Introduction

The case of Dwyer (UK Franchising) Ltd v Fredbar Ltd & Anor ([2022] EWCA Civ 889) addresses the enforceability of post-termination restrictive covenants within franchise agreements. The dispute arose between Dwyer, the franchisor, and Fredbar Ltd alongside Mr. Bartlett, the former franchisee and guarantor. Central to the case was whether the restrictive covenants included in the franchise agreement were reasonable and enforceable, especially considering the significant imbalance in bargaining power between the parties.

Summary of the Judgment

The Court of Appeal upheld the High Court's decision to declare the restrictive covenants in the franchise agreement unenforceable. The covenants in question prevented Mr. Bartlett from engaging in any similar or competitive business within the exclusive marketing territory for one year post-termination and from operating such a business within a five-mile radius of the territory. The court found these restrictions unreasonable due to the significant inequality of bargaining power between Dwyer and Mr. Bartlett, as well as the lack of tailored protection suited to the specific circumstances of the franchise's early termination.

Analysis

Precedents Cited

The judgment extensively referenced key precedents that shape the understanding of restrictive covenants in franchise agreements:

• Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co [1894] AC 535: Established the modern test for restraint of trade, emphasizing reasonableness in protecting legitimate business interests without harming public policy.
• Chipsaway International Ltd v Kerr [2009] EWCA Civ 320: Affirmed that restrictive covenants in franchise agreements aim to protect franchisor's goodwill and prevent competition from former franchisees.
• Dyno-Rod plc v Reeve [1999] FSR 148: Highlighted the necessity of restrictive covenants in safeguarding franchisor interests and ensuring smooth transitions between franchisees.
• Schroeder v Macaulay: Reinforced the significance of bargaining power in assessing the enforceability of restrictive covenants.
• Quantum Actuarial LLP v Quantum Advisory Ltd [2021] EWCA Civ 227: Emphasized the role of inequality of bargaining power in evaluating the reasonableness of restrictive covenants.

Legal Reasoning

The court's legal reasoning centered on the principle that restrictive covenants must protect a legitimate business interest without imposing undue restrictions on the individual. Key points include:

• Reasonableness: Under Nordenfelt, the restraint must be reasonable in scope and duration, aligning with the legitimate interests of the franchisor.
• Inequality of Bargaining Power: The court recognized the significant imbalance between Dwyer and Mr. Bartlett, deeming it crucial in assessing the reasonableness of the covenants.
• Contextual Assessment: The enforceability of the restraints was evaluated based on the specific circumstances, including Mr. Bartlett's lack of experience and significant financial risk.
• Proportionality: The restrictive measures were deemed disproportionate to the protection needed, especially given the early termination and minimal goodwill established.

Impact

This judgment underscores the judiciary's willingness to scrutinize restrictive covenants in franchise agreements, particularly where there is a notable disparity in bargaining power. It signals that franchisors must ensure their restrictive clauses are tailored to protect legitimate interests without being excessively burdensome, especially for franchisees who may be vulnerable or inexperienced. Future franchise agreements will likely see more nuanced restrictive covenants and heightened judicial scrutiny to ensure fairness and reasonableness.

Complex Concepts Simplified

• Restrictive Covenants: Clauses in a contract that restrict a party’s actions after the contract ends, such as not starting a competing business.
• Public Policy: Legal principles that govern the behavior of individuals and organizations to ensure fairness and protect societal interests.
• Inequality of Bargaining Power: A situation where one party has significantly more power or leverage in negotiations than the other, often leading to unfair contract terms.
• Rescission: The cancellation of a contract, returning both parties to their pre-contractual positions.
• Reasonableness Test: A legal standard used to determine whether a restrictive covenant is fair and appropriate under the circumstances.

Conclusion

The Court of Appeal's decision in Dwyer v Fredbar Ltd & Anor reinforces the necessity for restrictive covenants in franchise agreements to be reasonable and proportionate to the interests they aim to protect. The judgment highlights the importance of considering the bargaining power between franchisors and franchisees, ensuring that such covenants do not unduly restrict an individual’s ability to earn a livelihood. This case serves as a pivotal reference for future disputes involving post-termination restrictions, emphasizing judicial vigilance in upholding fairness and preventing the exploitation of weaker contractual parties.