Stone & Anor (t/a Tyre 20) v Fleet Mobile Tyres Ltd

This is an appeal from a decision of His Honour Judge Eccles QC sitting as a Deputy High Court Judge, the decision being dated 19 May 2006. By it the judge granted an injunction restraining the defendants, now the appellants, from directly or indirectly soliciting or touting for business for a period of one year from 6 February 2006 from any person who was during one year before that date a customer of or in the habit of dealing with the defendants. The terms of that injunction reflected the wording of a restrictive covenant to be found in clause 21.1.4 of two agreements in writing made between the parties hereto and dated 1^st July 2003 and 8 December 2003. Those agreements were in the same terms and, except where necessary to do otherwise, I shall refer to them as “the agreement”.

The judge also granted a declaration that another restrictive covenant, to be found in clause 21.1.1 of the agreement, was in restraint of trade and unenforceable. He dismissed a counterclaim by the defendants for damages and for an account and gave judgment for the claimant. The defendants’ appeal concerns only some of the issues which were dealt with in the judgment below. Permission to appeal was granted on 14 July 2006 and the appeal has been listed as a matter of urgency, since the period for which the injunction is in force already has less than half its time still to run. Partly for that reason and partly because of the narrowing of the issues, I do not propose to set out the facts in the same degree of detail as did the judgment below.

The claimant in the proceedings is a national company offering tyre fitting services. It conducts most of its business by way of entering into franchise agreements with persons who then operate a mobile tyre fitting service in a particular part of this country. In essence, the business involves arranging for a mobile fitter to travel to the vehicle in question and to fit a new tyre by the roadside or in a driveway or wherever is convenient for the customer, instead of the vehicle owner having to take his vehicle to a garage or other premises. The concept was apparently developed by the claimant. Much of the custom was achieved by the local efforts of the franchisee in his particular area, but some came from what were known as National Account Customers. Furthermore, from about 1997 the claimant had developed a website with the address www.eTyres.co.uk , a site managed by head office staff. That too produced custom.

Before turning to look at the terms of the agreement under which the defendants became franchisees, it is helpful to identify what is not, or not now at least, in dispute. First, there is no doubt that the agreement in the present case came to an end early in 2006. The claimant says that it was terminated pursuant to its terms by notice sent by its solicitors on 6 February 2006. The defendants contend that it was repudiated by the claimant, that they accepted that repudiation, and that the agreement terminated on 13 January 2006.

Secondly, there is no dispute that the defendants then began trading in such a way that the restrictive covenant in clause 21.1.4 would have been breached if that covenant was still effective. The difference between the parties lies in the fact that, if the claimant wrongly repudiated the agreement, the defendants would then be discharged from the obligation arising under clause 21.1.4: see General Billposting Co. Ltd. v. Atkinson [1909] AC 118. They would not be so discharged if the agreement was lawfully terminated by the claimant under its termination provisions. Thirdly, it is not now argued that the restrictive covenant upheld by the judge is unenforceable as an unreasonable restraint of trade.

The crucial issue, therefore, is whether the claimant was itself in repudiatory breach of the agreement, so entitling the defendants to treat it as at an end. That inevitably takes one to the agreement. As I have indicated, there were in fact two agreements in identical terms, save to the extent that one granted to the defendants the franchise in respect of East Kent and the subsequent one granted them the franchise for Mid Kent, and that the price paid as the “Franchise Fee” was £12,000 in the first case and £11,500 in the second.

By clause 2.1 of the agreement

In turn, the “Business” means, according to Recital A, the business operated by the Franchisor in tyre management and on-site tyre fitting. The “Trade Name”, albeit put in the singular, appears to embrace both “Fleet Mobile Tyres” and eTyres”: see clause 1.1 and Recitals. The “Trade Marks” are according to the third schedule “Tredchecker” and “eTyres”. The “Software” means the Tredchecker and other software supplied as part of a pack to the franchisees. The “Franchisee’s Business” is defined by clause 1.1 as

Clause 7.1 obliges the claimant to

Clause 8.3.6 is said to be of importance. It reads:

The defendants were obliged by clause 8.4.1 to ensure that sufficient numbers of staff were available to enable the defendants to operate efficiently. They were also obliged to ensure that adequate finance was available to them to enable them fully to develop the “Franchisee’s Business” in accordance with the agreement: clause 8.5.5. They also had to ensure that any vehicles used in their business were finished in the livery specified by the claimant.

