Pirtek (UK) Ltd v Joinplace Ltd (t/a Pirtek Darlington) & Ors

This claim arises out of a franchise agreement dated 1^st November 2006 (“the Franchise Agreement”) and made between the claimant Pirtek (UK) Limited (“Pirtek (UK)”), the first defendant Joinplace Limited (“Joinplace”) and Ian Vickers, pursuant to which Pirtek (UK) granted Joinplace a franchise to carry on business as Pirtek Darlington in the custom manufacture, sale and servicing of industrial hoses, fittings and components within County Durham for an initial term of ten years. Mr Vickers was the owner and a director of Joinplace and joined in the Franchise Agreement as its guarantor. Both he and Joinplace gave restrictive covenants, including a covenant not to compete, on the termination of the Franchise Agreement, which occurred on 19^th March 2009.

Pirtek (UK)’s case, in outline, is that Mr Vickers had by then already caused Joinplace to cease to trade (on 12^th March), set up a new company, the fourth defendant Vetech Limited (“Vetech”) with the assistance of his partner the third defendant Ms Lynn Garratt as his vehicle for the taking over of Joinplace’s business and assets, and caused Vetech to commence trading in breach of his restrictive covenants under the Franchise Agreement, with effect from 16^th March.

The restrictive covenant mainly relied upon by Pirtek (UK), being clause 22.7.1 of the Franchise Agreement, was that Mr Vickers would not, for the period of one year following termination, within County Durham:

In its claim form dated 27^th March 2009, supported by Particulars of Claim dated 21^st April 2009, Pirtek (UK) sought, in addition, specific sums alleged to be due from Joinplace and Mr Vickers, damages from Joinplace and Mr Vickers for breach of the franchise agreement, and damages from Mr Vickers, Ms Garratt and Vetech for conspiracy.

Joinplace took no active part in the litigation, being insolvent before the claim was issued and put into liquidation shortly thereafter. The claim was vigorously defended by Mr Vickers, Ms Garratt and Vetech on the main grounds that:

the RC was void by reason of contravention of the Chapter I prohibition in section 2(1) of the Competition Act 1998, or alternatively at common law;

the activities carried out or intended to be carried out by the three remaining defendants gave rise to no breach of the RC, actual or threatened, the main point being that Vetech’s proposed business was neither the same as, similar to or in competition with Pirtek (UK)’s business;

in any event Vetech was an independent company established and owned by Ms Garratt rather than Mr Vickers, all allegations that it was his vehicle, or that there had been any conspiracy, being vigorously denied.

In March 2010 Mr Vickers dropped out of the litigation due to his bankruptcy. At trial, Pirtek (UK) abandoned all monetary claims against the remaining defendants Ms Garratt and Vetech, on the basis that it had been sufficiently protected from loss by the injunction. Since the injunction had by then run its course, there was no claim that it should be continued. The result was that, by the time of trial, Pirtek (UK) was not pursuing any active claim against any of the defendants. By contrast Ms Garratt and Vetech were pursuing their claims, primarily under Pirtek (UK)’s cross-undertaking.

Pirtek (UK) appeared at trial by Mr Neil Berragan of counsel. The defendants had no legal representation at any time. Ms Garratt appeared at trial in person, assisted by Mr Vickers. I permitted her to represent Vetech as its director. Owing to Ms Garratt’s indisposition during part of the trial, and at her request, I permitted Mr Vickers to conduct some of the cross-examination on her behalf, which he did with considerable skill. It is evident that they had some assistance during the early stages of the litigation from someone with legal training or qualifications, not least because they advanced their challenges to the validity of the RC in writing with considerable sophistication.

The issues which I have to decide are therefore:

the validity of the RC;

actual or threatened breach of the RC by Mr Vickers;

liability of Vetech as an alleged vehicle for or conspirator with Mr Vickers sufficient to justify the injunction against it;

loss attributable to the injunction, recoverable under the cross-undertaking;

malicious prosecution.

Pirtek (UK) called four witnesses to give oral evidence. Its two main witnesses were Stephen Martin its commercial manager and Paul Dunlop its sales director. They both appeared to be experienced businessmen with reasonable memories of relevant events, not least because, due to the obtaining of urgent without notice relief, they were called upon to commit their recollection to writing soon after those events had occurred. The cross-examination of Mr Martin by Ms Garratt was so short that I had little opportunity to form a view as to his reliability, from his demeanour and evidence in the witness box. Nonetheless, nothing in his evidence caused me to doubt his honesty or reliability as a witness. Mr Dunlop’s rather longer cross-examination by Mr Vickers revealed him as occasionally rather slow in understanding or responding to the gist of questions put to him, and sometimes a little argumentative. Nonetheless I found him to be generally honest and reliable.

Pirtek (UK) also called a Mr Eian Dobbing, the co-owner with his wife of a neighbouring Pirtek franchisee for the Cleveland area. He came across as a solid, honest witness with a good recollection of events. Although not perhaps wholly independent of Pirtek (UK), I found him a thoroughly reliable witness.

