Franchisors beware – court confirms that heavy-handed post-termination restrictions on franchisees will not be enforced

Franchisors should ensure that any restrictions in a franchise agreement that seek to limit the outgoing franchisee's ability to work or trade in a business similar to the franchise following its termination are reasonable, or risk them being unenforceable.  In a recent decision, Dwyer (UK Franchising) Ltd v Fredbar Ltd and another [2021] EWHC 1218 (Ch), the court has found that terms which would have imposed such restrictions within the franchise territory or a 5 mile radius of it for 12 months were unreasonable and could not be enforced.

Dwyer (UK Franchising) Limited is the franchisor of the "Drain Doctor" plumbing and drain repair services franchise.  The franchise agreement used by Dwyer included a restriction on the franchisee carrying out a business similar to what was referred to in the agreement as "the Drain Doctor Business" for a period of one year after termination, within either the territory or a five mile radius of that territory.  Although the term "the Drain Doctor Business" was not expressly defined in the agreement, it was interpreted to mean the business of "plumbing and drainage".

Decision

It was noted in the judgment that the franchisor would have to satisfy the court that these "restraint of trade" provisions were designed to protect their legitimate interests and extend no further than is reasonably necessary to achieve those purposes.

In this case, there was no factual evidence to link the franchisor's inability to recruit a new franchisee to the continued trading of the former franchisee in its new business. Also, there were no facts stated to establish the general proposition that the continued operation of a former franchisee within the former franchise 'territory would make recruitment difficult or prejudice the success of the future franchisee.  The attempt to extend the radius beyond the Agreement's exclusive territory was considered to be entirely without justification and the period of 12 months was also deemed unreasonable as neither could be linked to protecting a legitimate interest.

Given the unreasonableness of the terms, particularly as the restricted territory extended beyond where the franchisee had been operating, the restrictions, including the 12-month restriction on competition, were found to be unenforceable.

Comment

John Shaw, a member of the Franchising team at Foot Anstey, notes that this decision highlights the importance of understanding the reasonableness of the terms in a franchise agreement, and provides useful guidance on what would amount to an 'unreasonable' restriction – both in terms of duration and geographical reach.  Although it may be tempting to extend certain post-termination restrictions from, say, three or six months to 12, this decision highlights that if you push the boundaries too far then you will not be able to rely on your restrictions because they will not be held enforceable by the court.  Instead, franchisors should rely on the brand recognition and reputation that they have developed to protect the franchise when a franchisee exits, along with more modest restrictions if this is really considered necessary.