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Restrictive Covenants in Franchise Agreements
The decision earlier this year in Chipsaway International Ltd v Errol Kerr has confirmed the courts' purposive approach to restrictive covenants.
Chipsway had a non-compete covenant in its contract with Mr Kerr. Mr Kerr did not renew his franchise at the end of the term, but continued a business supplying similar services. Chipsaway did not replace Mr Kerr in the territory covered by the franchise agreement, but still tried to stop Mr Kerr competing with them, relying on their restrictive covenant.
When the franchisor brought the claim against their former franchisee to stop his business continuing to trade, the franchisee argued that there was no competition with the franchisor.
However, on appeal, the court agreed with the franchisor, and despite them not replacing the franchisee in the territory, the court held the clause was enforceable (even though it made no commercial sense).
So what does it mean going forward? The Court of Appeal has decided that non-compete covenant in a franchise agreement can be breached even where there is no actual competition at the time of the breach.
Once again, a case of this type highlights the importance of obtaining advice on franchise agreements and the need to look carefully as restrictive covenants and how they may impact on both parties at the end of the agreement.
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