Post Termination Restrictive Covenants – Focus on Franchise Agreements
Restrictive covenants are included in many different types of agreement including employment, consultancy and partnership agreements, business sale agreements and franchise agreements.
In each case, the restrictions have to be considered in the context of the transaction or agreement to which they relate, but it is always the case that a restriction must protect the legitimate business interests of the party seeking to enforce the restriction (and go no further than that) and they must not conflict with the public interest. What is and what is not enforceable will differ widely between different types of agreement and the courts will always consider the conflict between the freedom to contract and the freedom to trade.
Post-termination restrictions in a franchise agreement have recently been reviewed by the High Court. In that case [Dwyer (UK Franchising) Ltd v Fredbar Ltd], the franchise agreement provided that the franchisee and the owner of that business were not allowed to operate a business similar to or competitive with the franchised business within the exclusive franchise territory (Cardiff) or within a radius of five miles of Cardiff for a period of 12 months after termination of the franchise agreement.
The Judge held that these restrictions would prevent the franchisee and its owner from operating a plumbing and drainage business within Cardiff without exception. This meant that the franchisee could not act as a subcontractor and the owner of the business could not be employed by a plumbing and drainage business. This was found by the court to be unreasonable as it was reasonably foreseeable that the restrictions would increase the risk of the owner being unemployed during the 12 month restricted period with the consequences that may flow from that, including the inability to service the mortgage on his family home.
In relation to the radius of five miles, again the Court found this to be unreasonable as the franchisee had not provided services within that area.
Whilst all cases are judged on their own particular facts, this case serves as a reminder that restrictions must be reasonable to be enforceable and they should always take into account the circumstances of both parties.
For further advice on restrictive covenants… Talk to Tollers on 01604 258558 and speak to the experienced specialists in our Corporate and Commercial team who will be happy to help with all your requirements.