English High Court confirms Enforceability of Post Termination Restrictions against Former Franchisee

28 January 2015

Victoria Hobbs

On Friday 23 January 2015 in the case of Oven Clean Domestic Limited v Read the High Court in London confirmed that a fairly standard post termination non-compete obligation in a UK domestic franchise agreement was reasonable and enforceable and therefore granted the claimant franchisor an interim injunction to prohibit the former franchisee from trading in her former franchise territory. Whilst this case did not make new law as such, it is a welcome confirmation for UK franchisors that carefully drafted post termination restrictions will be enforceable against former franchisees.

Ovenclean, advised by Bird & Bird London based Dispute Resolution Partner Victoria Hobbs, is part of the Franchise Brands Worldwide Ltd group of companies and is sister company to ChipsAway. Between the two brands, the group has over 400 franchisees in 12 countries and the case was being watched with interest by the group's UK based franchisees. An adverse decision on the enforceability of the restrictive covenant could therefore have had a devastating impact on the group's franchised networks.

The Defendant, Ms Read, traded as an Ovenclean franchisee for 17 months before her franchise agreement was lawfully terminated, a fact which she did not contest. The agreement provided (amongst other obligations and restrictions) "for a period of one (1) year following termination of this Agreement neither you nor any Associate or Affiliate shall be employed by or directly or indirectly be engaged concerned or interested in a business similar to the Ovenclean Business within the Territory". Ms Read carried on trading in the oven cleaning business in her former territory following termination, again a fact she did not deny. Ms Read (who appeared in person at the hearing) admitted to the judge that she wanted to carry on trading in her former territory as it had taken 18 months to build up the business within that area and she would have to start again if she was prohibited from working in that territory. As the judge pointed out, Ms Read was openly admitting that she used her franchise business as a springboard to set up her own, competing business which is precisely what restrictive covenants are designed to prevent and it is the goodwill in the franchisee's territory that a franchisor is entitled to protect. 

As the restrictive covenant prohibited Ms Read from being involved in a business 'similar to' the Ovenclean business the clause was potentially quite wide. Such clauses have previously been held to be too wide and therefore unenforceable in an employment context. However, it has long been established in English law that the franchisor/franchisee relationship is different to that of employer/employee and, generally speaking, the restrictive covenants in franchise relationships are more wide ranging that those in employment relationships. Ovenclean's case on this point was also supported by the judgment in the 2014 case of Carewatch Care Services Limited v Focus Caring Services Limited & Others where the judge held that a restrictive covenant prohibiting a former franchisee from being involved in "any business similar to the franchised business" did not go further than was reasonably necessary to protect the legitimate interests of the franchisor as the requirement of 'similarity' and the limitation to the former franchisee's territory kept it (to use the judge's words) "within reasonable bounds".

The judge in the Ovenclean case also made a summary assessment of costs and awarded Ovenclean 92% of its claimed costs of the injunction application citing Ovenclean's reasonable behaviour in trying to reach a resolution with Ms Read and her unreasonable refusal to enter into discussions despite her weak legal position. The costs award is another reminder to parties faced with such an application to try, as far as is possible, to agree a resolution at least on some points of contention and a blanket refusal to enter into discussions will, unless in exceptional circumstances, be viewed as unreasonable by the courts. In addition, Ms Read agreed to judgment being entered against her for Ovenclean's damages claim with the quantum of such damages to be assessed leaving Ovenclean the option to pursue an additional damages claim if it chooses to do so.

Tim Harris, CEO of OvenClean and Franchise Brands said "we do not have many disputes with our franchisees and we always try to resolve any issues with franchisees before they escalate.  However, every now and then all franchisors have a rogue franchisee who threatens the very core of the franchisor's business.  We had to act against Mrs Read to protect our business and the businesses of all our franchisees.  We are delighted with the result which confirms the enforceability of the restrictive covenants in our franchise agreement and sends a powerful message to the rest of the network.  Whilst going to court can be risky and expensive, Victoria managed our costs expectations very well and kept us updated throughout on costs and Victoria, supported by associate Jack Colthurst, quickly and efficiently guided us through the process so that we always felt in control.  It was a worthwhile investment in this case and we now have a very useful set of precedent documents which will reduce our costs for future applications, although hopefully the positive judgment against Ms Read means that will not be necessary."