Restrictive covenants in franchise agreements

Citation: Agency Express Ltd v Alan James Martin (Unreported Ch D 10 March 2011 Briggs J)

The issue

This was an application made for an injunction to enforce a restrictive covenant in a franchise agreement which restrained a former franchisee from providing and servicing property signs within his former designated geographical area.

The facts

Mr Martin (M) was a former franchisee of Agency Express (AE). He was responsible for the provision and servicing of property signs in an area around Northampton. The overall area was approximately one half of Northamptonshire.

The franchise agreement came to an end. Six months later AE brought proceedings to enforce the restrictive covenant in the franchise agreement which prevented M from providing or servicing property signs for a period of one year from the date of termination of the agreement.

M admitted that he had been self-employed since the date of termination and had in fact been supplying and servicing property signs. AE had engaged a new franchisee.

AE argued that the Court should not, in its discretion, apply the balance of convenience test. It said that the restrictive covenant would have expired before the matter came to trial. Effectively this was a final hearing of the matter. M said that the covenant was an unlawful restraint of trade.

Held: The Court held that this was not a final hearing and there were issues that needed to go to trial. For example, was the covenant an unlawful restraint of trade? Therefore, the Court was required to consider the balance of convenience. 

Factors which favoured M were that he would be prevented from earning a living which would result in financial hardship. Also, AE had been able to secure a new franchisee notwithstanding M’s activity. In the short term (that is, the relatively short remaining period of the covenant), M would suffer  a loss.

Factors which favoured AE were that M’s argument on restraint of trade was weak. The covenant only lasted one year and it covered the same territory as the new franchisee. M had also admitted that he had been in breach of the covenant. On the question of damages, the Court considered it difficult to quantify the loss of revenue for the new franchisee resulting from the competition offered by M(although this might be done with reference to M’s earnings in the remaining 6 months of the term of the covenant). It was also apparent that M would have some difficulty in meeting any award of damages.  Therefore, on balance, the injunction should be granted.

Comment

This is a welcome reinforcement, albeit at interim level, of what practitioners have always relied upon when advising franchisors, namely that a reasonably drawn restrictive covenant continues to be enforced by the Courts for both the benefit of the franchisor and the incoming franchisee.