The payments to be made by the defendants under the agreement were, first, the Franchise Fee already referred to and the legal costs of the agreement. In addition, by clause 9.2,

Special provision is made in the agreement for customers known as National Account Customers. They are defined by clause 1.1 as customers of the Business nominated as such under provisions in the Manual. In such cases the Franchisee, by clause 9.3, only supplies Products and Services “as a sub-contractor to the Franchisor”. Clause 9.4 states that the Franchisor

Clause 11.3 of the agreement states:

Provisions contained in clauses 16.1 and 16.2 enable the claimant to take action if the franchisee fails to achieve a set minimum annual figure for Gross Sales after the first year of the five year term of the franchise. The claimant in such circumstances has the power to reduce the size of the “Territory”, the area of the franchise, or to convert it into a non-exclusive Territory.

Finally I should refer to clause 25. Clause 25.4 states:

The Manual is also of relevance, given the obligation of the franchisee to conduct the business strictly in accordance with it (clause 11.3 of the agreement). It is a lengthy document. I need merely note that one of the express objectives of the claimant is said to be “to develop the eTyre brand” and that it refers to sales through eTyres as increasing rapidly. (Paragraphs 2.3 (3) and 5.2). There is also a section entitled “ETyres Procedures”. It states amongst other things that the franchisee’s first point of contact will be a telephone call from Head Office.

The dispute which arose between the parties concerned the eTyres work, which was, originally at least, a minority element in the total mix of work. Despite the fact that eTyres work was, on the face of it, part of the business franchised to the defendants under the agreement, the system which the claimant adopted for handling such custom was one, the mechanics of which were not easily reconciled with the terms of the agreement. The judge describes the processes adopted in some detail in his judgment, but in essence the claimant operated the website referred to earlier, and on that website it spelt out the prices for supplying and fitting various types of tyres. Those prices reflected various factors, including the cost of setting up and updating the website.

The customer using the website would place an order either online or by telephoning an 0800 number, which would connect him to the claimant’s head office. The head office would then contact the franchisee for the relevant area with details of the time and place of the job. The judge records, and it is not in dispute, that there would be no binding agreement with the customer until the franchisee had confirmed that the job would be done: see paragraph 17 of judgment.

However, the claimant made certain deductions from the website price to the customer before arriving at the amount of payment which the franchisee would get. The total six per cent payable by the franchisee to the franchisor on Gross Sales was still due under clause 9.2 of the agreement, but on the net amount after the deduction by the franchisor of the sum it thought appropriate to cover its costs. Under this system, the franchisee did not get the amount paid by the customer, but a lesser sum.

It seems from the judge’s account of events that the defendants were told this at a training session in late July 2003 after they had entered into the first of the two franchise agreements but before the second: see paragraph 32. Then in October 2004 the defendants and other franchisees were told that the claimant was going to take various steps to promote the eTyres brand. The defendants were unhappy about this, claiming that such work was less profitable for them.

It was also, they said, a system whereby they were not determining the sale prices as provided for in clause 8.3.6 of the agreement. The dispute became increasingly acrimonious, with the claimant’s operations director, Mr Young, insisting that eTyres jobs should be done unless there was some reason for turning a job down. Between late September and November 2005, according to the judge,

Soon afterwards, solicitors for the defendants wrote to the claimant, asserting that, amongst other things, it was unlawful for the claimant to deduct money from the eTyres customer price before passing the work on; that the eTyres prices were too low; that the defendants had a right to trade as Fleet Mobile Tyres as well as eTyres; and that the eTyres concept was a wholesale change of the franchise concept sold to the defendants. In further correspondence they demanded that the claimant agree to repay the money deducted, agree to deduct only six per cent from the price paid by the customer on eTyres transactions, provide properly audited accounts and allow the defendants to continue to trade and promote Fleet Mobile Tyres as before. Failing acceptance of these requirements by 13 January 2006, the defendants would accept the claimant’s fundamental breaches of the agreements and treat those agreements as at an end.

