Restrictive Covenants In Franchising

• Law Firm: Weightmans
• Subject Matter: Corporate/Commercial Law, Employment and HR, Contract of Employment, Franchising
• Author: Marc Allison
• Published date: 03 October 2023

A useful illustration of the courts' approach to determining whether the restrictive covenants in a franchise agreement are enforceable.

The relatively recent case of Dwyer (UK Franchising) Ltd v Fredbar Ltd [2022] EWCA Civ 889 considered how restrictive covenants are applied in the context of franchise agreements. Whilst the case itself did not set any particular precedent, it is a useful illustration of the courts' approach to determining whether the restrictive covenants in a franchise agreement are enforceable.

Reasonableness test

Courts generally take a strict approach when enforcing restrictive covenants. If the clause is not reasonable, it may not be enforceable. The party imposing the covenant must show that it is being used to protect a legitimate business interest and that the level of restriction is reasonable in duration, scope and location. Reasonableness is considered on a case-by-case basis, assessing the factual and contractual background to the agreement. A restrictive covenant should not be designed to prevent legitimate competition, but to prevent a party obtaining an unfair advantage.

Dwyer (UK Franchising) Ltd v Fredbar Ltd [2022]

The Dwyer case involved an emergency plumbing franchise, Drain Doctor, which imposed upon its franchisees a covenant not to be engaged, concerned or interested in a similar or competitive business within 5 miles of the franchisees' territory for 12 months after termination (a so-called "non-compete" covenant). Due to financial issues, the franchisee terminated their franchise agreement early, during the pandemic and found alternative employment in the same region, being his local area, with a similar business.

The franchisor sought, among other things, an injunction to prevent breach of the restrictive covenants. After an initial High Court decision, the case ultimately went to the Court of Appeal, which ruled that:

• Franchise agreements are not a special category of agreement for determining a restrictive covenant. The usual rules of reasonableness apply.
• Inequality of bargaining power is a significant factor in determining the reasonableness of a restriction. In particular, it has long been recognised that the courts will more readily strike down a restrictive covenant in an employer/employee relationship rather than in a commercial contract, because of this dynamic Franchise agreements are however usually entered into between an established franchisor business and a newly created franchisee with a...