Latest Article 14/11

Non-compete covenants in the UK: when can they be used?

 

In Convenience Co v Roberts (“Convenience”), the High Court considered for the first time a covenant which attempted to prevent a former franchisee from competing with the franchisor anywhere in the UK after termination of the franchise agreement. The Court found that the covenant was an undue restraint of trade and was therefore unenforceable.

In this article, Mark Abell, Head of the Franchise and Licensing group at City law firm Field Fisher Waterhouse, discusses this case and considers the question: when is a non-competition covenant enforceable?

Post-term non-compete clauses fail

In the “Convenience” case, the franchisee was not entitled to operate outside the franchise territory. The territorial scope for the restriction could not, therefore be justified because it was no more than was required to enable the franchisor to attract a new franchisee to the former franchisee’s territory.

For a non-competition covenant to be enforceable, it must be no wider than is reasonably required for the protection of the franchisor’s business interests. A franchisor is entitled to protect its interest against unfair competition from an ex-franchisee setting out on his or her own. The courts recognise that it would be extremely difficult for a franchisor to find a new franchisee if a former franchisee, with all his or her previous experience, knowledge and contacts in the area, was free to compete in the same area.

Sometimes a franchisor may have sought to prevent former franchisees from competing, not only in the area in which the franchisee operated, but also in areas in which its other franchisees operate.

Kall-Kwik v Rush

In Kall-Kwik v Rush (1996) FSR 114 (“Kall-Kwik”), the franchisor tried to prevent the franchisee from competing within a ten-mile radius of the location of the shop from which it had operated, or the premises of any of its other franchisees. An interlocutory injunction was granted to enforce the restrictive covenant but was limited to any business within a ten-mile radius of the former franchisee’s shop. Even that restriction was only permitted because the ten-mile radius was not the primary restriction in the covenant but was self-limiting in applying to a competitive business only.

The judge commented that a restriction on operating a rival business within a ten-mile radius of any of the franchisor’s other shops - which would effectively prevent any ex-franchisee operating anywhere in England where it was profitable to do so - could not be justified. Indeed, Kall-Kwik’s counsel did not even press for such an order.

Prontaprint v Landon Litho

In Prontaprint v Landon Litho (1987) FSR 315 (“Prontaprint”), the non-compete covenant covered the provision of the franchised service, or anything similar, within a half-mile radius of the defendant franchisee’s premises, or within a three-mile radius of any premises in the UK at which the particular service, or any similar service, was provided by any other franchisor or franchisee.

The judge found that, at trial, the covenant was likely to be held enforceable and accordingly granted an interim injunction to enforce the covenant in the meantime.

In the Convenience case, however, the judge said that the judge in Prontaprint had made a decision on the grounds that the only operative restriction was that which applied in the Staffordshire town of Hanly where the shop was situated. The judge in Convenience concluded that the Prontoprint decision could not be used as authority for the proposition that a restriction over a very wide geographical area in which the defendant has not traded can ordinarily be upheld.

Dyno-Rod Plc v Reeve

In Dyno-Rod Plc v Reeve (1999) FSR 148, in which FFW acted for the successful claimant, the covenant provided that the defendant should not be involved in any business which competed with the franchisor’s business within the former franchisee’s territory.

Conclusion

The Convenience case serves as a warning as to how important it is to ensure that restraint of trade clauses are no wider than necessary to protect the franchisor’s legitimate business interest. If they are, they will be unenforceable. The court will not redraw the contract so that it is limited to the protection required for the franchisor’s legitimate business interest, unless the clause is severable, as was the case in Kall-Kwik v Rush.

There should be a functioning correspondence between the area of the restriction and the area in which the franchisee can operate. This can be achieved by limiting restriction to the territory in which the franchisee can operate. If the franchisor seeks to impose a wider restriction, it does so at its own peril, as such a clause may be held to be unenforceable.

Covenants restraining competition must be reasonable, not just in terms of the area in which the restriction is imposed, but also in relation to the duration of such a ban and the scope of activities which fall under the umbrella of those which the defendant is to be prevented from undertaking in the event of termination of the franchise agreement.