The claimant denied any breach of the agreement and, when it discovered in January 2006 that the defendants were making plans to trade in competition with it, solicitors for the claimant wrote on 6 February 2006 to terminate the agreement under the provisions relating to termination.

Thus it is that the question arises of whether the claimant was in repudiatory breach of the agreement. The breaches relied on by the defendants were and are essentially of two types. First, it is said that in respect of eTyres work the claimant wrongfully deducted money from the gross sales to customers in excess of six per cent in breach of clause 9.2. Secondly, it is contended that the claimant prevented the defendants from promoting the Fleet Mobile Tyres trade mark and brand in their business, in breach of clause 2.1 of the agreement and thereby also substantially derogated from the grant of the right made by that sub-clause. Both these contentions also underlie the counterclaim for damages and for an account.

At trial the first of these contentions was coupled with an argument by the defendants that they were obliged under the agreement to accept eTyres work. It is now said by the defendants that, while there is a strong argument to that effect, it is something of a red herring. It is an argument which was rejected by the judge, who emphasised that there was no express provision in the agreement obliging the franchisee to do an eTyres job when the phone call came from the claimant’s head office. Miss Andrews, QC, who now appears for the defendants, observes that there is no express provision requiring the franchisee to take on any job, eTyres or non- eTyres in nature, but that clause 8.3.5 requires the franchisee to operate in accordance “with the Franchisor’s reasonable instructions.” Nonetheless, she does not regard this line of argument as a necessary part of her case.

When the judge came to deal with the issue of whether the claimant was making wrongful deductions from the price paid by an eTyres customer, he concluded that the eTyres work was not regulated under the franchise agreement, save for the right of the franchisee to use the eTyres mark, a situation he frankly described as “very odd”: paragraph 102. His view was that each offer of an eTyres job to a franchisee was an ad hoc offer of work, which the franchisee was free to accept or decline. Consequently,

The judge concluded therefore that it was impossible to construe the agreement in such a way as to include the claimant’s price to the eTyres customer as part of the gross sales of the franchisee. It followed that the deductions made from the price paid by the customer did not constitute an illegal deduction or secret profit.

That construction is not one which the claimant seeks to uphold. Its case on this appeal is that the judge was right that the price paid by the eTyres customer was not part of the franchisee’s gross sales, but wrong in how he reached that conclusion. The claimant accepts that the eTyres work is, contrary to the judge’s view, regulated by the agreement but says that under the agreement it is the price to be paid by the franchisor to the franchisee in such cases which forms part of the gross sales and not the price paid by the end customer. This departure by the claimant from the reasoning adopted by the judge illustrates the difficulties which all who have been involved with this case have found when applying the agreement to the eTyres work.

On behalf of the defendants, Miss Andrews emphasises the claimant’s concession that eTyres work forms part of the business and she points out that it is not argued by the claimant that there was any subsequent variation of the terms of the agreement. But under the agreement it is the franchisee who contracts with the customer and it cannot be right to treat the franchisor as the customer in eTyres cases as the claimant submits it is. The agreement makes express provision for those instances where the contract is made between the claimant and the customer and where in consequence the defendants are mere sub-contractors. Those are the instances of National Account Customers, specifically provided for by clause 9.3 and 9.4. It is submitted that the claimant is seeking to rewrite the agreement by treating the eTyres customers as if they were nominated National Account Customers.

Miss Andrews acknowledges the practical constraints which exist when customers come via a national website which states a price. But she argues that, if eTyres sales are to be construed (as the claimant advocates) as sales by the franchisee to the franchisor, one does not need a brand or a territory. Nothing in the agreement allows eTyres sales to consumers to be treated differently from other sales. If the claimant wanted to make a bigger financial deduction because of the costs involved in eTyres sales, it should have so provided in the agreement. Insofar as the customer contacts the claimant first in respect of an eTyres job and agrees a price, the claimant must be acting as an agent for the franchisee who has the franchise for the area where the work is located. But, it is contended, there is no contractual justification for the deductions made by the claimant from that price. Nor, if such deductions are a breach of the agreement, does the claimant argue that it would not amount to a repudiation.

