Franchisee breaks restrictive covenant

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Gannons helped a franchise enforce a restrictive covenant broken by former franchisee.

Our client owned a fast-food restaurant business. Our client franchised their business. This granted the use of their exclusive territory,trademarks, vehicle get up and customer relationship management system. A franchisee left the franchise and broke a restrictive covenant, which prevented them from engaging in a competing business once the franchise agreement terminated. Our client enforced this restrictive covenant, to protect their goodwill.

The franchise dispute

The dispute concerned an ex-franchisee who chose not to renew their franchise agreement. The franchise agreement contained restrictive covenants. These restricted the former franchisee after termination of the agreement from competing with our client’s business in the franchised territory for 6 months.

However, they ignored these restrictive covenants and opened a new fast-food restaurant business in the area.

It now traded under a new name, re-branding its vehicles to use the new name as well. It also stopped using the franchisor’s trademark and customer relationship management system. However, it was still in breach of the restrictive covenants. Hence our client wished to stop their former franchisee quickly. They were operating a competing fast-food business, in the same territory, within six months of terminating the franchise agreement. This was a clear breach of contract.

Mitigating risks

On behalf of our client, we assisted with the interpretation of the franchise agreement. Then we enforced the restrictive covenant. We also obtained an injunction that prevented the franchisee from damaging our client’s brand and goodwill.

The franchisee’s defence

They argued that they had not breached the franchise agreement’s post-termination obligations. They did so on the grounds that our client no longer operated within the franchised territory, because they had failed to franchise the territory to another business. This meant that no competing business could cause our client any loss, including the ex-franchisee under their new trading name.

Since they had not breached the franchise agreement’s restrictive covenants, they could continue their business. This was because our client was no longer a competing business within the territory, and they also were not using our client’s trademark without authorisation.

Our client’s arguments

We argued the restrictive covenant protected our client’s goodwill in the territory. Customers visiting their former franchisee would incorrectly assume it was still connected to our client. The 6 month non-compete period ought to allow customers to recognise a new proprietor and for our client time to find a replacement franchisee to compete in the area.

The court’s decision

The judge agreed with us. The fundamental purpose  of the restrictive covenant was to prevent the former franchisee competing in our client’s territory. This enabled our client to protect its goodwill.

The judge allowed the injunction. This then stopped the new fast-food business operating in the territory for the remainder of the 6 months. All franchisees agreed this provision when signing our client’s franchise agreement.

Conclusions

To build a successful franchise, franchisors must enforce their rights and control their franchising network.

Franchise disputes arise during and after the agreement. Drafting the franchise agreement to cover every eventuality is key.

We avoid the risk of franchisees failing to perform as expected by planning at the outset. If a franchisee’s performance cannot be improved, we’re skilled in resolving franchise disputes. We also extract you from franchise agreements, with minimal exposure, and enforce your rights.

John Deane is a partner in the commercial team. Understanding the ins and outs of a franchising model is key to successfully resolving a franchise dispute. Please do get in touch with John if we can assist.

  • The skills on offer at Gannons were evident as they handled our case with aplomb