Stone & Anor (t/a Tyre 20) v Fleet Mobile Tyres Ltd

In a franchise agreement, website-generated tyre sales within the franchisee’s exclusive territory formed part of the franchised business. The franchisee sold to the end customer, so the franchisor could deduct only the agreed six per cent from the customer price. A commercial franchise is also subject to the principle of non-derogation from grant. Contractual powers over branding and vehicle livery must be construed in the context of the agreement as a whole. They cannot be exercised so as to substantially impede the franchisee’s right to operate and promote the business. Total deprivation is unnecessary. Wrongful deductions and branding restrictions were fundamental breaches amounting to repudiation, which the franchisees accepted.

The appellants operated two tyre-fitting franchises under agreements with the respondent. A dispute arose over website-generated eTyres work, including deductions made from customer payments and instructions requiring the appellants to give much greater prominence to eTyres than to the Fleet Mobile Tyres brand.

The respondent terminated the agreements on 6 February 2006. The appellants alleged that the respondent had already repudiated them. The High Court granted an injunction restraining customer solicitation, declared another restrictive covenant to be an unreasonable restraint of trade, dismissed the appellants’ counterclaim, and entered judgment for the respondent.

The appeal concerned whether the deductions and branding instructions were breaches sufficiently fundamental to amount to repudiation, and the resulting effect on the restrictive covenant and the counterclaim.

Lord Justice Keene gave the leading judgment. Lord Justices Wall and Wilson agreed.

1. Appeal and construction. The appeal was allowed. The court construed the written agreements objectively, by asking what they conveyed to a reasonable person with the relevant background knowledge, while retaining the presumption that the parties intended the words they used. No later variation or estoppel was relied upon.
2. eTyres sales and deductions. The eTyres work fell within the franchised business. The franchisees held exclusive territories, and the agreement contained specific provisions treating National Account Customers as cases in which the franchisee acted as a subcontractor. No equivalent provisions applied to eTyres work. The franchisees therefore sold to the end customers, rather than to the respondent. Their gross sales included the prices paid by those customers. The respondent was entitled to deduct six per cent under clause 9.2, but no larger amount, and had to account for the balance.
3. Repudiation and restrictive covenant. The excess deductions, together with the continued refusal to pay the sums retained, amounted to repudiatory breach. The appellants accepted that repudiation and were discharged from the restrictive covenant in clause 21.1.4. They were also entitled to the sums wrongfully retained and an account.
4. Non-derogation from grant. The principle applies beyond land transactions and reflects fair dealing. In a detailed commercial agreement, its scope must be determined by construing the contract as a whole and in its commercial context. A power to control vehicle livery and promotional material was not unfettered. It was subject to a limitation against substantially impeding the franchisees’ right under clause 7.1 to operate and promote the business under the trade names. Total impairment was not required.
5. Application. The required livery, business cards and Yellow Pages advertising would have made eTyres dominant and materially impeded effective promotion of Fleet Mobile Tyres. That was a substantial impediment and a fundamental breach amounting to repudiation, which the appellants accepted. The injunction was discharged. The appellants succeeded on liability on the claim and counterclaim, with quantum left for further hearing at first instance.

1. Court of Appeal (Civil Division) — Appeal allowed. The injunction was discharged, the appellants succeeded on liability on the claim and counterclaim, and quantum was left for further hearing at first instance.
2. High Court of Justice, Chancery Division — His Honour Judge Eccles QC granted an injunction restraining customer solicitation, declared another restrictive covenant unenforceable as a restraint of trade, dismissed the counterclaim, and gave judgment for the respondent.