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David E. Grant QC and Anson Cheung successful in significant franchising case in the Court of Appeal

The Court of Appeal has just handed down judgment in Dwyer (UK Franchising) Ltd v Fredbar Ltd & Bartlett [2022] EWCA Civ 889 in which David E. Grant QC and Anson Cheung appeared for the successful respondents. This is the most detailed consideration yet by the courts of the enforceability of post-termination restrictions in franchise agreements.

Background to the Appeal

The First Respondent, Fredbar Ltd, was a franchisee of the “Drain Doctor” brand licensed by the Appellant, Dwyer, which claimed to be the UK’s largest full-service network of emergency plumbing and drainage operations and part of the world’s largest home service franchise. Fredbar and the Second Respondent, Mr Bartlett (the sole director and employee of Fredbar and guarantor under the franchise agreement) purported to terminate by reason of Dwyer’s conduct, including a decision not to exercise a force majeure clause in late March/early April 2020 following the intervention of Covid. The case also raised issues of misrepresentation, undue influence, repudiatory breach, affirmation and the reasonableness of the post-termination restrictive covenants.

Insolvency and Costs Judge Jones held that Dwyer had been in repudiatory breach of the force majeure clause and a clause specifying how a marketing fund was to be applied. While the Judge held each breach justified termination, he also held that Fredbar and Mr Bartlett had affirmed the Franchise Agreement. In consequence, they had no basis in seeking to terminate in July 2020 and the Franchise Agreement only terminated when Dwyer accepted this breach in August 2020. The Judge held to be unenforceable the restrictive covenants preventing Fredbar and Mr Bartlett from working in a competing or similar business within the exclusive marketing territory for a period of twelve months.

The Appellant appealed the finding that the restrictive covenants in the franchise agreement were unenforceable as between itself and the Respondents.

General points of application

A number of general points arising from the Court of Appeal’s assessment of the reasonableness of restrictive covenants will be interesting to practitioners and those in the business community:

  • Contrary to Dwyer’s submissions, inequality of bargaining power between the covenantor and the covenantee will not only be relevant, but is a significant factor in determining reasonableness of the restrictive covenant.
  • Further, there is no general rule that a twelve month restriction in franchise agreements is reasonable. Each case is to be assessed on its own facts.
  • The onus is on the covenantee to justify the restraint on the covenantor.
  • The court may have regard to the amounts invested and/or the sums paid – not as an assessment of the adequacy of consideration, but as an indication of the degree of risk undertaken by the covenantor and thereby a factor in assessing the inequality of bargaining power.
  • The length of time the franchise agreement has been in operation is relevant. As Arnold LJ noted, “it would have been perfectly possible to have a covenant the duration of which depended on how long the franchise agreement had subsisted prior to termination. The longer it had subsisted, the greater the goodwill that would have been expected to have been built up during the currency of the agreement and the longer the period of protection that would have been justified.” (at [90])
  • Lastly, the characterisation of the franchisee is a relevant factor. Where a franchisee is well-established and successful such that there is cogent evidence of the need to protect its goodwill, the court may well conclude that restrictions are reasonable. Again, each case is to be assessed on its own facts.   

Specifics

A number of specific points can also be adduced from the judgment.

