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Restrictive Covenants in Franchise Agreements

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United Kingdom

Restrictive covenants are very common in franchise, agency and distribution agreements. They seek to protect goodwill, know-how and customer relationships.

1. Introduction

Restrictive covenants ("RCs") are very common in franchise, agency and distribution agreements. They seek to protect goodwill, know-how and customer relationships by limiting the licensee’s right to operate a competing business both during the term and after the termination or expiry of the agreement. RCs will typically consist of undertakings of non-solicitation, non-dealing, confidentiality and non-competition and have a specific duration and/or geographical reach. RCs can be vital in protecting the integrity of a brand's network.

Two recent cases in the English Courts have considered the enforceability of RCs. In the case of Prophet Plc v Huggett (the "Prophet Case"), the Court of Appeal overturned a decision in the High Court, which had taken an unorthodox approach to an incorrectly drafted post termination RC in an employment contract. In Carewatch Care Services Limited v Focus Caring Services Limited & Others (the "Carewatch Case"), Mr Juctice Henderson considered (and upheld) the enforceability of standard post termination RCs in a franchise agreement, as a matter of common law and under principles of EU and UK competition law.

This article will consider the background of RCs in the context of franchising and discuss the implications of both judgments.

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