Finally (in terms of importance) Pirtek (UK) called a Mr Kristian Wagstaff, who had been instructed by Pirtek (UK) to pose as a purchaser of a replacement industrial hose from the newly established Vetech on 26^th March 2009. He was vigorously cross-examined by Mr Vickers on his mainly typed witness statement signed on the evening of the same day, in particular on the basis that he had simply assented by his signature to a story put in front of him by Pirtek (UK)’s representative Mr Smart. Mr Wagstaff turned out to be a very uncomplicated individual with no side to him. I was persuaded both of the accuracy of the account of his meeting with Mr Vickers at Vetech’s premises, and that his statement was prepared as the result of a de-brief on the telephone by Mr Smart. In the significant respects in which his evidence differed from that of Mr Vickers, I preferred Mr Wagstaff’s account.

Pirtek (UK) relied, in addition, upon witness statements from a Mr Philip Harbon, who I was told was unwell, and from a Mr Mark Wilton, Pirtek (UK)’s European finance director, whose evidence simply confirmed Pirtek (UK)’s ability to satisfy a cross-undertaking in damages.

The defendants’ main witnesses were Ms Garratt and Mr Vickers, both of whom were cross-examined at some length. Both appeared to have good memories, and they had carried out detailed research, deployed in written evidence, about the market in the UK for Pirtek’s products and services. Generally speaking, they (and Mr Vickers in particular) backed up that written evidence with useful detail during cross-examination about the way in which Joinplace had traded while a Pirtek (UK) franchisee.

In certain specific respects however I regret to have to say that, by the end of their cross-examination, I did not consider that, in relation to disputed issues of fact about the circumstances of the setting up of Vetech and its business, I could rely on their evidence (and in particular their oral evidence) as being truthful. The gist of Ms Garratt’s and Mr Vickers’ oral evidence at trial was that Vetech had not been established for the purpose of running an industrial hose replacement business at all, but rather for a business mainly concerned with the supply, fitting and maintenance of pumps, and that it was not intended to be a vehicle or platform for the continued deployment by Mr Vickers of his considerable skills as a custom hose maker, supplier and fitter. Rather, it was suggested that it was entirely Ms Garratt’s enterprise, in which (since she entirely lacked it) the necessary technical and business skills and experience would be provided to her by her son.

In sharp contrast, the general thrust of the defendants’ case prior to trial (which was deployed in considerable detail in a written response to the claimant’s skeleton argument used on the without notice application), in a detailed defence and in several witness statements, was that, while it was always denied that Mr Vickers had or was to have any beneficial interest in Vetech as a shareholder, it was nonetheless formed to carry on a business which included, as a main element, the custom manufacturer and supply of replacement hydraulic hoses, and that Mr Vickers’ skills, experience and customer contacts in that regard were to be deployed by Vetech in the establishment of its business. For example, in a witness statement signed by Mr Vickers on 23^rd June 2009 he said this:

The real point of difference between Vetech’s proposed business and that of Pirtek (UK) generally, or Pirtek Darlington (i.e. Joinplace) in particular, was that Vetech did not propose to include a mobile van service for the purpose of providing replacement hydraulic hoses to customers on-site, but only an over-the-counter service at Joinplace’s former premises in Darlington.

The suggestions that Vetech’s business was, from the outset, planned to be focussed on industrial pumps, and that the essential technical and business skills required to make it succeed were to come from Ms Garratt’s son rather than from her partner Mr Vickers, emerged for the first time in their cross-examination at trial. They were in my judgment inventions designed, at a late stage, to assist them in their case that the injunction should never have been granted. They were deliberate inventions, not to be explained on the basis of an innocent change in recollection over time. The result is that, where the evidence of Ms Garratt and Mr Vickers conflicts with that of the claimant’s witnesses who were cross-examined, I have in general preferred that of the claimant’s witnesses. Nonetheless, as will appear, that has not by any means involved a wholesale rejection of the defendants’ evidence, part of which was consistent with the documents, and with the general probabilities of the matter.

The defendants relied in addition upon the witness statements of five other witnesses, Lynda Goldsmith, Darren Todd, Graham Vickers, Mark Howe and Sean Clennell, none of whom were required to be cross-examined, and whose evidence I therefore accept in full, to the extent relevant to the issues which I have to decide.

Pirtek (UK) was established (as its name implies) in the United Kingdom in order to exploit a business method originally developed in Australia for the custom manufacture, supply and fitting of replacement hydraulic hoses to industrial customers both by a mobile van service, travelling to customers’ places of business, and by over-the-counter sales from depots. Pirtek (UK)’s business is to be distinguished from the manufacture and supply of hydraulic hoses to be used in the original manufacture of machinery.

The distinctive feature of Pirtek (UK)’s business method when originally deployed in the United Kingdom was the use of mobile vans rather than just static depots as the points of sale and supply. A customer needing a replacement hydraulic hose for some part of its existing machinery could contact Pirtek (UK) or, typically, a Pirtek (UK) franchisee, and arrange for a van to attend its premises. The van would itself be equipped both with hoses with the necessary dimensions and specification, together with the machinery necessary to cut and attach the requisite lengths of hose to the appropriate terminals, for supply to the customer and, if necessary, fitting to the customer’s machinery. The provision of a mobile van service gave Pirtek (UK) an initial competitive edge within the market for the custom manufacture and supply of replacement hydraulic hoses, but by the 21^st century it had been joined by a number of competitors offering similar mobile services.

