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Franchise agreements and the enforceability of post-termination restrictions

02 Sep 2022

This case is a cautionary tale as the Court of Appeal ruled against a franchisor in a dispute over the eforceability of post-termination restrictive convenants.

The recent decision in Dwyer (UK Franchising) Ltd v Fredbar Ltd and another [2022] EWCA Civ 889 is a reminder that restrictive covenants in franchise agreements should be carefully drafted and tailored to individual circumstances so as to ensure enforceability and avoid any inadvertent loss of protection.

In this case, the Court of Appeal has dismissed an appeal against the decision that the post-termination restrictive covenants in its franchise agreement were unenforceable. The franchisor, Dwyer, operates “Drain Doctor” an emergency plumbing and drainage franchise business. The franchisee, Fredbar Ltd (first respondent), was incorporated by Mr Bartlett (second respondent) with a view to entering into a franchise agreement with Dywer to operate under the “Drain Doctor” brand.

The franchise agreement contained a restraint of trade provision, preventing the franchisee from being involved in a competing business for 12 months post-termination, within a 5 mile radius. The Court of Appeal, having regard to reasonableness, held that there was an inequality of bargaining power between Dwyer, the UK’s largest emergency plumbing and drainage franchise business and Mr Bartlett, a man with no previous experience of running a franchise. Additionally, Dwyer were aware of Mr Bartlett’s circumstances, including that he had invested all of his savings and had taken out a loan and despite this risk, entered into the franchise agreement. As a result, the restraint of trade provision was excessive because Mr Bartlett would be prevented from earning a living as a plumber in the area that he lived.

Another factor considered by the Court was goodwill and early termination. The Court recognised that Dwyer would want to impose a post-termination non-competing provision in order to protect its goodwill, given that whilst this franchise was the first in its territory, the Drain Doctor brand already had goodwill within it. However, the franchise agreement was terminated 18 months into its 10 year term and during that time, it had performed worse than expected. Therefore, “Drain Doctor” generated little additional goodwill and the post-termination restriction was held to be disproportionate.

This has been regarded a significant judgment and going forward, post-termination restrictions will require careful drafting as the Court will have regard to what is reasonable in the circumstances when deciding whether they are enforceable.

If you would like more information on anything mentioned in this article, please contact Darcy MacMillan on 0161 832 3434 or email darcymacmillan@kuits.com .

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