It has been well established for thirty years that post termination non compete covenants in franchise agreements will be upheld by the English courts as reasonable if they go no further than is necessary to protect the franchisor’s goodwill. The courts have, historically, based their approach in establishing the reasonableness of such covenants on how similar covenants in business sale agreements are treated and not on covenants in employment contracts – the latter are dealt with much more strictly. Up until now, the difference in bargaining power of the parties was irrelevant when analysing franchise agreements.
The Court of Appeal following its approach in two recent Court of Appeal decisions on restrictive covenants indicated that differences in bargaining power were relevant and analysing restrictive covenants on the basis of whether the agreement is more like an employment contract or a business sale agreement is unhelpful.
It upheld the trial judge’s decision that in view of the fact that the franchisee had only started its trading 18 months before termination and the covenant had been badly drafted, that a 12 month non compete in the franchisee’s territory was unreasonable and, therefore, unenforceable. The decision means that virtually all, if not all, restrictive covenants in franchise agreements will have to be re-drafted for them to be enforceable.
John Pratt, IDI Country Expert for franchising in UK