The evidence did not disclose when it was initiated, but by the 21^st century, Pirtek (UK)’s business was, at the point of service and sale, conducted exclusively through a franchise structure. By 2009 it had more than ninety franchisees, each operating a mobile van service within a specified territory from one or more depots. Those depots both underpinned the mobile van service (in the sense of providing the vans with the requisite supplies and tools) and provided an over-the-counter service to customers willing, or preferring, to bring their hose replacement requirements to a Pirtek (UK) depot. Mr Vickers acknowledged that the mobile van service was priced at a premium rate, both because of its convenience and the value of the skilled labour supplied to customers on-site, so that some customers could obtain a Pirtek (UK) supply of replacement hoses more cheaply over-the-counter at a franchisee’s depot, even though the price difference might frequently be marginal. Detailed statistical evidence before the court showed that all Pirtek (UK)’s franchisees offered an over-the-counter service, that the over-the-counter service was generally a significant part of a franchisee’s turnover, but that it never formed a bulk of any franchisee’s turnover, and only very occasionally exceeded even 40% of any individual franchisee’s monthly turnover.

Pirtek (UK)’s turnover had, by March 2008, reached some £14.7 million (falling by £2 million during the following year of recession). It consisted mainly of the supply of hydraulic hoses and associated fittings and tooling to its franchisees. In turn, the combined turnover of Pirtek (UK)’s franchisees by 2008 had reached £58.8 million, falling by slightly less than a million pounds in 2009. These figures are for accounting years ending in each case on 31^st March of the relevant year.

Pirtek (UK) went to considerable lengths to ensure that the service being provided throughout the United Kingdom by its franchisees was heavily branded with the Pirtek (UK) name and corporate get-up, and provided in a broadly uniform manner and to uniform standards of quality and service. Pirtek (UK)’s name was prominently displayed on vans, at depots and on hydraulic hoses. These objectives were achieved in part by training and assistance, in part by a contractual regime laid down in the standard form franchise agreements, and by the requirement that its franchisees purchase and use a uniform system of business management software, on computers at franchisees’ depots and in the mobile vans.

The development of a uniform Pirtek (UK) brand, and of common standards of quality and service across Pirtek (UK)’s franchise network, had two important consequences for present purposes. The first was that, inevitably, substantial goodwill built up in the Pirtek (UK) name and in the business carried on both by Pirtek (UK) and its franchisees under that name. Pursuant to the franchise agreements, the whole of that goodwill was, as a matter of contract, available for exploitation by franchisees only during the currency of franchise agreements, being otherwise the property of Pirtek (UK).

The second consequence was that an individual franchisee and (if corporate) its owner or senior manager, would be likely during the currency of a franchise agreement to build up its or his own connections with customers, which would be a product of its or his own business skill and experience, and the training, assistance and know-how contributed to the franchisee’s business by Pirtek (UK). Inevitably, that customer connection would be available, unless restrained, to franchisees and/or their owners or senior managers after termination of franchise agreements as a basis for continuing in the hydraulic hose replacement business in competition with Pirtek (UK) and its other franchisees.

Needless to say, the parties to this litigation differed in their views as to the main contributor to this ability to compete post-termination, Pirtek (UK) attributing it to the know-how and assistance which it provided under the franchise agreement, and Mr Vickers attributing it to his own business and engineering skills and experience. In my judgment the ability of a former franchisee (or its owner if corporate) to compete with the Pirtek (UK) business after termination, without any use of the Pirtek (UK) name, would almost invariably be a combination of both those inputs, and it is unnecessary for me to attribute any priority as between them, either generally or in the case of that part of the Pirtek (UK) business formerly franchised to and run by Joinplace as Pirtek Darlington. I shall return to these issues when considering the validity of the RC.

Mr Vickers trained and served an apprenticeship as a fitter and turner and, after employment at Hilti Limited in London, joined Pirtek (UK) as a Mobile Sales and Service Technician in about 1989, shortly after Pirtek (UK) established its business. Within a year he was given the opportunity to manage a new Pirtek (UK) franchise to be opened in Team Valley, Gateshead owned by a Mr Alan Maidwell, who had no engineering experience of his own. That franchise became known as Pirtek Tyne and Wear. He worked there until 2002. At that stage, Pirtek Tyne and Wear and Pirtek Cleveland’s franchise territories included, between them, the whole of County Durham.

In September 2002 Mr Vickers and Mr Maidwell opened a new franchise for the territory of County Durham based in Darlington, at Unit 2, Nestfield Industrial Estate, Albert Hill, Darlington (“the Darlington Depot”). Since it was carved out of the territories of Pirtek Tyne and Wear and Pirtek Cleveland, they were obliged to make capital payments to those two franchisees for the goodwill thereby acquired. Since Mr Maidwell was still the owner of the Tyne and Wear franchise, that payment was left outstanding between Mr Maidwell and Mr Vickers. The payment to Pirtek Cleveland was routed through Pirtek (UK).

In 2006 Mr Vickers took over Mr Maidwell’s share of the Pirtek Darlington franchise, becoming therefore for the first time the sole owner of that franchise, and incurring as a result substantially increased personal obligations and liabilities, both as the guarantor of Joinplace’s obligations under the Franchise Agreement to Pirtek (UK), and in relation to the finance of Joinplace’s plant and equipment, IT systems and software. The Franchise Agreement was made between Pirtek (UK), Joinplace and Mr Vickers on 1^st November 2006.

