Restrictive Covenants in Franchise Agreements

The judgment of Mr Justice Males in PSG Franchising Limited v (1) Lydia Darby Ltd (2) Lydia Victoria Darby (3) David George Darby [2012] EWHC 3707 (QB) makes interesting reading for at least 4 reasons:

1. it is one of relatively few decisions dealing with restrictive covenants away from the normal context of employment contracts and instead in the context of franchise agreements;
2. the judge makes observations as to the appropriate course for the Court to adopt when faced with conflicting cases as to the construction of the relevant restrictive covenants;
3. the judge casts doubt as to the correctness of an earlier (albeit little appreciated) decision which may have troubled practitioners; and
4. the case seems to provide another illustration of the importance of occupying the moral high ground whenever possible when making or resisting an application for injunctive relief.

The facts do not require much attention. In short C sought to enforce a twelve month post-termination restrictive covenants contained in a franchise agreement that they had entered into with Ds. The covenants in question would be reasonable if Cs’ construction of the same, containing as it did an important territorial restriction, was to be preferred but would be unenforceable if Ds’ construction (which would not contain the territorial restriction) succeeded. The only remaining fact of importance was that the franchise agreement had been for a fixed term but it was common ground that the relationship had lasted beyond that fixed term. Ds were contending that the 12 month covenant had expired because it only commenced as of the end of the fixed term that had been provided for and not from the actual date of termination.

As to the first of my four reasons why practitioners may be interested in the case, Mr Justice Males reiterated the normal distinction that the Courts apply when considering such covenants in commercial contracts from their approach to employment covenants. In paragraph 45 of his judgment he states: “Restrictions in commercial contracts have been more readily enforced and a franchise agreement has been regarded as closer to a commercial contract such as a sale of a business tan an employment contract (Dyno-Rod Plc v Reeve [1998] FSR 148 at 153).

The second point of note will be of interest to all those who seek to enforce restrictive covenants regardless of the context. At paragraph 31 of his judgment, Mr Justice Males finds that where there are two possible ways of constructing a restrictive covenant, one of which will render it a reasonable restriction and one of which will not, then the Court should interpret it in the former way as “it makes sense to suppose that commercial parties of equal bargaining power were seeking to provide reasonable protection for a legitimate business interest rather than to assume the opposite”. Of course his reliance on the fact equal bargaining power may limit the import of this dicta to such cases.

Moving to the third point, for those readers aware of the decision of Sir John Lindsay in The Flat Roof Co Ltd v Bowden [2009] EWHC 2894 (Ch) to the effect that post termination restrictive covenants in a franchise agreement do not ordinarily extend beyond their contractual expiry dates when the parties continue the franchise informally after expiry of its contractual term, then it is important to note that Mr Justice Males expressly doubts that it is correct (paragraph 54).