High Court finds post-termination restrictions in franchise agreement unenforceable

Judgment

The High Court’s decision, delivered by Insolvency and Companies Court Judge Jones, found in favour of the franchisor on various issues arising out of the termination of the franchising agreement by the franchisee. However, it held that the restraints of trade on the franchisee were unreasonable and unenforceable in the circumstances. It was not a case where the unreasonable part could be severed.

The term “Drain Doctor Business” was not defined in the franchise agreement. However, the High Court held that the term must refer to the business of plumbing and drains, as that was the business carried out under the “Drain Doctor” trade name. This construction was consistent with the other terms of the franchise agreement.

The first restriction would prevent the franchisee from engaging in any plumbing or drainage business within Cardiff without exception (even where such engagement wouldn’t have any effect on the franchisor’s goodwill). The circumstances of the parties were relevant in determining the unreasonableness of this restriction; it was clear the franchisor knew that its application would seriously increase the risk of unemployment for Mr Bartlett (who had set up the franchisee company for the purposes of this project) and might lead to mortgage possession proceedings for him and his family.

The second restriction extended the restraint of trade to an unreasonable range. There was no goodwill to protect insofar as the franchisor had never provided plumbing or draining services within the extended range.

The Judge held that the restrictions therefore failed to strike “a reasonable balance between the freedom of contract and the freedom of trade”, and “were far more extensive than was required to provide reasonable protection”. Mr Bartlett’s lack of experience within the sector and as a company director was a significant contributing factor (not least because the franchisor was aware of the fact).