Restrictive covenants in franchise agreements

Franchisors will welcome a High Court decision that applied established employment law principles on restrictive covenants to a business to business relationship. The court enforced an ambiguously drafted restrictive covenant against an ex-franchisee and also dismissed an argument that a further restrictive covenant was too wide.

In this case, the franchisor had appointed the defendant as its franchisee for a property search business in the Milton Keynes area in May 2006. The franchise agreement was for a fixed term of five years and contained a number of post-termination restrictive covenants, including territorial and services restrictions. Despite expiry of the agreement, the parties continued their relationship for a further 17 months, eventually terminating it by agreement. When the franchisor learned that the defendant had been operating a business in competition with the franchisor from, at the latest, six months after the expiry of the agreement, he applied to the court to enforce the restrictive covenants in the agreement against the defendant.

This checklist highlights the advantages and disadvantages of franchising a business from the franchisor’s perspective.