It is unnecessary to describe the terms of the Franchise Agreement in any detail. It was for a period of ten years, with a right of renewal to the franchisee thereafter. It required Pirtek (UK) to provide both initial and follow up training and assistance, including an Operations Manual containing details of what the agreement called “the System” which was defined as “the methods, trade secrets and know-how of conducting and marketing the Pirtek (UK) business”, which were described as the property of Pirtek (UK) and its associated Australian company. It required Pirtek (UK) to make available a supply of hydraulic hoses and associated products. For its part, Joinplace was required to purchase its tooling from Pirtek (UK), its stock of hoses and associated products from Pirtek (UK) or its nominated suppliers, generally to conduct the business in accordance with Pirtek (UK)’s System and under its name and get-up, and at all times to maintain a customer database which was to be the property of Pirtek (UK).

The Franchise Agreement contained provisions for early termination by Pirtek (UK) in specified circumstances including breach of the agreement by Joinplace or its insolvency. Clause 18.3 contained an option for Pirtek (UK) to buy Joinplace’s business on termination at a formula price. Clause 18.9 contained post-termination restrictive covenants by Joinplace in substantially the same form as those sought to be enforced against Mr Vickers, the most important of which I have already described. The restrictive covenants also included a one year restraint on competition within any Pirtek (UK) franchised territory within the UK, the validity of which is not directly in issue in these proceedings.

Joinplace’s business as Pirtek Darlington did not, unfortunately, prosper after 2006. Mr Vickers’ evidence was that, by early 2009 a Pirtek (UK) franchise in a territory as sparsely populated as County Durham, even based in Darlington, was no longer viable (whether or not it ever had been). For its part, Pirtek (UK) did not after termination of Joinplace’s franchise seek either to buy Joinplace’s business or to establish an independent franchisee for that territory. Rather, at least as a temporary measure, it invited the neighbouring franchisees, Pirtek Tyne and Wear and Pirtek Cleveland to cover the requirements of customers of the Pirtek (UK) business located in County Durham from their depots and vans.

Beginning in about December 2008, there were some discussions between, on the one hand, Joinplace and Mr Vickers and, on the other hand, Pirtek (UK) for the purpose of exploring options available to address Joinplace’s predicament. They included a possible buyback of stock by Pirtek (UK) so as to reduce Joinplace’s gearing, and the finding of a management position for Mr Vickers somewhere in Pirtek (UK)’s franchise structure, in the event that Joinplace was forced to cease trading. At trial, both sides made allegations of lack of cooperation against the other, which it is unnecessary for me to resolve. The upshot was that Mr Vickers and Ms Garratt, both of whom were directors of Joinplace, sought insolvency advice during the week beginning 9^th March 2009 and, by a Notice to Creditors signed by Mr Vickers and dated 9^th March 2009, a creditors’ meeting was called for 23^rd April 2009 with a view to putting the company into voluntary liquidation. There is an issue as to whether 9^th March 2009 was precisely the correct date to place on the notice, which I do not have to resolve.

Joinplace ceased active trading on the evening of Thursday 12^th March. Vetech had by then already been incorporated by formation agents acting for Ms Garratt on the previous day and, by the following Monday 16^th March, negotiations had sufficiently advanced with the landlords of the Darlington Depot for Vetech to enter into a three year lease of the Depot, effective from that date, notwithstanding that Joinplace had paid its rent for the same premises for the whole of March.

Staring on Friday 13^th March, and continuing during the weekend, there ensued a period of busy activity at the Darlington Depot, which included (at least) the taking down of Pirtek (UK)’s name, the removal to an adjacent (temporarily vacant) unit of stock and equipment in respect of which Pirtek (UK) had ROT and other rights of ownership, for later collection by Pirtek (UK), and the re-ordering of the Depot to the extent necessary to enable Vetech to start trading there (as it duly did) on the following Monday 16^th March.

It must have been decided, as between Mr Vickers and Ms Garratt as directors of Joinplace and Ms Garratt as the sole shareholder and director of Vetech, during the same three days (if not earlier), that Vetech would acquire Joinplace’s office equipment, plant & machinery, one vehicle (not a mobile van) and its remaining stock, because those items were all immediately employed in Vetech’s business on 16^th March. Nonetheless, pending what appears to have been a rather perfunctory valuation (which did not apparently include any inspection of the stock by the valuers) agreement as to price appears to have been delayed until Wednesday 18^th March, there being an invoice for those items for the combined price of £2,800 plus VAT from Joinplace to Vetech, on ninety days’ credit.

Vetech traded from 16^th March until service of the injunction on or about 27^th March, after which it did no further substantial trading and gave up its lease of the Darlington Depot in November 2009. Hard evidence about that brief period of trading is thin on the ground. In particular Vetech has disclosed no trading records for that, or any, period. Nonetheless it was proved by Mr Wagstaff and admitted by Mr Vickers that he made up and sold a replacement hose to Mr Wagstaff at the Depot on 26^th March. Mr Wagstaff’s evidence (backed up by the hose which he purchased, as an exhibit) is that the hose had Pirtek (UK) branding incorporated in its lay line. Mr Vickers said that it did not, and produced, during cross-examination of Mr Wagstaff, a version which he said was identical to that which he had supplied Mr Wagstaff. Mr Wagstaff’s evidence was that, in his presence, Mr Vickers had told another visitor, in response to his question “where have Pirtek (UK) gone?” that “we have taken over from Pirtek (UK)”. Mr Vickers denied that. To the limited extent that it matters, I prefer Mr Wagstaff’s evidence on both those issues.

