Trouble ahead for franchisors enforcing post-termination restrictions

The Court of Appeal caused a stink for an emergency plumbing franchise when it held that its post-termination restrictive covenants were unenforceable. Below, Liam Tolen, Franchise Dispute Solicitor sets out why and what you can do to avoid the same fate.

Trouble ahead for franchisors enforcing post-termination restrictions

When a franchisor and a franchisee part ways it is common-place for the franchisee to have promised not to set up in competition for a fixed period of time and usually in a defined area. In very broad terms, provided the restrictions are reasonable, a franchisor could expect the Courts would enforce the restrictions by imposing an injunction if the franchisee set up in competition. 

The Court of Appeal have however potentially thrown that into jeopardy. The Court has put the inequality of bargaining position between Franchisor and Franchisee at the front and centre of whether post-termination restrictions are reasonable. It also introduced a seemingly new concept of looking at how restrictions apply in the event of early termination versus after a long contractual relationship. 

What happened? 

The franchisee was a special purpose company set up by Mr Bartlett in order to enter into a 10 year franchise agreement. Mr Bartlett had no background in plumbing and undertook training with the franchisor. He was of relatively modest means and the failure of the business would put his family home at risk.

The franchise did not perform as well as projected and Mr Bartlett tried to sell up. Not long later, Mr Bartlett decided to attempt to terminate the franchise agreement and set up a similar business. Ultimately the Court agreed that it was the franchisor who had validly terminated the contract. 

The franchise agreement stated that Mr Bartlett would not, for one year after termination, work in any business similar to or competitive with the franchisor business within his former franchise territory. Even though the Courts have often discouraged a one-size-fits-all approach to drafting restrictions, it is fair to say, a restriction in those terms is likely to be regarded as industry standard and something like that will appear in almost every franchise agreement. 

However, it was held to be unreasonable largely because: 

(1) the inequality of bargaining position (meaning a more franchisee friendly approach to the assessment of reasonableness was the correct approach); and  

(2) the full impact of the restrictions applied regardless of how long the parties had been in a contractual relationship. 

Avoiding the same fate 

Inequality of bargaining position is almost inevitable between franchisee and franchisor but can be mitigated against. The franchisee should be required to obtain independent legal advice and confirm that it has done so in the terms of the franchise agreement. More than just lip-service should be given to independent legal advice – it should be a condition of entering into the agreement. If you wanted to go the extra mile, you could require the franchisee’s lawyer to certify that they have explained the consequences of the restrictions.   

Whilst it likely is unattractive for a franchisor to negotiate individual restrictions, being open to discussions could also increase the likelihood of having enforceable restrictions. Blanket provisions should be avoided. If you are in an industry where customers renew contracts every six months – a seven month restriction (ensuring all customers have completed a renewal cycle after the exiting franchisee has departed) may be preferable to a 12 month restriction which bears no relationship to the characteristics of the business. 

Finally, consider redrafting your restrictions so that they increase in duration in a manner which reflects how long you have been in the contractual relationship with the franchisee. Or, perhaps better still, so they “kick-in” only after a certain period. This provides an answer to the Court of Appeal’s criticism that Mr Bartlett would face the same restrictions if the agreement was terminated after 10 days as he would if it was terminated after 10 years. 

If the post-termination restrictions in your franchise agreement look like an off-the-shelf, one-size-fits-all template, now is definitely the time to revisit, as a matter of urgency, how the restrictions are designed to work in order to maximise your chances of being able to enforce, should the need arise.

Liam Tolen
Liam Tolen