PSG Franchising Ltd v Lydia Darby Ltd

A post-termination restraint in a franchise agreement should be construed, where the language permits, as protecting the franchisor’s legitimate goodwill within the franchise territory. A construction producing a wider and unreasonable restraint should be rejected. A restraint may cover new services introduced during the restraint period where it remains limited by subject matter, duration and territory. Where parties continue operating a franchise after its contractual expiry, the legal effect depends on their agreement and conduct; clear wording in a subsequent deed may preserve and reactivate post-termination obligations. Reasonable restraints protecting legitimate business interests may be enforced by injunction.

The claimant franchisor sought preliminary declarations and injunctive relief against a franchisee and its guarantors. The dispute concerned the construction and enforceability of post-termination non-compete and non-solicitation covenants, the effect of the parties’ continued operation of the franchise after expiry of its fixed term, and a later deed of surrender.

The principal questions were whether the non-compete covenant was territorially limited, whether it extended to services introduced after termination, whether it was reasonable, whether the covenants remained binding until 31 August 2013, and whether an injunction should be granted.

1. Construction of the non-compete covenant. Applying ordinary principles of contractual construction, including commercial common sense and the legitimate-interest principle applicable to restraints of trade, the words “within the Territory” qualified the services provided by the claimant or its franchisees. The covenant therefore prohibited competition for customers with offices within the specified Milton Keynes territory, rather than imposing a United Kingdom-wide restraint. That construction was natural, workable and consistent with the goodwill which the claimant was entitled to protect.
2. New services. The definition of “Services” covered new forms of property search report and new methods of providing such reports introduced after termination. The covenant did not extend to an entirely different business. Its potential application to new services did not make it unreasonable because it lasted only one year, concerned property-search services and was territorially limited.
3. Reasonableness. The restraint was no more extensive than reasonably necessary to protect a legitimate business interest. The possibility of hypothetical circumstances in which its operation might cause difficulty did not invalidate a carefully framed commercial restriction.
4. Effect of continued operation and deed of surrender. The court doubted the analysis in The Flat Roof Co Ltd v Bowden, under which post-termination covenants ordinarily expired despite informal continuation of a franchise, and preferred the analysis in SJD Group Ltd v KJM (Scotland) Ltd. In any event, the deed of surrender expressly stated that the agreement subsisted beyond its expiry and preserved clauses 18 to 25. It therefore terminated the franchise on 31 August 2012 and left the post-termination covenants operative for one year thereafter.
5. Relief. Damages were not an adequate remedy. Subject to any competition-law defence not yet pleaded, injunctions were granted against each defendant until 31 August 2013 or further order. The answers to all preliminary questions were yes.

First-instance decision. No earlier appellate decision is stated in the judgment.