Chipsaway International Ltd v Kerr

A post-termination non-compete covenant in a franchise agreement should be construed by making only the minimum changes needed where its literal wording is nonsensical, while giving effect to its commercial purpose. A covenant preventing competition with the franchise business carried on at termination is not conditional on a replacement franchisee actually trading during the restricted period. Its purpose may include protecting goodwill and giving the franchisor time to establish a replacement franchise. That purpose is not lost because the franchisor does not in fact seek a replacement after termination. Contractual meaning cannot depend on events occurring after the agreement was made.

The claimant franchisor appealed against a Chancery Division decision concerning post-termination restrictive covenants in a franchise agreement. The defendant former franchisee continued repairing vehicle paintwork in the former franchise territory after declining to renew the franchise, but no longer used the franchisor’s name, products or manuals.

Sir Andrew Park held that the principal non-compete covenant did not apply because no successor ChipsAway business was actually trading in the territory. He did not decide whether the covenant was an unreasonable restraint of trade, and the defendant did not pursue that issue by respondent’s notice. The central issue before the Court of Appeal was the true meaning of the non-compete covenant.

1. Appeal allowed. Lord Justice Dyson gave the judgment, with Lord Justice Thomas and Lord Justice Richards agreeing. The appeal concerned the interpretation of clause 23.1(a); the enforceability issue was not determined.
2. The literal wording of clause 23.1(a) made no sense because it appeared to prevent the defendant from competing with the business that he himself had carried on. The court was therefore entitled to rewrite the clause, but only by making the minimum changes necessary to produce a sensible meaning and give effect to its commercial purpose.
3. The judge’s interpretation was rejected. The words referring to the Business as carried on at termination naturally concerned the business conducted at that date, and the services then provided pursuant to the franchise agreement. They did not make the restraint conditional on a different business being conducted by a successor after termination.
4. The proper meaning was that, for twelve months after termination, the defendant could not engage within the territory in a business competing with the type of service provided under the franchise agreement at the date of termination. The covenant therefore operated whether or not a replacement franchisee was actually trading.
5. The commercial purpose was to protect the franchisor’s territorial goodwill and provide a breathing space in which to establish a replacement franchise. The reasoning in Prontaprint Plc v Landon Litho Ltd [1987] FSR 315 and Dyno-Rod plc v Reeve [1999] FSR 148 supported that purpose. The claimant’s subsequent failure to seek a replacement franchisee was irrelevant, since contractual meaning could not depend on events after the agreement was made.
6. Clause 22, which contemplated the possibility of a successor franchisee, did not determine the scope of clause 23.1(a). The appeal was allowed and argument was directed to the relief that should follow.

1. Court of Appeal (Civil Division): In [2009] EWCA Civ 320, allowed the appeal on the proper interpretation of clause 23.1(a) and directed that argument be heard as to relief.
2. Chancery Division: Sir Andrew Park held that the defendant had not breached the principal restrictive covenant because no successor ChipsAway business was actually trading in the territory. He did not determine enforceability and refused injunctive relief under the separate customer-related covenant.