Mr Todd (one of the defendants’ witnesses who was not cross-examined) said that on 13^th March he visited the Darlington Depot and was told by Mr Vickers and Ms Garratt together that:

Pirtek (UK)’s case as to the actual and intended nature of Vetech’s business is that it was established as a front or vehicle for Mr Vickers (whether or not with Ms Garratt’s assistance) to enable him to carry on both the over-the-counter and the mobile service previously offered by Joinplace as Pirtek Darlington and that, although it is not suggested that any van trading had actually occurred by the time when the injunction was granted, Mr Vickers had through Vetech nonetheless set himself up in competition with Pirtek (UK)’s business by over-the-counter trading in substantially the same goods and services as had been previously supplied by Joinplace, by the time the injunction was granted.

For their part, Ms Garratt’s, Vetech’s and (in his evidence) Mr Vickers’ case was that he had been knocked sideways by the collapse of his Joinplace business, that Ms Garratt had set up her own company intending to trade over-the-counter, but not through vans, primarily as a pump supply and maintenance business, with the technical assistance of her son, and that such isolated instances of Mr Vickers’ involvement merely revealed him offering on a purely temporary basis to help out until her new business was properly established.

In my judgment the truth lies between those two extremes. First, I am satisfied that Vetech was established as Ms Garratt’s company, with no beneficial interest afforded to Mr Vickers. That is what the documents show, and there were sensible business reasons for doing that. On any view, Mr Vickers faced heavy personal liabilities arising out of the collapse of Joinplace’s business, including but not limited to his liability to Pirtek (UK) as guarantor under the franchise agreement. Since he and Ms Garratt were partners, living together on a permanent basis, business commonsense suggested that it would be better for her rather than him to own any new business vehicle, so that its future could not be undermined, for example, by his bankruptcy.

Secondly, I am equally satisfied that Ms Garratt’s new company Vetech was indeed established to enable the two of them to benefit from Mr Vickers’ continuing deployment of his considerable skill and experience, both as a mechanical engineer and as a business manager, in the establishment and successful trading of Vetech. Ms Garratt had no such skill or experience, either in mechanical engineering or business management, and there is no credible evidence that those essential requirements could be, or were intended to be, supplied by her son. For present purposes it does not matter whether Mr Vickers’ assistance was to be provided as a consultant, as an employee, as a director or purely informally. He was to be, and was intended to be, a lynchpin of the new business.

Thirdly I am not persuaded that Ms Garratt and Mr Vickers intended that Vetech should establish a mobile van hose replacement service. The only evidence that they did so intend was that the vans previously used (and held on lease) by Joinplace remained parked at the Darlington Depot for some time after Joinplace ceased trading, and while Vetech was itself trading. I accept Mr Vickers’ evidence that a business consisting merely of a replica of Pirtek (UK)’s mobile van and over-the-counter business was not regarded by him in March 2009 as viable. In my judgment their plan was to start business simply by continuing Joinplace’s former over-the-counter custom manufacture and supply of hydraulic hose replacements, and to seek to expand from that starting point into other profitable areas of related business, as and when their financial circumstances and business opportunities made that possible. I doubt whether, in fact, they had formulated any more specific plan than to use the over-the-counter business formerly carried on by Joinplace as a springboard into a continued business venture, rather than face Mr Vickers’ return to his former status (that is, before 2002) of an employee, working for someone outside his de facto family.

The evidence that the initial business of Vetech was simply to be a continuation of the over-the-counter custom manufacture and supply of replacement hoses formerly carried on by Joinplace is overwhelming. Vetech’s opening stock in trade consisted entirely of Joinplace’s closing stock, less that part returnable to Pirtek (UK) by reason of ROT or other claims to ownership. Such scanty evidence as there is of the business actually transacted shows that Vetech was both planning to, and did, continue in the custom manufacture and supply of such hoses, both to Mr Wagstaff and to such former customers of Joinplace as might beat a path to Vetech’s (identical) door. Furthermore, the only person present at the Darlington Depot once under Vetech’s leasehold ownership with any business or technical skills, prior to the grant of the injunction, was Mr Vickers, who simply continued to provide, albeit only over the same counter, the service which he had been providing for substantially the whole of his career.

The Chapter 1 prohibition was enacted by section 2 of the Competition Act so as to create within the United Kingdom a regime for the avoidance of anti-competitive agreements broadly equivalent to that by then established in relation to the EU by what was then Article 81 of the Treaty . By section 60(1) of the Act, questions arising under Part I (which includes section 2) in relation to competition within the United Kingdom are to be dealt with in a manner which is consistent with the treatment of corresponding questions arising in Community law in relation to competition with the Community.

