ChipsAway International Ltd v Kerr* (Dyson, Thomas and Richards LJJ; [2009] EWCA Civ 320; 11.03.09)

The Court of Appeal held that a former franchisee who carried on a car-care business following the termination of a franchise agreement was acting in breach of a restrictive covenant.

The Claimant, ChipsAway, owned rights and know-how in a system for restoring damage to the bodywork of cars, and also supplied products used in the system. It was a franchise business only. The Defendant, Kerr, was granted a franchise in the Banbury area. The franchise agreement contained various restrictive covenants, one of which provided that, for a period of 12 months following the termination of the agreement, Kerr could not without ChipsAway’s prior consent “be engaged in any capacity in any business which competes with the Business (as carried on at the date of termination or assignment) within the Territory”. “Business” was defined as the provision by Kerr of a service repairing damage to vehicle paintwork within the Territory using the ChipsAway system. At the end of the term of the agreement, Kerr did not renew the franchise. However he carried on a business at the same premises which included providing a service of repairing damage to vehicles, although not using ChipsAway’s products or name.

The trial judge interpreted the restrictive covenant as only preventing Kerr from competing if, during the twelve months after termination, there was a successor in the territory. As there was no other ChipsAway business in the territory, Kerr was not in breach. ChipsAway appealed.

Dyson LJ held that the trial judge rightly recognised that, on a literal interpretation, the restrictive covenant made no sense. In effect it restrained Kerr from competing with himself. Therefore some rewriting of the clause was necessary. However, Dyson LJ rejected the judge’s interpretation. Dyson LJ’s fundamental objection was that the interpretation did not achieve a sensible commercial purpose. The purpose of the restrictive covenant was to prevent Kerr for a period of time from competing in his former territory in the same line of business, so as to allow ChipsAway breathing space in which to establish a replacement franchisee and to protect its goodwill. The fact that ChipsAway did not actually seek a replacement was not relevant as the meaning of the clause could not depend on what happened after the contract was made.

Lastly, Dyson LJ noted a practical problem with the judge’s interpretation: if the clause did not bite until the replacement franchisee was appointed then, unless Kerr monitored the situation regularly or ChipsAway informed him, Kerr would not know whether and when the clause started to bite and he should cease to trade.

The appeal was therefore allowed.