Post termination non compete covenants in franchise agreements are standard. Usually they last for 12 months and apply to a franchisee’s territory and will be enforced by the English courts, notwithstanding the fact that, as a matter of public policy, post termination non compete covenants will not be upheld unless they are reasonable.
In this case, the franchisor of the US concept, Drain Doctor sought to enforce its post termination non compete covenant against its franchisee who had terminated the franchise agreement and set up a competing business.
The judge, in his judgment, referred to the difference in bargaining power between the franchisor and the franchisee and took exception to the length and complexity of the franchise agreement which had been produced by a well known franchise lawyer.
The franchisee raised various arguments concerning misrepresentation and undue influence which were unsuccessful but also argued that the post termination non compete covenants were unenforceable.
The court accepted that the purpose of post termination non compete covenants in franchise agreements is to allow a franchisor to exploit the goodwill that had accrued by the terminated franchisee and this is especially important when the franchisor seeks to recruit another franchisee for that territory. The court recognised that it would be harder for a franchisor to recruit an incoming franchisee if an ex franchisee was competing in the territory but the judge found that the post termination non compete covenants went too far in preventing the franchisee and the individual guarantor from being employed in any plumbing or drainage company even if their involvement would have no affect on the franchisor’s goodwill and ability to recruit another franchisee.
It is understood that this decision may be subject to appeal, because it certainly seems to adopt a stricter approach to enforcing post termination non compete covenants then previously demonstrated by the English courts. It does, however, emphasise, along with the need to have simple and understandable franchise agreements, the need to take great care in drafting post termination non compete covenants so as to ensure that they cannot apply in situations were there would be no affect on a franchisor’s ability to recruit a franchisee.
John Pratt, IDI Country Expert for franchising in UK