Dyno-Rod Plc v Debel Ltd & Ors

I have before me this morning an application made by the intended Claimant in this action, Dyno-Rod plc, for a search and seize order and freezing order against three intended Defendants, Debel Limited, John Anthony Gaunt and Pamela Anne Gaunt.

Dyno-Rod plc needs no introduction. It is an extremely well known franchising operation, which has a network of franchisees who carry out drain clearance and repair services throughout the United Kingdom. The proposed Defendants are all franchisees. As I understand it from the evidence before me, the current practice of Dyno-Rod is to ensure that the franchise is entered into not only by a company but also by the principals operating within that company; and that is the form that this franchise takes, that is to say, the Gaunts are the principals and Debel Limited is their company.

The franchise agreement was entered into on 29 May 2003. The claim for relief is based upon an alleged breach of that agreement and none other. Indeed, the allegation is that the Gaunts are unscrupulous and dishonest traders and that they have pursued a course of business which is designed to siphon away work from Dyno-Rod, or at least to hide it from Dyno-Rod, so that the commission which Dyno-Rod should get from its franchisees is not paid.

As I have indicated already, the relief sought is both for a search and seize order and a freezing order. Search and seize orders were first fully sanctioned by the court in the well known Anton Pillar decision . But it is invaluable, in my view, to remember how the Anton Pillar decision came to the Court of Appeal. The original decision was made before Mr Justice Brightman (as he then was). He had refused search and seize relief in a judgment which has continued to have relevance even though his decision was overturned. He pointed out that search and seize orders, in the hands of the strong and the mighty, could be instruments of hardship and unfairness; that they could be abused unless carefully controlled. Although the Court of Appeal in Anton Pillarsanctioned the court’s power to grant such relief, it did not in any way relieve courts of the obligation to ensure that such orders were only made in strong cases and to reduce the risk, so far as possible, of them being abused.

Search and seize orders are one half of the nuclear coupling, the other half being freezing orders. Indeed, in many respects, freezing orders are more powerful than search and seize orders. Search and seize orders subject a defendant to the indignity of his premises being examined (potentially by a business rival in many cases), but the harm inflicted on a defendant by the execution of such orders can be comparatively short lived and ephemeral. By contrast, freezing orders can have the effect of simply destroying a defendant’s ability to trade. It is standard practice for a freezing order to be served not just on defendants but on banks and building societies. The result in very many cases is that a defendant in business is deprived of all ability to trade. In this case, if I were to make the order sought by the Claimant, I have no doubt at all that it would cause drastic and dramatic damage to the Gaunts’ ability to trade in the business of drain clearance and repairing.

Dyno-Rod, however, has a legitimate interest to preserve the structure of its franchise network. To that end, it has detailed agreements which it requires franchisees to enter into. The agreement of 29 May 2003, which is in issue in this application, is just such a franchise agreement. It includes strong restrictions on the franchisees preventing them from trading as drain clearance and repair experts outside the scope of the franchise. It also contains strong post-termination restrictions on trade. All of those are no doubt necessary to ensure that Dyno-Rod can properly market its franchise operation. The benefits to the franchisees are considerable. They obtain the technical backup of Dyno-Rod; they get the benefit of the 24 hour manned telephone service operated by Dyno-Rod; they get the advantage of Dyno-Rod’s considerable advertising spend and promotional activities; and they get the benefit of trading under and by use of the well known luminous red Dyno-Rod vans. They pay for these advantages. Some 27.5% of the gross revenues made by the franchisee go to Dyno-Rod. So Dyno-Rod has a legitimate interest in making sure that its franchisees keep to the terms of their franchise.

In this case, it is alleged that the Claimant has evidence of activities which (to use the words of their chief witness, Mr Oatham) shows that the Defendants have an “absence of commercial morality”. It is said that there is evidence that these intended Defendants are breaching the terms of their franchise.

