Restrictions which regulate a party’s conduct after a contractual agreement with another party comes to an end are fairly commonplace in the commercial world. They are often seen in franchise agreements; distribution agreements; consultancy agreements; shareholder agreements; and share purchase agreements and often, typically in an employment contract. They are sometimes referred to as restrictive covenants.
Such clauses aim to prevent (or at least minimise) opportunities for a contracting party to exploit the knowledge (particularly confidential information); trade connections & relationships arising out of the contract. In some cases, for example in a share purchase agreement, to protect goodwill.
Lawyers, and no doubt most senior commercial parties know, that to be enforceable, such restrictions must be reasonable. To put it in legal terms, the restriction must be included to protect a legitimate business interest and crucially, afford no more than the protection needed. However, the Court does not engage in “salami slicing” – 360 days may practically offer the same protection as a restriction which lasts a year but the Court is unlikely to engage with that argument.
For a lawyer to be asked: “is this restriction enforceable?”, would normally result in the necessary bland, albeit unhelpful response of: “that depends”. Typically what it depends on are the facts and circumstances of (amongst other things) the business, the industry and the relevant market. The more convincingly a party can evidence the rationale behind the restrictions which links to their scope, the better chance such restrictions will be deemed reasonable.
The Courts have typically given effect to a greater latitude in assessing the reasonableness of restrictions in a commercial contract as opposed to those contained in an employment contract.
Lawyers are rarely brave enough to say that an Appeal Court has changed the law. The writer has no illusions of such courage but will say that the Court of Appeal’s recent decision in Dwyer (UK Franchising) Limited -v- Fredbar Ltd and Anor [2022] EWCA Civ 889 will have rendered many post-termination restrictions in many existing agreements either unenforceable or at least, at risk and will necessarily change the approach to drafting such restrictions.
Dwyer, perhaps better known as the franchisor of the Drain Doctor franchise, entered into a franchise agreement with Fredbar Limited (a special purpose company incorporated to enter into the agreement) and Mr Bartlett, the Director and shareholder of Fredbar. Ultimately the franchise agreement was terminated approximately 2 years into a 10 year term.
The franchise agreement included post termination restrictions which sought to prevent the franchisees from being engaged in a similar or competing business for one year after termination within a fixed area.
On this occasion the Court did not apply a franchisor friendly approach. Instead of focussing on the business interests to be protected, the Court placed the emphasis squarely on the characteristics of the other contracting party. It put the inequality of bargaining position front and centre. Despite acknowledging the franchisee’s opportunity to obtain legal advice (which was indeed reflected in the terms of the agreement) it focussed on the terms being standard (with no willingness to negotiate) and the franchisee being inexperienced and effectively putting his family home at risk if the business failed. Moreover, the Court (and the Court of Appeal) took objection to the fact that the fullest extent of the restrictions applied regardless of whether the contract was terminated after 1 day or after 10 years. The Court has therefore introduced a concept of multi-tiered / staggered restrictions being preferable to restrictions unqualified by the duration of the parties’ contractual relationship.
The case comments on various other factors which will be relevant to the enforceability of post termination restrictions across the spectrum of commercial contracts. It is a clear signal to the lower courts that if there was a developing tendency to wave through “standard” or “blanket” restrictions as being enforceable, that practice must stop.
Lawyers and commercial parties must now be alive to these potential stumbling blocks. Revisiting existing contracts and redrafting where necessary may save a business from the dire position of wanting to be able to enforce the unenforceable.
For more information on this article, please contact Liam Tolen. Liam is a Senior Associate in our Commercial Disputes Team with a wealth of experience advising on disputes relating to post-termination restrictions in a variety of commercial contracts.
