Post termination restrictions on agents, distributors and franchisees are an important way to protect goodwill and customer relationships that have developed as a retail network expands. Stopping a former member of a retail network from competing for a period of time to secure the goodwill and customers gained in the former retail territory can be vital to protect the network's integrity.

Franchisors (in common with the operators of networks of distributors and agents) often seek to protect themselves through a combination of post termination restrictive covenants and, in appropriate circumstances, a right to step in and take over the premises and items employed by the business. This then allows franchisors to provide continuity of service to customers.

However, as a relationship starts to unravel, there can be circumstances that arise or past unresolved complaints that lead to assertions of breaches of contract - giving the potential for the post termination restrictions to be void. In a recent decision of the High Court - Carewatch Care Services Limited v Focus Caring Service Limited and Others [2014] - Mr Justice Henderson had to consider the enforceability of standard post termination restrictions, as a matter of common law and under principles of EU competition law, against a background of alleged breaches on both sides. He also had to consider whether an implied duty of good faith should be implied into the franchise agreement whose breach might justify dis-applying the restrictive covenants.

This is the first case in a number of years where EU competition law has been asserted to attack the enforceability of a range of restrictive covenants that are not unusual in the retail sector. It is also the first case involving franchising to look at the possible application of a duty of good faith since the well known decision in Yam Seng.

The Judge upheld the covenants both on the facts of the case and as a matter of competition law whilst also declining to find any implied duty of faith in the franchise agreement.

The "Carewatch" Case

Carewatch provides homecare services in the United Kingdom through a network of directly owned corporate branches and franchises. Distrust developed between it and a number of its franchisees who were (in some cases) holding over their franchises and seeking to re-negotiate their renewal terms.

One of those franchisees had established a business that would (Carewatch said) compete with the franchise business in contravention of the terms of the franchise agreement. The franchisee itself had a number of complaints about Carewatch's approach to its franchisees. When the parties could not resolve the issues between them, both sides sought to terminate the franchise agreement. The question of the enforceability of the post terminations restrictive covenants and Carewatch's contractual right to step in and take over the former franchised business became the central issues.

The main provisions that were in issue are fairly standard in franchise agreements (and also agency and distribution agreements):

  • a twelve month restriction on competing within the territory of the former franchised business;
  • a nine month restriction on being involved in a competing business in a territory of another franchisee or the franchisor;
  • a twelve month restriction on soliciting customers; and
  • a twelve month restriction on poaching staff.

The enforceability of these covenants was challenged both in terms of their reasonableness and their applicability to the facts in issue. It was also said that they were anti-competitive - a breach of Article 101 TEFU as incorporated into English law by the Competition Act.

The Court, having considered the development of the authorities on the enforceability of these covenants in franchise agreements in English law and, also, the decisions at a European level in Pronuptia and Servicemaster was satisfied that these covenants would be enforceable. They were not seen as unreasonable in their extent or duration or as being anti-competitive.

The Court also had to consider whether the franchise agreement included an implied obligation of good faith between the franchisor and franchisee. English law does not generally import obligations of good faith into commercial contracts. This was the first case since the debate started by the decision of Yam Seng on whether good faith obligations could be implied into particular types of contracts that were long term and involved a particularly close relationship of dependence between the parties; it was said by the franchisee that their agreement came within Yam Seng. However, the Court considered that as a franchise agreement is akin to an ordinary commercial relationship rather than a species of joint venture (adopting reasoning from Jani King (GB) Limited v Pula [2007]), the parties franchise agreement was not a contract to which the Yam Seng concept might attach.

The Court's decision on this point provides clarity and confirmation that generally there is no separate implied duty of good faith that a franchisor must bear in mind when considering its obligations to a franchisee.