To obtain the relief that they seek, as Mr Tritton, who appears on behalf of Dyno-Rod, points out in his skeleton argument, the Claimant must show a strong prima facie case. It must show damage, potential or actual damage, which must be of a very serious nature and it must show that there is clear evidence that the Defendants have in their possession incriminating documents. It must also show that there is a real possibility that the Defendants might destroy such material before an application inter parties can be made, and it must show that harm likely to be caused by the execution of the order to the respondent and his business affairs must not be excessive or out of proportion to the legitimate object of the order. Those are the criteria for the grant of search and seize orders, but a similar factors apply to freezing orders.

The current proceedings are based upon an anonymous tip-off given to Dyno-Rod. Apparently, the person who gave the tip-off is unwilling for his name to be disclosed. As I understand it, it is accepted by Dyno-Rod that the evidence he gave was circumstantial. It contained no documents and no details of any sort, but it did suggest that the Defendants were operating, or at least had some connection with, another drainage company called Leat. There is no doubt that there is a company called Leat and there is also no doubt that that company employs two ex-employees of the Defendants. But Mr Tritton, quite rightly, says that there is nothing wrong with ex-employees being so employed. Nor is it suggested that there is anything wrong with Leat being in competition with Dyno-Rod. But what is said is that there is a connection between the Defendants and Leat. It is also said that there is a connection between the Defendants and another company called Egress.

I should make it clear that the Claimant has known about the alleged link between the Defendants and Egress for three years, ever since an inspector called Mr Freer, while acting on behalf of Dyno-Rod, visited the Defendants’ premises. Nothing has been done about that in three years. I should point out also that, although the franchise agreement of which breach is complained was only entered into in May 2003, there was a previous relationship at least between Dyno-Rod and the Second Defendant, Mr Gaunt; and it was in relation to that that it appears that Dyno-Rod learned of the possible contact or connection between Mr Gaunt and Egress.

In support of the current application I have been shown documents which indicate that Egress was trading successfully at least until the middle of 2002. Ignoring for the moment the fact that the Claimant has known about the potential connection between Mr Gaunt and Egress for three years and has done nothing about it, the fact is that evidence showing that Egress was trading successfully until the middle of 2002 goes nowhere at all towards showing that there has been breach of a franchise agreement – which is the only one relied on here - entered into a year later in May 2003. There is, therefore, nothing before me now which, in relation to Egress, shows a strong prima facie case that any of the Defendants have breached any of their contractual obligations.

As far as Leat is concerned, it is worth bearing in mind what has been said by Mr Freer on the basis of the information given to him by the anonymous source. First, the anonymous source, according to Mr Freer, said that he thought some of the First Defendant’s employees were also carrying out work for Leat and that people from Leat were often known to be working at the Second Defendant’s home. This is extraordinarily thin. When the First Defendant’s employees were working for Leat and in respect of what and where is unparticularised, and the basis for the informant’s belief that some employees might have been doing that is unstated. The fact that people from Leat were known to be working at the Second Defendant’s home, once again, is unparticularised and, furthermore, does not of itself show that there was any breach by the Second Defendant of the terms of the franchise agreement.

Second, the informant says (and I quote from Mr Freer’s evidence):-

“Shaun Thomas, a previous employee of the First Defendant, had handed out business cards for Leat Limited.”

I understand that Shaun Thomas works for Leat Limited. I cannot see how that indicates any wrongdoing by the Defendants. He was an employee of the First Defendant. That an ex-employee of the Defendants obtains employment in a similar business does not take the claimant anywhere unless, which is not the case here, it can be shown that in so doing he or the Defendants have breach some right of the claimant.

Third, Mr Freer says (and I quote again from his evidence):-

“The Leat offices seem to be right by the First Defendant’s Dyno-Rod premises on the King Charles Business Park.”

The evidence as to this close relationship of the two businesses is very thin. An investigation has been made of the King Charles Business Park, where the First Defendant is supposed to carry on business. As far as I can see, there is no evidence actually identifying where the Leat offices are on that site, save that it is said that Leat uses green on its business cards and there is a hut on the King Charles Business Park which is green and that there is a green tipper truck beside it and, therefore, that looks like it must be the offices of Leat. In my opinion, that evidence is terribly thin.

