchisor of ‘Drain Physician’, a really giant emergency plumbing and drainage franchise. In distinction, the Defendant basically consists of Mr. Bartlett, a person who ran his enterprise from house and had no earlier plumbing expertise aside from a quick course offered by Dwyer.
The franchise settlement was terminated in mid-2020, and Mr. Bartlett then started to commerce as ‘Every day Drains’. Dwyer alleged that this was in breach of the post-termination restrictive covenants within the franchise settlement. The Excessive Court docket disagreed, holding that the restrictions have been too broad as a result of they successfully left Mr. Bartlett unable to be employed by the same enterprise for 12 months even when there was no confusion with Drain Physician, and unable to make use of his house as a registered tackle even when working elsewhere. The choose took into consideration the inequality of bargaining powers between Dwyer and Mr. Bartlett in reaching his conclusion.
The Court docket of Attraction Judgment
Dwyer appealed to the Court docket of Attraction (Dwyer (UK Franchising) Restricted v Fredbar Restricted [2022] EWCA Civ 889), alleging that the Excessive Court docket choose thought of irrelevant and impermissible components in reaching his resolution. Regardless of Dwyer’s arguments, the Court docket of Attraction agreed with the Excessive Court docket and held that the covenants weren’t enforceable.
The inequality of bargaining powers was a major issue within the Court docket of Attraction’s resolution. Dwyer’s contractual phrases have been commonplace and the settlement was offered to Mr. Bartlett on a ‘take it or depart it’ foundation. A lot was fabricated from the cash that Mr. Bartlett had invested and the monetary threat he had assumed in coming into into the franchise settlement within the first place.
In a departure from the Excessive Court docket judgment, the Court docket of Attraction considered the franchise settlement as extra akin to an employment contract than to the sale of a enterprise. This helped help the argument that the bargaining energy between the events was unbalanced, and exhibits that the true nature of any franchise settlement should be correctly thought of when deciding whether or not the restrictive covenants are cheap.
The Court docket of Attraction additionally deemed the size of time that the franchise settlement had been in operation as related. The post-termination restrictions didn’t distinguish between whether or not the franchise had been short-lived or long-running. In reality, Mr. Bartlett had solely been working the ‘Drain Physician’ franchise for 18 months, 4 of which have been throughout the pandemic, and this fed into the conclusion {that a} 12 month restriction was not cheap. Nonetheless, the judgment did concede {that a} 12 month covenant may need been cheap if the franchisee had been well-established and profitable.
Key Takeaways
This judgment highlights the truth that each franchise settlement is completely different, and that such agreements don’t kind a particular class of their very own in restrictive covenant instances. Some franchise agreements will likely be real business-to-business contracts, however the place the connection between the events is extra akin to an employment relationship, the courts will probably draw a comparability with employment contracts as an alternative.
In the same vein, a standout level from each the Excessive Court docket and Court docket of Attraction judgments was the deal with inequality of bargaining energy. The courts have been each prepared and eager to think about the precise circumstances of the events, together with the diploma of threat undertaken by Mr. Bartlett and the potential monetary affect he may expertise if issues went unsuitable.
Each case is fact-specific and there aren’t any onerous and quick normal guidelines about what makes an enforceable covenant. You definitely mustn’t assume that just because a restriction is 12 months or much less, it is going to be thought of cheap. It is very important take into account the size of time {that a} franchise had been operating for within the first place; restrictions drafted in relation to the franchise’s period, somewhat than a blanket 12 months, may need had extra success.
In brief, the Court docket of Attraction has actually emphasised the significance of tailoring post-termination restrictive covenants to the actual state of affairs at hand.