Are most restrictive covenants now in jeopardy? Court of Appeal hands down judgment in Dwyer v Fredbar

Following a line of recent Court of Appeal cases on restraint of trade (Quantum Actuarial LLP v Quantum Advisory Ltd [2021] EWCA Civ 227 and Credico Marketing Ltd v Lambert [2022] EWCA Civ 864) the Court of Appeal in this case, with the Chancellor giving the lead judgment, confirmed that inequality of bargaining power is a ‘significant factor in determining reasonableness’. The Court of Appeal found that a risk of failure and the risk of financial difficulties were factors that a court is entitled to take into account when assessing the reasonableness of a restraint; indeed the court at first instance here was entitled to find that they were ‘significant’ factors that can support a conclusion that the restraint of trade provisions was unreasonable.

The Chancellor also considered that blanket period restrictions were inapposite where ‘there cannot be some general rule that a twelve month restriction in franchise agreements is reasonable’. In a short concurring judgment on this point Arnold LJ added a deprecation of blanket franchise agreements and His Lordship also considered that the financial effects upon a covenantor when restrictions became operative was also an aspect of this ‘significant factor’ in considering reasonableness.

In addition, the Chancellor also concluded that the court at first instance was ‘right to conclude … that the restriction was unreasonable because 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’. Arnold LJ lent support for a sliding scale of restrictions as a method of promoting reasonableness.

It is suspected that going forwards the courts will now see a significant number of challenges to reasonableness in franchising, commercial contracts generally such as shareholders’ agreement and in employment contracts, arising out of these points. These challenges may include (at least): failures on the part of the covenantee to take into account the financial/life impacts on the covenantor during any restriction, whether a sliding scale of periods of operation should have been applied and whether a template restriction was appropriate. Whether that means, in extremis, that interviewers for senior executives and franchise recruiters will be compelled to enquire into a potential employee’s/franchisee’s personal financial circumstances in order to ensure any hope of enforceability, remains to be seen in practice.

You can access the full judgment here: Dwyer (UK Franchising) Limited v Fredbar Limited and ano’r [2022] EWCA Civ 889