The relevant parts of section 2 for present purposes are as follows:

For Pirtek (UK), Mr Berragan submitted that the RC fell entirely outside the purview of section 2, for two reasons. The first was that the RC had no “appreciable effect” on trade within the United Kingdom or, if appropriate, County Durham, that being the part of the United Kingdom within which the Franchise Agreement and the RC was intended to operate. The second reason was that, in any event, the RC was part of a franchise agreement which was necessary for the avoidance of the risk that Pirtek (UK)’s know-how and assistance might aid its competitors, and therefore outwith Article 81 and, therefore, section 2 of the Act under the analysis of the ECJ in Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgallis (Case 161/84) [1986] 1 CMLR 414. I shall refer to this submission as the Pronuptia defence and, for reasons which will become apparent, I will address it first.

Pronuptia was the first occasion when the ECJ had to consider the extent to which, if at all, restrictions in franchise agreements fell within Article 81 (then numbered Article 85). It was not, in terms, a case about the enforceability of a post-termination restraint on competition. Nonetheless, the principles laid down are readily applicable to such a restraint, and its potential validity is expressly addressed in the Judgment.

At paragraph 13 of the Judgment the Court identified, for the purposes of classification, three types of franchise agreements, namely service franchise agreements, production franchise agreements and distribution franchise agreements. It then confined its attention solely to the third of those categories, because the agreement in question was a distribution franchise agreement. The court continued:

In a distribution franchise system such as this, an enterprise which has established itself as a distributor in a market and which has thus been able to perfect a range of commercial methods gives independent businessmen the chance, at a price, of establishing themselves in other markets by using its mark and the commercial methods that created the franchisor’s success. More than just a method of distribution, this is a manner of exploiting financially a body of knowledge, without investing the franchisor’s own capital. At the same time this system gives businessmen who lack the necessary experience access to methods which they could otherwise only acquire after prolonged effort and research and allows them also to profit from the reputation of the mark. Distribution franchise agreements are thus different from either dealership agreements or those binding approved resellers appointed under a system of selective distribution which involve neither use of a single mark nor application of uniform commercial methods nor payment of royalties in consideration of the advantages thus conferred. Such a system, which permits the franchisor to take advantage of his success, is not by itself restrictive of competition. For it to function two conditions must be satisfied.

First, the franchisor must be able to communicate his know-how to the franchisees and provide them with the necessary assistance in putting his methods into effect, without running the risk that this know-how and assistance will aid his competitors, even indirectly. It thus follows that those clauses which are essential to prevent this risk do not constitute restrictions of competition in the sense of Article 85(1). These include the prohibition on the franchisee opening, for the duration of the franchise or for a reasonable period after its termination, a shop with an identical or similar purpose in an area where he could be in competition with one of the members of the network. The same applies to the obligation on the franchisee not to sell his shop without the prior approval of the franchisor: this clause serves to ensure that the benefit of the know-how and assistance provided does not go indirectly to a competitor.”

It is evident, in particular from paragraph 16, that a post-termination restraint on competition may, but will not necessarily, fall outside the purview of section 2, and that this question will depend upon whether the post-termination restraint is essential to prevent the risk that know-how and assistance provided by the franchisor to the franchisee will, after termination, be used to aid the franchisor’s competitors. The test is in many respects similar, but not identical, to that which the common law applies to the validity of a post-termination restraint on competition. It is in both cases a necessity test, but whereas the common law considers what is necessary to protect the franchisor’s goodwill, Community law addresses that which is essential to protect the franchisor against his know-how and assistance being used by his competitors.

This is by no means merely a difference in language. In Charles Jourdan OJ 1989 L35/31 [1989] 4 CMLR 591, the Commission, as part of its review of a franchise agreement which did not in fact contain a post-termination restraint said this, at paragraph 27:

In Kall-Kwik Printing (UK) v. Bell [1994] FSR 674, Harman J had to consider the application of the Pronuptia defence to an allegation that a post-termination restrictive covenant fell foul of Article 81 (then 85). The restraint in question was an eighteen month restraint on competition within a radius of 700 metres of the premises from which the franchisee carried on a photocopying and printing business. Harman J thought that, in the face of the Pronuptia defence, the attempt to apply Article 81 to a post-termination restraint on competition in a franchise agreement was unarguable.

I consider that both Pronuptia and the Commission’s decision in Charles Jourdan call for a more cautious, case-specific, analysis. In the present case, Pirtek (UK) went to great lengths in framing its standard franchise agreement to maximise the apparent extent and value of its provision of know-how and assistance to its franchisees. It even went so far, in the Franchise Agreement with Joinplace and Mr Vickers, to extract from Mr Vickers as “the Principal” the following warranty, at clause 22.6

the PIRTEK BUSINESS; or

how to operate a business similar to the PIRTEK BUSINESS; or

how to conduct the PIRTEK BUSINESS; or

the System

Whatever may be the effect of that warranty as a matter of contract, it was plainly untrue in relation to Mr Vickers who, although for the previous four years a contracting franchisee or principal, had been for at least thirteen years beforehand an employee, first of Pirtek (UK), and later of one of its franchisees.

Mr Vickers and Ms Garratt’s case was that he had, in reality, learnt little about either the System or how to run a Pirtek business pursuant to the provision of the know-how or assistance provided by Pirtek (UK) under the 2006 Franchise Agreement or its 2002 predecessor. Mr Vickers said that the only thing which was special about Pirtek (UK)’s System was its mobile van service, so that a covenant which restrained competition merely by means of an over-the-counter service failed the necessity test.