  • Evidence is important to demonstrate the inequality of bargaining power. Here, there were a number of matters which demonstrated the inequality of bargaining power between the two parties. Dwyer is the largest emergency plumbing and drainage company in the country, with more than thirty franchises covering sixty territories. In contrast, Mr Bartlett was essentially a “man with a van” (which itself was borrowed) who had invested all his limited savings in the business.
  • No hard-and-fast categorisation of franchise agreement. Dwyer argued in its submissions before both the first instance judge and the Court of Appeal that a franchise agreement was more akin to a contract for the sale of business rather than a contract of employment and therefore the reasonableness of the restrictive covenant was to be judged on that basis. However, the Court of Appeal noted that on the facts of this case, given the stark inequality of bargaining power, the franchise agreement was more akin to a contract of employment. This is in direct contrast to the ICC Judge Jones’ findings at [293] in the judgment under appeal.
  • The parties had contemplated that the protection required by the franchisor might increase with time. The Court of Appeal held that the parties had objective contemplated that where a franchisee was early in the franchise or where it was not successful, the franchisor would need far less protection than a franchise which had been running successfully for close to ten years. Therefore, ICC Judge Jones had been right to conclude that the restriction in the Franchise Agreement was unreasonable as it failed to distinguish between the position if there was early termination, and the position if the franchise had been running for the full ten-year period or a substantial portion of that period.
  • Regulation of franchises. It is interesting that despite ICC Judge Jones’ judgment at [258] that there should be regulation of franchises, and a similar remark by the Chancellor in argument, the Court of Appeal’s judgment is silent as to the need for regulation in this increasingly common area of commerce.
  • The dangers of lawyer-led witness statements. Finally, it was notable that the Court of Appeal agreed with ICC Judge Jones’ criticism of a witness statement produced on behalf of the Appellant as  being “more to be lawyer than witness led in its drafting” (at [19]) and “a lawyer’s construct” (at [85]). ICC Judge Jones was clear that on that basis, little or no reliance could be placed on such a witness statement and therefore disregarded the statements contained in the witness statement. It is clear that the Court of Appeal agreed with ICC Judge Jones’ approach (and there was no appeal against his finding). Such an approach illustrates the danger of lawyer-led witness statements in contentious trials, and is particularly relevant for practitioners in light of the fact that PD 57AC is now in force.

David and Anson were instructed by Fredbar and Mr Bartlett on a direct access basis.

Please click here to view the full judgement.

Find Out More

David E. Grant QC is a chancery and commercial practitioner with specialist expertise in pensions, trusts, tax, will and estatesprofessional negligencefinancial services, asset recovery, insolvency and employment.

He has extensive advocacy experience in courts and tribunals up to the European Court of Justice. He has also attended numerous mediations and round table meetings in a wide variety of cases. David is happy as sole advocate, being led and/or leading a junior and enjoys the process of working in a team with his instructing solicitors.

David has been recommended in Chambers and Partners and the Legal 500 since 2007 and is described as “The go-to junior for Part 8 and professional negligence claims concerning pension schemes.”

His clients have included many leading business including the Atos Group, British Airways, BT, ITV, the Royal Bank of Scotland, Lloyds Bank, Aegon and Transport for London. He has also acted for the Pensions Protection Fund, the Pensions Regulator and the Pensions Ombudsman as well as leading professional service companies such as Aon, Mercer and Barnett Waddingham as well as various high net worth individuals.

David studied law at undergraduate and post-graduate level at the University of Oxford and lectured and tutored as SOAS and Queen Mary and Westfield College respectively. He has spoken extensively at domestic and international conferences

To find out more, contact Matt Sale +44 (0)20 7427 4910 for a confidential discussion.


Anson Cheung practises in international arbitration, construction and commercial litigation including financial servicesprofessional negligence and pensions.

She was awarded a full-ride merit-based scholarship, the Swire Scholarship, for her undergraduate degree, and graduated from the University of Oxford with a Double First in Jurisprudence. She then achieved a Distinction on the BCL at Oxford. During her studies, Anson represented the University of Oxford twice in international moots, and won the Herbert Smith Freehills Oxford Disability Mooting Championship 2017. She was a research assistant to Professor Timothy Endicott and contributed to comparative law reports that were submitted to the US Supreme Court, as organised by Oxford Pro Bono Publico.

Prior to starting the BPTC, Anson worked in the Legal Office of the UN World Food Programme in Rome. For the BPTC, Anson was awarded the most prestigious scholarship at Gray’s Inn, the Bedingfield Scholarship, and an Advocacy Award for aptitude in advocacy from BPP University. She was called to the Bar by Gray’s Inn in 2019.

To find out more, contact Sam Carter on +44 (0)203 989 6669 or Colin Bunyan on +44 (0)20 7427 4886 for a confidential discussion.

Commercial, News 30 Jun, 2022

Authors

David E Grant KC

Call: 1999 Silk: 2022

Anson Cheung

Call: 2019

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