On this first issue, Mr Jones QC for the claimant accepts that the agreement is “not ideal”. But he argues that the definition of Gross Sales in it is such that it covers sales by a franchisee to the franchisor and that that is what happens in an eTyres job. It is the claimant franchisor who contracts with the end-customer, not the franchisee, who cannot have contemplated that he was the party contracting with that customer in such cases. On that basis, it is the lesser price at which the work is offered to the franchisee which forms part of the gross sales of the business, not the larger price paid to the franchisor by the end-customer. Mr Jones stresses that his client has only sought to deduct the six per cent stipulated in the agreement and no more, though from the lesser price. His case is that the price paid by the end customer is not part of the Franchisee’s Business; what is part of it is the lesser price at which the franchisee had agreed to do the work.

The claimant accepts that the agreement does not prevent the franchisee contracting with the eTyres customer. Indeed, at one point in the argument Mr Jones accepted that under the agreement neither the claimant nor anyone on its behalf was entitled to do an eTyres job in the franchisee’s territory if the franchisee was unable to do it or for any reason would not do it. He seemed subsequently to have some doubts about that concession but never spelt them out.

The starting point for any consideration of this first issue must be that neither party suggests that the written agreement has been varied by some subsequent agreement. Nor is any estoppel pleaded. The problem facing the court, therefore, is one of the construction of the agreement as it stands, the vital terms of which have been set out earlier. Moreover, it is not suggested by the claimant that any different construction should be adopted in respect of the later agreement, by which time the defendants knew about the deductions the claimant intended to make in eTyres cases, from that applicable to the earlier agreement, when they did not.

The principles to be adopted in the construction of commercial contracts such as these are not in dispute. One is seeking, not what one or other of the parties meant or intended to mean by the words used, but

The claimant’s argument depends critically, as Mr Jones effectively recognised, on the sales by the franchisee in eTyres work being regarded as sales to the franchisor, not to the end-customer. It is right that the definition of Gross Sales in clause 1.1 includes “sales to the Franchisor” within it, though that is a necessary part of the definition, given the terms dealing with National Account Customers, where the franchisee is expressly said to be a sub-contractor: see clause 9.3. But there seem to me to be two formidable obstacles in the way of regarding eTyres sales by the franchisee as being sales to the franchisor and not to the end-customer. First, that would be a situation where the franchisor is the main contractor with the end-customer and the franchisee is in effect a sub-contractor of the work. That is the situation provided for in the case of identified National Account Customers, by clauses 9.3 and 9.4. It is a situation dealt with by express clauses. No such clauses exist in respect of eTyres work. If the franchisee was to be regarded as a sub-contractor for an eTyres job, one would have expected similar provisions. There are none.

Secondly, the whole concept of the franchise under this agreement is one whereby the franchisee purchases the exclusive right to operate the system of on-site tyre fitting under the Trade Names within the territory in question. The Trade Names include “eTyres”, as clause 1.1 and the recitals make clear. Clause 2.2 prevents the franchisor granting the right to any other person to carry out such work in the franchised territory, and clause 16.2 shows that the territory is to be regarded as an exclusive territory unless the franchisee fails to achieve a certain annual level of sales. If there is such a failure, the franchisor may convert the territory into “a non-exclusive Territory”. Absent such failure, the franchisee acquires an exclusive territory.

The significance of that is that the eTyres sales in issue in the present case are sales to customers within the defendants’ two franchised territories. The work would not have come their way, were it not work consisting of such sales. Yet under the agreement, the claimant has no right to make such sales on its own behalf to customers within East Kent and Mid Kent. If and insofar as it makes such sales, it can only be doing so on the defendants’ behalf.

It is no objection to that to say that, in such a situation, the franchisee would not be entitled to reject the job, because the claimant would already have contracted with the customer on behalf of the franchisee and the franchisee would be bound. That argument cannot work. It is common ground that there is no contract, certainly not an unconditional contract, with the customer until the franchisee has approved. That is why the claimant contends that the franchisee is at liberty to turn an eTyres job down. As the judge records, there was no binding agreement with the customer until the franchisee had approved: paragraph 17.