Although the defendants’ case on this point is not without some argumentative force, I have not in the end been persuaded by it. I consider that the way in which it should be tested is not by reference to the torrential language of the Franchise Agreement, but by reference to the evidence as to the know-how and assistance which was in fact routinely provided by Pirtek (UK) to its franchisees, both generally and to Joinplace in particular.

In my judgment the level of know-how and assistance provided by Pirtek (UK) to its franchisees and to Joinplace in particular, amply justified a post-termination restraint on competition for the purpose of protecting Pirtek (UK) against the risk that it might be used by competitors. I have already summarised the nature of that training and assistance in my findings of fact. It extended to technical assistance (both to principals and staff), business management assistance, including in particular the expensive and sophisticated IT system and, in the form of the Operating Manual, included a comprehensive description of the way in which to run a business which would be attractive to customers. Mr Vickers was taken through this in cross-examination, and he agreed with substantial parts of it, albeit saying that in certain respects he had no particular need for it himself.

Although I accept that, at least when it commenced trading in the UK, the special feature of Pirtek (UK)’s business was its mobile van service, I am by no means persuaded, on the evidence as a whole, that this formed the only part of the know-how and assistance provided to franchisees qualifying for protection under Community competition law and therefore in relation to section 2.

It follows therefore that, in accordance with the principles laid down in Pronuptia, a post-termination restraint upon competition of the type constituted by the RC falls outside the purview of the Chapter 1 prohibition. I have considered whether any aspect of the RC goes further than necessary to provide appropriate protection, and in particular whether its prohibition of carrying on of a similar business, or any kind of competing business, is too wide. In my judgment it is not. Once it is established that, taken as a whole, the know-how and assistance provided by a franchisor to a franchisee and (in the present case its principal) is of an extent and type likely to turn that franchisee or principal into an effective competitor of the franchisor, it is in my judgment quite inappropriate then to conduct a minute assessment of the question whether a particular franchisee could somehow devise a similar and competing business after termination which might minimise the extent of the prior provision of know-how and assistance by way of contribution to his competitiveness. In any event, I was not persuaded by the defendants’ evidence, taken as a whole, that Mr Vickers’ competitiveness, or the competitiveness of Vetech with his assistance, was not to a substantial extent based upon Pirtek (UK)’s contribution by way of the provision of know-how and assistance. On the contrary, I consider that it was.

Finally, I note in passing that the Franchise Agreement in this case probably straddles all three classes of those identified by the Court of Justice in Pronuptia. Nonetheless I can see no reason why the principles there enunciated are inapplicable to classes of franchise agreement other than distribution agreements. I note that Kall-Kwik v. Bell was a case about a service franchise agreement, and that Harman J’s view (with which I agree) was that this made no significant difference to the principles to be applied.

It follows that is unnecessary for me to decide whether Pirtek (UK)’s alternative submission, namely that the RC had no appreciable effect on trade, is also well-founded. In case a higher court should take a different view of the Pronuptia issue, I shall however briefly express my conclusions on this alternative. The first question is whether the requirement, undoubtedly to be found in the Community jurisprudence on Article 81, that the agreement under challenge should have an appreciable effect on trade, is replicated in the Chapter 1 prohibition. There is a conflict of authority on that question. In Aberdeen Journals Limited v. The Office of Fair Trading [2003] CAT 11 the Competition Appeal Tribunal concluded that it did not, upon the basis that the “appreciable effect on trade” requirement was understood in Community law as a jurisdictional requirement which demarcated the boundary line between the application of Community competition law and national competition law, a demarcation unnecessary within the Chapter 1 prohibition: see paragraphs 459 to 460 of the Tribunal’s Judgment. By contrast, in P&S Amusements Limited v. Valley House Leisure Limited [2006] EWHC 1510 (Ch) the Chancellor expressed “considerable misgivings” about the validity of the Tribunal’s conclusion, at least in the context of a Chapter 1 prohibition case. In his view section 2(1)(a) of the Act necessarily required it to be shown that the impugned agreement had a more than de minimis effect on trade within the United Kingdom.

I share the Chancellor’s reservations. As will appear below, my conclusion on this issue would be the same whether or not the Chapter 1 prohibition requires it to be shown that the impugned agreement has an appreciable effect on trade, so it is doubly unnecessary for me to decide which of the foregoing two authorities is correct.

Nonetheless, I consider that the Franchise Agreement is, within the meaning of section 2(7) of the Act, one which operated or was intended to operate only in a part of the United Kingdom, namely County Durham. It is true that the nationwide restraints in clauses 18.19.2 and 22.7.2 purport to impose a restriction on conduct outside County Durham, but they are, in my judgment, so much more extensive than are necessary either to preserve know-how and assistance, or to protect goodwill, that the Franchise Agreement should for present purposes be construed as if those particular restraints were void, and therefore to be ignored.

Most of the parties’ energy and evidence in relation to the possible effect of the RC upon trade was directed to the analysis both of the market, and of Pirtek (UK)’s place in it, within the United Kingdom generally, rather than within County Durham. Evidence about the market within County Durham, and Pirtek (UK)’s, Joinplace’s and Mr Vickers’ places in it emerged largely in cross-examination. That evidence demonstrated that Pirtek (UK) was (mainly but not exclusively through Joinplace) a major custom manufacturer and supplier of hydraulic hoses, both from fixed locations and mobile vans, so that a post-termination restraint on Joinplace or its principal Mr Vickers might well be supposed to have an appreciable effect on trade in that market within County Durham. Furthermore, since the express object of the RC was to prevent Joinplace and Mr Vickers from competing with Pirtek (UK) in County Durham after termination of the Franchise Agreement, it was one which was specifically intended to affect trade, and in particular competition, within that area.