Fourth, Mr Freer says that he was told by the informant:-

“The Defendants take calls at the King Charles Business Park, but their main office is at the home of the Second and Third Defendants.”

Mr Tritton, quite rightly, says that that of course is of no relevance to the issue of whether or not there is a strong prima facie case of breach by these Defendants of their franchise agreement.

However, it has been shown that there is a holding company of Leat called Akhdar (Holdings) Limited. That was created before the franchise agreement was entered into. Mr Gaunt used to be a director of it. Immediately prior to him entering into the franchise agreement, he resigned as a director. However, Mrs Gaunt continues to be the company secretary of Akhdar, which is connected with Leat through its shareholding. That is clearly, in my view, evidence that Mrs Gaunt has some connection with Leat. It may well be that that connection, even if it is in a non-executive rôle and only at some distance, is a breach of her obligations under the franchise agreement. But the fact that Mr Gaunt has resigned seems to me to be consistent with him taking his franchise obligations seriously.

Furthermore, there are some really quite surprising features of this case. The courts are used to applications made on behalf of franchisors against franchisees where franchisees have rebelled against paying the commission and have decided to carry out work on the side. Franchisees sometimes do that and the courts are very willing to help the franchisor stop that sort of activity. But, in this case, there is absolutely no evidence at all that contracts have been diverted away from the Dyno-Rod franchise. In particular, there is no suggestion that the amount of work done by the Defendants under the franchise has tailed off. Mr Tritton says that the diversion of work from within the franchise agreement may have been hidden if there has been a significant upturn of work in the area; in other words, what has been diverted is the growth in the market. But there is no evidence whatsoever that there has been a growth in the market in this area.

Reliance is also placed upon the fact that before this franchise agreement was ever entered into -- in fact, some two years earlier -- Mr Gaunt had entered into a contract with an insurance company, Royal & Sun Alliance (“R&SA”), outside the scope of his then franchise agreement. That, of course, is absolutely true. What is also quite clear is that R&SA were unwilling to have anything to do with Dyno-Rod. They wanted Mr Gaunt to do certain drain repair work on their behalf, but they were not prepared to have anything to do with Dyno-Rod. Mr Gaunt drew this to the attention of Dyno-Rod and eventually agreed with them an arrangement under which he would carry out the work for R&SA, who would not know about Dyno-Rod’s involvement, but he would continue to pay to Dyno-Rod the sums due to them under the franchise agreement. This, in my view, is no indication that Mr Gaunt is in any way dishonest. On the contrary, it seems to me to indicate that, at least in relation to that matter, he took the provisions of his then franchise agreement extremely seriously.

I am wholly unconvinced there is even a prima facie case that the Defendants have done anything seriously wrong in this case. I am unconvinced that there is any evidence of significant damage to the Claimant. There is, so far as I can see, nothing to suggest that there are incriminating documents, or no clear evidence that there are incriminating documents, held by the Defendants and there is no evidence that the Defendants are likely to destroy anything. In my view, the position is that it is likely that the order sought by the Claimant would cause immense damage to the Defendants as against little significant legitimate benefit to the Claimant.

It is not in doubt, as I say, that there would be damage caused to the Defendants by the order sought. Further than that, however, the Claimant makes it clear that it intends forthwith, on service of any order, to terminate the franchise agreement and then to bring into operation the extensive and wide ranging restrictions in restraint of trade which the franchise agreement contains. It says that it will do so on the basis of the flagrant breaches of the franchise agreement which it says its evidence shows. So the result will be, if the relief is given as sought by the Claimant, that not only will the franchise agreement be terminated, but the assets of not only the corporate Defendant but the two individuals will be frozen and it is likely that they will find themselves in great difficulty in earning a living. It is not suggested that the Gaunts have any expertise save in the drainage clearance and repair field.

In my view, this is the sort of case where the warning words of Mr Justice Brightman in the Anton Pillarcase at first instance have to be remembered. In my judgment, there is no basis whatsoever for the grant of the relief sought and I will refuse any ex parte relief on this application.