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A recent High Court decision in Francotyp-Postalia Ltd v Whitehead highlights the importance of having appropriately drafted post-termination restrictions in franchise agreements. The court determined that where a franchise agreement contains an unenforceable restrictive covenant, the offending wording will not be severed where to do so would modify the unenforceable clause. Severing the unreasonable part of the provision would have allowed the rest of the clause to remain operative against the ex-franchisee. This decision is particularly significant for franchisors as properly drafted non-compete clauses are very effective in restricting how ex-franchisees use a franchisor's know-how after an agreement has ended. This case is a useful reminder, however, that franchisors should be mindful of the risk of drafting post-termination clauses too broadly.
Background Facts
The claimant in Francotyp-Postalia Ltd v Whitehead argued, amongst other things, that the defendant had breached the post-termination restriction in the agreement. This clause prevented the franchisee from engaging in a competing business, supplying competing goods or soliciting clients and staff in a certain area for twelve months after the termination of the agreement. This area was very broadly defined. It encompassed the franchisee's original territory and anywhere else where the franchisor, its other franchisees or any dealer or distributor of the franchisor were supplying the products in the United Kingdom. The claimant accepted this clause was too wide to be enforced. It therefore asked the court to remove certain words to effectively reduce the 'restricted area' to the franchisee's original territory, thereby enabling the rest of the clause to survive.
The Court's Approach
The court refused to 'sever' the clause. In reaching this conclusion, it affirmed the previous cases of Beckett Investment Management Ltd & Ors v Glyn Hall and Ors and Sadler v Imperial Life Assurance Company of Canada Ltd. These cases established that a court will only sever an unenforceable provision if:
- it is capable of being removed without the necessity of adding to or modifying the wording of what remains;
- the remaining terms continue to be supported by adequate consideration; and
- the removal of the unenforceable provision does not so change the character of the contract that it becomes 'not the sort of contract that the parties entered into at all'.
Mr Justice Smith deemed the clause not to meet the requirements of the first limb of the test. He concluded that to amend the definition of the restricted area would also affect other clauses which incorporated the definition. Unlike the non-compete clause, these clauses were valid. Consequently, severing the offending words would have simultaneously varied other, fully enforceable and agreed restrictive covenants. As a result, and based on the principle that a court should not delete parts of clauses where to do so would make a new contract between the parties, Mr Justice Smith ruled that the provision could not be severed. The entire non-compete provision was therefore unenforceable.
Significance for Franchisors
Whilst post-termination restrictions allow franchisors to prevent ex-franchisees competing with them in a certain area for a defined period, franchisors should be careful not to draft these clauses too broadly. Clauses obligating ex-franchisees to refrain from certain activities for too long a period or in too wide an area may be deemed unreasonable. As has been demonstrated in Francotyp-Postalia Ltd v Whitehead, such clauses are likely to be unenforceable in their entirety as courts are often reluctant to sever unreasonable terms.
It is therefore advisable that franchisors keep their post-termination clauses under review.