When the UK Court of Appeal handed down its judgment in the case of Dwyer (UK Franchising) Limited v Fredbar Limited and Shaun Rowland Bartlett[1], the British Franchise Association sent out an update to its members titled “The end of franchising?”. Whilst that title was maybe designed to catch attention rather than the BFA’s reasoned position on the case, it is fair to say that the decision has caused surprise and concern in the franchising industry in the UK. But how important is the decision and what does it mean in practice for franchisors who operate in the UK?
The reason why the case has caused such concern is that post-termination restrictive covenant which was successfully challenged by the franchisee was in pretty standard form, in that it restricted the franchisee from being involved in a similar business in the franchisee’s former territory for one year following termination. Clauses of that type are very common in territory based franchise agreements and have been held to be enforceable by the courts in a number of previous cases including by the Court of Appeal in the case of ChipsAway v Kerr[2]. However, the Dwyer case is a reminder that restrictive covenants do need careful thought and there is no ‘one size fits all’.
The franchisee in the Dwyer case challenged the restrictive covenant on the basis that it went further than was reasonably necessary to protect the franchisor’s goodwill in the territory. The Court of Appeal held that the franchisee was correct and the restrictive covenant was unreasonably wide and therefore unenforceable. On the face of it, this is a very worrying precedent as it was a fairly standard form restrictive covenant and it therefore appears the decision could have a considerable impact on many UK franchise agreements. However, the decision was also quite fact specific and the franchisee’s situation can be distinguished from that of many other franchisees.
The key points of the case and judgment are set out below.
- The franchisee was inexperienced and naive and had given up paid employment to become a franchisee. He had no prior business experience and had taken considerable financial risk in entering into the franchise agreement. This seemed to be quite an important factor for the court.
- The franchisee did not take legal advice and the franchise agreement was presented very much on a ‘take it or leave it’ basis. There were internal notes to show that the franchisor did not think the individual would make a very good franchisee but offered the agreement anyway and the franchisee was provided with financial projections which, whilst held not to amount to misrepresentations, did not accurately reflect the figures achieved by the franchisee.
- The Court of Appeal considered that the failure of the franchisee was foreseeable as the projections were far from what was actually achieved and the franchisor knew that the financial consequences of failure could be serious for the franchisee.
- For the above reasons, the Court of Appeal decided that there was a considerable inequality of bargaining power between the franchisor and the franchisee and this point was crucial to the Court’s decision. It is also apparent there was a good deal of sympathy for the franchisee who was very much seen as the innocent victim in the dispute.
- The Court also held that the relationship was more akin to an employer/employee relationship rather than a business to business relationship. This is quite different from previous franchising cases where the courts have specifically held that it is not an employment or consumer relationship but more similar to a business sale agreement when considering the enforceability of restrictive covenants[3]. As a result of deciding that the relationship was more akin to an employment relationship, the Court of Appeal considered that the restrictive covenants should be viewed more from an employment law perspective.
- The franchisee took on a virgin territory and, whilst the Court did accept that the Drain Doctor name (under which the franchisee traded) had good brand awareness in the UK, it was not a ‘big brand’ franchise. This was another key factor for the Court as it held that the franchisee had not built up significant goodwill in the territory, which is what the franchisor is normally entitled to protect. The franchisee only traded for around 18 months, part of which was during the pandemic. The franchisee therefore did not build up the type and size of business as was expected and again this was a significant factor for the court when deciding whether the one year post termination non-compete was enforceable and reasonable in terms of the goodwill that it was seeking to protect. For this reason, the case will be less of a concern to ‘big brand’ franchises where, even in a location where there are no existing outlets, high brand awareness could mean that the franchisor has considerable goodwill to protect even if a franchisee traded from a location for a short amount of time.
- The Court of Appeal did expressly acknowledge that a one year non-compete could be enforceable in a situation where a franchisee had been trading for longer and built up more significant goodwill in its territory. The Court suggested that the restrictive covenants could have distinguished between termination at an early stage of the agreement and terminations towards the end of the ten-year term when the goodwill to be protected was likely to be substantially more valuable. The Court also noted that there was no express discretion in the restrictive covenant for the franchisor to amend or reduce the scope of the restriction in appropriate circumstances.
So what does this mean for franchising in the UK?
There is a risk that franchisees will raise this case when their agreements come to an end thinking that it will release them from their own restrictive covenants without really considering the specific facts of the Dwyer case which do set it apart from many other franchisor/franchisee relationships.
The case does, however, show that this is a complex and changing area and it is important to consider each restrictive covenant in the context of the specific contractual relationship rather than trying to have a ‘one clause fits all’ approach especially when franchisors are granting rights to new territories or building up a lesser known brand.
For further information, please contact:
Victoria Hobbs, Partner, Bird & Bird
victoria.hobbs@twobirds.com
[1] [2022] EWCA Civ 889
[2] [2009] EWCA Civ 320
[3] See for example Prontaprint plc v Landon Litho Ltd [1987] F.S.R. 315 and Kall Kwik Printing (UK) Ltd v Rush [1995] 3 WLUK 252