I conclude, therefore, that the franchisee is not a sub-contractor where eTyres work is concerned. Such work is part of the franchised business, and the franchisee is not selling to the claimant but to the customer, albeit by way of the claimant’s website and the customer’s response thereto. Consequently, the franchisee’s gross sales include the eTyres sales to those customers at the prices paid by those customers. The claimant is entitled to its six per cent on those amounts under clause 9.2, which will normally be done by way of deduction received by it from those customers. It is, however, not entitled to deduct any greater amount but must account to the franchisee for the remainder of those payments by the customers.

If this result is not that which the claimant wanted to achieve under its franchise agreements, so be it. It was responsible, together with its advisers, for the drafting of the terms of the franchise agreement, and any failure to achieve the desired result through those terms are its own responsibility.

It follows that, by deducting sums for eTyres work greater than it was entitled to under the agreement, the claimant was in breach thereof. It does not contend that any such breach and its continued refusal to pay over such sums to the defendants did not amount to a repudiation, capable of acceptance by the defendants. On this first issue, therefore, I would hold that the agreement was wrongfully repudiated by the claimant, that the defendants were discharged from their obligation under clause 21.1.4 and that they are entitled to the sums wrongfully retained by the claimant and to an account thereof.

I turn to the second alleged breach. This concerns the instructions given by the claimant to the defendants about changing the livery of their vans and the brand names on their stationery and advertisements, so as to emphasise the eTyres name and not the Fleet Mobile Tyres name. This acquires particular significance if the deductions by the claimant of the amounts referred to above in eTyres cases did not amount to a breach, not only because it would be the only repudiatory breach on which the defendants could rely, but also because such a situation would mean that the defendants were doing eTyres work at prices set by the claimant, not themselves, prices which the defendants regarded as less profitable than the work done under the Fleet Mobile Tyres trade name. The judge appears to have accepted that eTyres work was less profitable for them: see paragraph 51 of his judgment.

There is no real dispute about what the defendants were instructed to do. In respect of their vans, they were required to put the word “eTyres” in large and prominent lettering, together with the claimant’s 0800 telephone number, on both sides of each van and across the back doors. There was no reference at all to “Fleet Mobile Tyres” on the back of the van or on the main side panels. The words “Fleet Mobile Tyres” and the defendants’ phone number appeared in very much smaller size letters on the driver and passenger doors beneath the window. There can be no doubt that it was the “eTyres” name and telephone number which would be noticed by an onlooker, and it would be unlikely that many would note the much smaller reference to Fleet Mobile Tyres.

In addition, the defendants were instructed that their business cards to be distributed should carry only the eTyres name and not that of Fleet Mobile Tyres, though along with the eTyres website and its e mail address there would be the defendants’ own 0845 telephone number. The instruction given in respect of advertisements in Yellow Pages required that only the eTyres name be used albeit along with the defendant’s 0845 telephone number. Some items of stationery were to retain references to Fleet Mobile Tyres: thus, the notepaper, though giving more prominence to the eTyres name and the 0800 telephone number, did include the name Fleet Mobile Tyres.

The claimant relied in giving these instructions on clauses 8.3.5.4 and 8.5.7 of the agreement (see paragraphs 9 and 11 of this judgment). The former of those two clauses only entitles the claimant to give “reasonable instructions” on the matters then set out; the latter, which deals solely with vehicles used in the business, contains no such express limitation.

In his judgment the judge accepted that the franchisor owed a duty not to derogate from the grant of a franchise, as the defendants argued. But he held that the claimant had not been in breach of that duty by its actions. At paragraph 111, he said:

Miss Andrews submits that the judge was there applying the wrong test and too demanding a test. She refers to a passage from the judgment of Lord Denning MR in Molton Builders Ltd v. City of Westminster London Borough Council [1975] 30 P. and C.R. 182 at 186, which reads as follows:

The defendants also rely on the decision of Clarke J in Paperlight Limited v. Swinton Group Limited [1996] CLC 1667, a case concerning a franchise agreement, where the judge identified certain principles of construction of the contract. The fourth of these was that of non-derogation from grant, which Clarke J said was in this context “really no more than an application of the contra proferentem rule” (page 1673 C-D).

