Franchise agreement – Post-termination restrictions – Property search business – Fixed term of agreement expiring but parties continuing franchise – Franchise later terminated by deed of surrender – Claimant franchisor claiming defendant franchisees breaching restriction on engaging in competing business within one year of termination – Whether restriction enforceable – Whether going further than necessary to protect claimant’s legitimate business interest – Whether period of restriction running from expiry of fixed contract term or date of surrender – Claim allowed
The first defendant company operated a local property search business as a franchisee of the claimant, pursuant to a franchise agreement that covered a territory comprising several postcode areas in and around Milton Keynes. The second and third defendants were directors of the first defendant and guaranteed its obligations under the agreement. Franchisees of the claimant used its system to provide property search information of the type typically required by conveyancers and lenders; their territories were defined by reference to the location of customers’ offices, rather than the franchisee’s place of business.
The first defendant’s franchise agreement was for a fixed term of five years. It contained a post-termination restriction prohibiting the defendants, for a period of one year after termination of the agreement, from engaging in any business that provided “any services which compete with any of the Services provided by [the Claimant] or any of its franchisees within the Territory”. The fixed term expired at the end of March 2011 but the parties continued to operate the franchise thereafter as if the agreement were still in place. Following a reduction in business, the defendants finally gave up the franchise by a deed of surrender in August 2012.
The claimant subsequently brought proceedings against the defendants, asserting that they were operating a competing business in breach of the post-termination restriction. The defendants contended that the restriction was unreasonable and unenforceable since, on its proper construction, it prohibited competition with the claimant throughout the United Kingdom, whereas the claimant’s legitimate interest was limited to goodwill built up within the relevant territory. The defendants further submitted that the restriction had expired at the end of March 2012, one year after the end of the original five-year contract period, and had not been revived by the deed of surrender in August 2012.
Held: The claim was allowed.
(1)A post-termination restriction would be unenforceable as a restraint of trade unless it was intended to protect a legitimate business interest of the covenantee and was no more extensive than was reasonably necessary to achieve that end: Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 applied. Where the relevant clause had two possible meanings, it was legitimate to adopt a construction that limited the restriction to reasonable protection of a legitimate business interest, with the consequence that the clause would be valid and enforceable, and to reject a construction that would render it void: Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 applied. Although that consideration should not be pushed too far, in principle it made sense to suppose that commercial parties of equal bargaining power were seeking to provide reasonable protection for a legitimate business interest. Applying those principles, the post-termination restriction in the first defendant’s franchise agreement applied only to prohibit the provision of services within the territory covered by the franchise agreement. On the natural meaning of the relevant clause, the words “within the Territory” qualified the words “the Services provided”, rather than the words “or any of its franchisees”. The natural meaning was preferable to any other possible meaning since it produced a result that was straightforward, workable and in accordance with business common sense and also limited the clause to the reasonable protection of the claimant’s legitimate interest in its goodwill in the relevant territory.
The restriction was limited to services concerned with the business of providing search reports and would not enable the claimant to restrict competition in the event that, after termination it began to carry out an entirely different kind of business. Subject to that, a new kind of search report provided by the claimant after termination of the agreement, or a new way of providing the same kind of reports as were already provided, would fall within the definition of “Services” covered by the restriction. The restriction, being carefully limited as to both period and territorial scope, and to the provision of property search reports, went no further than was reasonable to protect the claimant’s legitimate business interest and was enforceable at common law.
(2) The deed of surrender executed by the parties had proceeded on the basis, and the parties had thereby agreed, that the franchise agreement continued in force and would be terminated at the end of August 2012, with the consequence that post-term covenants would run for one year from that date. The deed made clear that what was to terminate at the end of August 2012 was the franchise agreement, not some notional franchise-at-will with an existence independent of that agreement. It was therefore unnecessary to decide whether, in the absence of such a deed, post-termination restrictions in a franchise agreement would ordinarily extend beyond their contractual expiry dates in circumstances where the parties continued the franchise informally after expiry of its contractual term: The Flat Roof Co Ltd v Bowden [2009] EWHC 2894 (Ch) and SJD Group Ltd v KJM (Scotland) Ltd [2010] CSOH 13 considered. The post-termination restriction remained in force and the claimant was entitled to an injunction against each of the defendants.
Robert Duddridge (instructed by Sherrards Solicitors LLP, of St Albans) appeared for the claimant; Jason Evans-Tovey (instructed by Hamilton Pratt, of Warwick) appeared for the defendants.
