Dwyer (UK Franchising) Limited v Fredbar Limited & Anor.

A post-termination covenant in a franchise agreement is subject to the restraint of trade doctrine. Its enforceability depends on whether, at the date of contracting, it affords no more than reasonably necessary protection for the franchisor’s legitimate interests and is reasonable between the parties and in the public interest.

There is no single rule for franchise agreements. Inequality of bargaining power, a standard-form agreement, the franchisee’s risks, the actual and expected goodwill, and the breadth and duration of the restraint are material considerations. A fixed non-compete may be unreasonable where it applies equally to early and long-established franchises, extends beyond goodwill capable of protection, and lacks cogent justification. Severance cannot save a covenant where the remaining restraint is still unreasonable.

Dwyer granted Fredbar, whose sole operator was Mr Bartlett, a ten-year franchise to operate a plumbing and drainage business under the Drain Doctor name in parts of Cardiff. The standard-form agreement contained one-year post-termination non-compete covenants within the franchise territory and within a five-mile surrounding area.

After the franchise ended, Fredbar and Mr Bartlett began a competing business. Dwyer brought proceedings and sought to enforce the covenants. The trial judge held that the covenants were unenforceable as restraints of trade, while also holding that Dwyer had validly accepted the defendants’ repudiatory breach of the agreement.

Dwyer appealed the declaration of unenforceability and contended that any excessive wording could be severed. The central issue was whether the covenants were reasonable when the franchise agreement was made.

1. Appeal dismissed. The Chancellor, with whom Arnold and Whipple LJJ agreed, held that the restrictive covenants were unreasonable and unenforceable on the particular facts. The doctrine of restraint of trade applies to franchise agreements, but franchise cases are not subject to a single categorisation or a one-size-fits-all rule.

2. The applicable inquiry was whether the covenants, assessed when the agreement was made, gave Dwyer no more than reasonably necessary protection for its legitimate interests and were reasonable between the parties and in the public interest. Inequality of bargaining power was not irrelevant. It was a significant factor, requiring close scrutiny of a standard-form restraint imposed on a franchisee with materially weaker bargaining power.

3. The judge was entitled to take account of the parties’ factual and contractual circumstances. Dwyer knew that Mr Bartlett was inexperienced, was exposed to substantial financial risk, and was regarded as likely to need exceptional support. The franchise agreement was, on those facts, closer to an employment contract than to a sale of a business.

4. The one-year restriction failed to distinguish between early termination, when limited goodwill might have been built up, and termination after a successful long-running franchise. Dwyer’s goodwill in the territory was limited at the outset. There was no cogent evidence that a twelve-month clear period was needed to recruit and establish a replacement franchisee. The covenants also prohibited forms of work which would not affect protected goodwill, and the five-mile buffer zone extended to areas in which no goodwill had been established.

5. The result was fact-specific. A similar duration might be reasonable for an established and successful franchise, or if a franchisor adduced cogent evidence justifying the protection sought. Deleting “similar to” or individual words from the first covenant, or excising the second covenant, would not cure the unreasonable remaining restraint. The blue-pencil principle therefore did not assist Dwyer.

• Court of Appeal (Civil Division): Dwyer’s appeal was dismissed. The declaration that the post-termination restrictive covenants were unenforceable was upheld.

• High Court, Business and Property Courts: ICC Judge Jones, sitting as a Judge of the High Court, declared the covenants unenforceable by an order dated 17 May 2021. That conclusion was affirmed.