The submission by the defendants is that one should not construe a contract so as to enable the grantor of a right the ability to impair substantially the exercise by the grantee of that right. Here, brand recognition was a very important aspect of the franchise which was purchased; technical know-how was of lesser significance. What the claimant sought to do was to inhibit the promotion of the Fleet Mobile Tyres brand by the franchisee and this amounted to a substantial impairment of the franchisee’s enjoyment of the rights they had acquired under the agreement. The fact that they might not suffer a total deprivation of those rights in respect of the Fleet Mobile Tyres brand is irrelevant, because that is not the legal test.

The claimant argues that the judge did not apply so extreme a test. Mr Jones relies on the reference by the judge to the issue being “a question of fact and degree”. In any event, the grant of the right to operate the business under the trade names was “subject to and in accordance with the terms and conditions herein contained”: see clause 2.1. Those terms and conditions, while they permitted the franchisee to operate and promote the business under the trade names (clause 7.1), also included those clauses giving the claimant the right to require the defendants’ vehicles to bear the livery specified by the claimant. Nothing in the agreement prevents any diminution in the size of the trade names displayed.

Furthermore, the defendants’ concerns are grossly exaggerated, as it seems the judge found, since he said he accepted the claimant’s submissions on this. The eTyres business is part of the total business and a part which is likely to increase. As the judge said, there remained a significant chance that eTyres work would not drive down the chance of profitability for the defendants to an unacceptable level (paragraph 111). That was the proper approach to be adopted, and there was neither a derogation from grant nor a breach of contract as a result of the claimant’s actions.

For my part, I bear in mind that we are here concerned with a commercial contract, albeit one which granted certain rights to the franchisee. The fact that it was a commercial agreement does not in itself mean that the principle of non-derogation from grant has no application. The principle may have evolved principally in the field of real property but it is one of wider application. As Nicholls LJ said in the Johnston case (ante), it is

Nonetheless, the task in the present case is to construe a contract in writing which contains detailed provisions as to the rights of the parties, and it seems to me that the proper approach is that which was described by Moore-Bick J when dealing with licence agreements in respect of petrol stations in the case of Esso Petroleum Company Limited v. Addison [2003] EWHC 1730 (Comm):

As a matter of construction, it cannot be that this agreement gave to the claimant an unfettered power to instruct a franchisee to change the livery on vehicles to whatever the claimant chose, however detrimental to the business, nor does Mr Jones advance any such proposition. Clause 8.5.7 must therefore be seen as subject to a limitation such as that described by Moore-Bick J in the Esso case, namely that it would not be exercised so as to impede substantially the exercise of the franchisee’s right

I put it in those terms of substantial impediment, because it cannot have been intended that the claimant was entitled to do anything so long as it fell short of a total impairment or extinguishment. The claimant does not contend for such a construction and, in my view, rightly so. The judge, however, does appear to have approached this issue by applying such a test. One cannot read his references in paragraph 111, which I have cited earlier, to desisting “entirely” or depriving of the chance to trade profitably as anything but an illustration of such a test.

What is clear from the evidence is that in a number of important respects the claimant’s instructions would have prevented the defendants from promoting effectively the Fleet Mobile Tyres aspect of the business they had purchased. The van livery would have been dominated by the eTyres name and telephone numbers, as would the business cards. The name to be advertised in the Yellow Pages would only be eTyres. Yet eTyres was a part of the business where the prices to the customer were set by the claimant, not by the franchisee as contemplated by clause 8.3.6 of the agreement. The “Fleet Mobile Tyres” work was clearly intended to be a significant part of the business. The agreement, when read as a whole, cannot be construed as entitling the claimant to impose such far-reaching restrictions on the franchisee’s ability to promote that part of the business where he set the sale price directly with the customer.

I conclude that the claimant’s instructions would have substantially impeded the defendants’ exercise of their rights under the agreement, had the defendants accepted such instructions. The claimant was thus acting in breach of the agreement in a manner sufficiently fundamental as to amount to a repudiation, which the defendants were entitled to and did accept. On this issue also, therefore, I would allow the appeal.

In my judgment, the defendants are right in contending that the claimant wrongfully repudiated the agreement in both the ways alleged. It follows that I would allow the appeal, discharge the injunction imposed by the judge and find for the defendants as to liability on the claim and counterclaim. There will have to be a further hearing at first instance as to quantum.

I agree.

I also agree.