Sally Dobson, barrister
Franchise agreement – Post-termination restrictions – Property search business – Fixed term of agreement expiring but parties continuing franchise – Franchise later terminated by deed of surrender – Claimant franchisor claiming defendant franchisees breaching restriction on engaging in competing business within one year of termination – Whether restriction enforceable – Whether going further than necessary to protect claimant’s legitimate business interest – Whether period of restriction running from expiry of fixed contract term or date of surrender – Claim allowedThe first defendant company operated a local property search business as a franchisee of the claimant, pursuant to a franchise agreement that covered a territory comprising several postcode areas in and around Milton Keynes. The second and third defendants were directors of the first defendant and guaranteed its obligations under the agreement. Franchisees of the claimant used its system to provide property search information of the type typically required by conveyancers and lenders; their territories were defined by reference to the location of customers’ offices, rather than the franchisee’s place of business.The first defendant’s franchise agreement was for a fixed term of five years. It contained a post-termination restriction prohibiting the defendants, for a period of one year after termination of the agreement, from engaging in any business that provided “any services which compete with any of the Services provided by [the Claimant] or any of its franchisees within the Territory”. The fixed term expired at the end of March 2011 but the parties continued to operate the franchise thereafter as if the agreement were still in place. Following a reduction in business, the defendants finally gave up the franchise by a deed of surrender in August 2012.The claimant subsequently brought proceedings against the defendants, asserting that they were operating a competing business in breach of the post-termination restriction. The defendants contended that the restriction was unreasonable and unenforceable since, on its proper construction, it prohibited competition with the claimant throughout the United Kingdom, whereas the claimant’s legitimate interest was limited to goodwill built up within the relevant territory. The defendants further submitted that the restriction had expired at the end of March 2012, one year after the end of the original five-year contract period, and had not been revived by the deed of surrender in August 2012.Held: The claim was allowed.(1)A post-termination restriction would be unenforceable as a restraint of trade unless it was intended to protect a legitimate business interest of the covenantee and was no more extensive than was reasonably necessary to achieve that end: Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 applied. Where the relevant clause had two possible meanings, it was legitimate to adopt a construction that limited the restriction to reasonable protection of a legitimate business interest, with the consequence that the clause would be valid and enforceable, and to reject a construction that would render it void: Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 applied. Although that consideration should not be pushed too far, in principle it made sense to suppose that commercial parties of equal bargaining power were seeking to provide reasonable protection for a legitimate business interest. Applying those principles, the post-termination restriction in the first defendant’s franchise agreement applied only to prohibit the provision of services within the territory covered by the franchise agreement. On the natural meaning of the relevant clause, the words “within the Territory” qualified the words “the Services provided”, rather than the words “or any of its franchisees”. The natural meaning was preferable to any other possible meaning since it produced a result that was straightforward, workable and in accordance with business common sense and also limited the clause to the reasonable protection of the claimant’s legitimate interest in its goodwill in the relevant territory.The restriction was limited to services concerned with the business of providing search reports and would not enable the claimant to restrict competition in the event that, after termination it began to carry out an entirely different kind of business. Subject to that, a new kind of search report provided by the claimant after termination of the agreement, or a new way of providing the same kind of reports as were already provided, would fall within the definition of “Services” covered by the restriction. The restriction, being carefully limited as to both period and territorial scope, and to the provision of property search reports, went no further than was reasonable to protect the claimant’s legitimate business interest and was enforceable at common law.(2) The deed of surrender executed by the parties had proceeded on the basis, and the parties had thereby agreed, that the franchise agreement continued in force and would be terminated at the end of August 2012, with the consequence that post-term covenants would run for one year from that date. The deed made clear that what was to terminate at the end of August 2012 was the franchise agreement, not some notional franchise-at-will with an existence independent of that agreement. It was therefore unnecessary to decide whether, in the absence of such a deed, post-termination restrictions in a franchise agreement would ordinarily extend beyond their contractual expiry dates in circumstances where the parties continued the franchise informally after expiry of its contractual term: The Flat Roof Co Ltd v Bowden [2009] EWHC 2894 (Ch) and SJD Group Ltd v KJM (Scotland) Ltd [2010] CSOH 13 considered. The post-termination restriction remained in force and the claimant was entitled to an injunction against each of the defendants.Robert Duddridge (instructed by Sherrards Solicitors LLP, of St Albans) appeared for the claimant; Jason Evans-Tovey (instructed by Hamilton Pratt, of Warwick) appeared for the defendants.Sally Dobson, barrister
