The importance of checking post-termination restrictions in franchise agreements
In the recent case of Dwyer (UK Franchising) Ltd v Fredbar Ltd, the Court of Appeal held post-termination restrictions in a 10-year franchise agreement were unenforceable after their contract ended early.
Many business owners presume that these clauses are always legally binding, however, as this example shows, this is not always the case. In this blog, we look at the reasons behind this decision and what employers and business owners should be aware of when drafting these types of clauses.
What are post-termination restrictions?
Post-termination restrictions (or restrictive covenants) are clauses in an employment contract or settlement agreement that prevent an individual, i.e. an employee, from doing something after they have left their job. Generally, this covers taking clients to their new role (a non-dealership restriction) or working for a competitor (a non-compete clause).
Restrictive covenants and franchise agreements
In this case, the post-termination restrictions applied to franchise agreements, which granted the franchisee (Fredbar Ltd) the right to provide plumbing and drainage services using the name ‘The Drain Doctor Business’ under the franchiser’s (Dwyer) trademark.
The post-termination restrictions in these agreements prevented Fredbar Ltd from being “engaged, concerned or interested in a business similar to or competitive with” the Dwyer’s plumbing franchise within a specific area for 12 months after termination.
The Court of Appeal said that there is no general rule that a 12-month non-compete in a franchise agreement is enforceable and that each case must be assessed individually.
In this case, the court looked at both parties’ circumstances and the relevant considerations for assessing how reasonable these clauses are. For example, the Claimant, Dwyer, was a major established business, whereas Fredbar Ltd did not have any prior plumbing experience, and so it was inevitable that the franchise would fail. Dwyer had presented the Defendant with the contract on a ‘take it or leave it’ basis, and the non-compete restrictions were not discussed.
In court, the judge therefore argued that:
- The contract was more like an employer-employee relationship than a business agreement and the reasonableness of these clauses was therefore under greater scrutiny.
- This was the first franchise in the area, and both parties objectively knew there would be much less inclination to protect it if the contract ended early than if it ended after several years of successful operation. A 12-month non-compete was unnecessary to protect Dwyer’s legitimate interests in the case of an early termination and was therefore unenforceable. The same restriction may have been more reasonable should the franchise have been well-established and successful, however.
‘Not all franchisees are equal’
The judge noted that using a franchise agreement or contract is understandable but not all franchisees are equal. He said that, “It would have been better to draft the restrictions so that their duration depended on how long the franchise agreement lasted prior to termination.”
Although this case demonstrates that the court will look at the facts on a case-by-case basis, the importance of seeking expert legal advice before drafting any type of employment or business agreement cannot be underestimated.
A specialist solicitor can check any post-restriction clauses and advise you on what you should include depending on the type of relationship and the circumstances surrounding it.