The High Court in PSG Franchising Ltd v Lydia Darby Ltd [2012] has upheld a post termination restrictive covenant contained in a franchise agreement.

What?

The case of PSG Franchising Ltd v Lydia Darby Ltd [2012] is interesting as it indicates the way in which a Court will approach restrictive covenants contained in a franchise agreement.

So What?

This is a useful reminder that it is a principle of law in construing a restrictive covenant that it is legitimate to adopt a construction which limits the clause to reasonable protection of a legitimate business interest.

The franchise agreement covenant provided that the defendant would not be engaged for a period of one year in a “...business which provides any services which compete with any of the Services provided by the Company or any of its franchisees within the Territory...”.

It was unclear whether the reference to the Territory (a) meant the territory of the franchisee during the term of the agreement or (b) whether it applied to the territory in which the claimant or any of the claimant’s franchisees provided Services, with the effect that the covenant also applied anywhere in the UK as this was where the claimant operated. The Court found in favour of the narrower interpretation, partly because it was the more natural meaning of the words used, and partly because this interpretation would allow the covenant to be valid and enforceable as it protected the claimant’s legitimate business interest. In construing a restrictive covenant it is a principle of law that it is legitimate to adopt a construction which limits the clause to reasonable protection of a legitimate business interest and to reject a construction that would render the clause void.

The definition of Services included changes made from time to time and so the defendant argued that the covenant was too wide, as it purported to cover services that only came into being after the termination date. It was held that as “Services” only covered new ways of providing the same kind of services and not services of a completely different nature it was not too broad to be enforceable. Further, the covenant was limited to the Territory and to a period of one year post termination of the agreement. The Court expressly noted that to find the clause void because of the mere possibility that in some as yet unidentified circumstances it might operate unreasonably would be wrong.