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 subsequently unenforceable. Since then, the Claimant has appealed the judgment and the Court docket of Enchantment 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 Info
The info of the case are set out in our earlier article (hyperlink above). Nonetheless, in brief, the Claimant (Dwyer) is the franchisor of ‘Drain Physician’, a really massive emergency plumbing and drainage franchise. In distinction, the Defendant basically consists of Mr. Bartlett, a person who ran his enterprise from dwelling and had no earlier plumbing expertise apart from a short course supplied by Dwyer.
The franchise settlement was terminated in mid-2020, and Mr. Bartlett then started to commerce as ‘Day by 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 large as a result of they successfully left Mr. Bartlett unable to be employed by an identical enterprise for 12 months even when there was no confusion with Drain Physician, and unable to make use of his dwelling as a registered deal with even when working elsewhere. The decide took into consideration the inequality of bargaining powers between Dwyer and Mr. Bartlett in reaching his conclusion.
The Court docket of Enchantment Judgment
Dwyer appealed to the Court docket of Enchantment (Dwyer (UK Franchising) Restricted v Fredbar Restricted [2022] EWCA Civ 889), alleging that the Excessive Court docket decide thought-about irrelevant and impermissible components in reaching his resolution. Regardless of Dwyer’s arguments, the Court docket of Enchantment 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 Enchantment’s resolution. Dwyer’s contractual phrases have been commonplace and the settlement was introduced to Mr. Bartlett on a ‘take it or depart it’ foundation. A lot was manufactured from the cash that Mr. Bartlett had invested and the monetary danger 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 Enchantment seen 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-about when deciding whether or not the restrictive covenants are affordable.
The Court docket of Enchantment 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 truth, 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 affordable. Nonetheless, the judgment did concede {that a} 12 month covenant might need been affordable 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 circumstances. 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 possible draw a comparability with employment contracts as a substitute.
In an identical vein, a standout level from each the Excessive Court docket and Court docket of Enchantment judgments was the give attention to inequality of bargaining energy. The courts have been each keen and eager to think about the particular circumstances of the events, together with the diploma of danger undertaken by Mr. Bartlett and the potential monetary impression he may expertise if issues went improper.
Each case is fact-specific and there are not any laborious and quick normal guidelines about what makes an enforceable covenant. You definitely shouldn’t assume that just because a restriction is 12 months or much less, it is going to be thought-about affordable. It is very important think about the size of time {that a} franchise had been operating for within the first place; restrictions drafted in relation to the franchise’s length, reasonably than a blanket 12 months, might need had extra success.
In brief, the Court docket of Enchantment has actually emphasised the significance of tailoring post-termination restrictive covenants to the actual state of affairs at hand.