Francotyp-Postalia Ltd v Whitehead & Ors

Contractual severance of an unenforceable restraint requires strict application of the blue-pencil test. The offending wording must be capable of excision without adding to or modifying the remaining wording. The remaining provisions must retain adequate consideration, and severance must not change the contract into a fundamentally different bargain. Where several covenants incorporate one shared definition, excising part of that definition from one covenant may necessarily modify otherwise valid covenants. The court must not rewrite or vary those covenants indirectly. In such circumstances severance is unavailable, even if the resulting restriction would otherwise be valid.

The claimant franchisor brought claims arising from the termination of franchise agreements and sought damages for breaches of post-termination covenants. The agreements contained an area covenant, competition restrictions and non-solicitation provisions, all using the same definition of “Restricted Area”.

The claimant accepted that the wider definition was an unreasonable restraint of trade but argued that the words extending the area beyond the contractual “Territory” could be removed under the blue-pencil test. The defendants accepted that the area covenant would be valid if limited to the Territory, but maintained that severance would also cut down the otherwise valid non-solicitation covenant. The issue directed for trial was whether the definition could be severed in that way.

1. The answer was no. The court could not sever the definition of “Restricted Area” so as to confine clause 21.1.1 to the contractual Territory.
2. The applicable principles were that the court would not make a new contract for the parties and would not sever unenforceable contractual provisions unless public policy permitted it. The three-limb test approved in Beckett Investment Management Ltd v Glyn Hall [2007] EWCA Civ 613 required: excision without adding to or modifying the remaining wording; adequate consideration for the remaining terms; and no transformation of the agreement into a contract of a fundamentally different character.
3. The consideration requirement was satisfied. If clause 21.1.1 stood alone, the offending words could be removed and the covenant would become an enforceable restriction limited to the Territory.
4. That was not the contractual arrangement. The same definition was incorporated into the competition and non-solicitation covenants. Cutting down the definition in clause 21.1.1 would therefore cut down clause 21.2.3 and alter the scope of an otherwise valid and freely agreed covenant. The proposed severance would consequently modify the wording and effect of what remained, contrary to the first limb of the test.
5. The proposed construction would also amount to rewriting the agreement. Clause 33 merely repeated the common-law principles and did not enlarge the court’s limited jurisdiction to sever. The court therefore determined the directed question in the negative.

The judgment was a first-instance determination of a question of law directed by Chief Master Winegarten. No appellate decision is stated in the judgment.