In outline, the evidence was, at the time when the Franchise Agreement was terminated, as follows: Joinplace had one depot and three vans, Linden had one depot and two vans, A5 Hydraulics had a depot and an unspecified number of vans, but carried on a rather wider hydraulic engineering business. Hydrafix was an ex Pirtek (UK) employee operating a single van, without any depot. Certain other traders such as Hose Doctor, EMI, Hydraequip and Hudson Hydraulics achieved some market penetration with mobile vans in County Durham, but based in Newcastle. Finally, some supply to customers within County Durham was achieved by the two neighbouring Pirtek franchises, but only from their depots.

In that context, it seems to me that a restrictive covenant specifically designed to prevent either Joinplace or its principal Mr Vickers from competing after termination was such as to be likely to have an appreciable effect on trade. It is to be borne in mind that, for this purpose, the RC must be addressed by reference to its entire effect, which would be to prevent both mobile and over-the-counter trading. The test of validity does not depend upon analysis of the effect upon trade of a restriction upon Mr Vickers’ wish to carry out over-the-counter activities on their own.

It follows that this second ground of objection by Pirtek (UK) to the defendants’ invocation of the Chapter 1 prohibition would, had it mattered, have failed.

Pirtek (UK) advanced two claims for exemption from the Chapter 1 prohibition if, contrary to its main argument, section 2 of the Act applied at all. The first was based on section 9, which exempts an agreement if it:

It is, again, unnecessary for me to decide whether the Franchise Agreement qualifies for a section 9 exemption, but I shall briefly express my conclusions on that point, if, contrary to the foregoing, I had concluded that the Chapter 1 prohibition was engaged. In my judgment the Franchise Agreement plainly contributed to improving production or distribution of replacement hydraulic hoses, essentially because of the provision of know-how and assistance to franchisees. The evidence as to both the United Kingdom and County Durham markets demonstrated that the restrictions on post-termination conduct included within the Franchise Agreement did not afford Pirtek (UK) the possibility of eliminating competition in respect of a substantial part of the products in question.

The more difficult question is whether the restrictions in the Franchise Agreement were indispensable to the attainment of the objective of improving production or distribution. In my judgment, once shorn of the UK-wide restriction on competition, the remaining restrictions were indispensable, in the sense that Pirtek (UK) could not reasonably be expected to afford the know-how and assistance to its franchisees without imposing in substance the restrictions on post-termination competition which the Franchise Agreement did impose. I reach that conclusion by an analysis broadly the same as that set out above in relation to the Pronuptia defence, to which section 9 is closely related.

I need say nothing about Pirtek (UK)’s alternative argument for exemption under the Commission Regulation No 2790/1999 (then in force). Mr Berragan advanced it without much enthusiasm. Pirtek (UK) faced the difficulty that under Article 5(b) of that Regulation the exemption does not extend to any direct or indirect obligation causing the buyer, after termination of the agreement, not to manufacture, purchase, sell or resell goods or services, unless that obligation is limited to the premises and land from which the buyer has operated during the contract period. The RC in the present case is by no means limited to over-the-counter sales from the Darlington Depot, and is therefore difficult to fit within the narrow ambit of the regime contemplated by the block exemption.

As already noted, the approach of the English common law to contracts in restraint of trade focuses upon that which is necessary to protect goodwill, rather than know-how or assistance. In my judgment the RC is not rendered void at common law, being well within the species of restriction which the common law accepts is generally necessary for the protection of goodwill.

In ChipsAway International Limited v. Kerr [2009] EWCA Civ 320 the Court of Appeal approved the following dictum of Neuberger J in Dyno-Rod plc v. Reeve [1999] FSR 148, at 155:

In my judgment those dicta are of direct and straightforward application to the present case. Both Joinplace and Mr Vickers were persons to whom Pirtek (UK) had made available the goodwill associated with Pirtek (UK)’s name and business system, so that Pirtek (UK)’s goodwill had become associated in the minds of Joinplace’s customers both with Joinplace itself, and with Mr Vickers as its leading light. It was in my judgment perfectly reasonable for Pirtek (UK) to seek to protect that goodwill from competition in the event of an early determination of the Franchise Agreement. A one year period coupled with an area restraint limited to the franchise territory (i.e. County Durham) was in my judgment no more than reasonably necessary to protect Pirtek (UK)’s goodwill, although the UK-wide restrictions were, equally clearly, much more than what was necessary, and should therefore be blue-pencilled. It is, for the reasons given by the Court of Appeal in Chipsaway, irrelevant that, in the event, Pirtek (UK) does not appear to have sought to find a new independent franchisee for the County Durham territory after termination of the Franchise Agreement, but rather chosen to encourage its existing neighbouring franchisees in Tyne & Wear and in Cleveland to extend their activities into that territory.

The defendants’ main case in relation to the common law, was that for Mr Vickers to continue in business merely over-the-counter rather than by mobile sales did not offer any real competition to Pirtek (UK), since the key to its business success was the mobile sales and service operation. That argument, in my judgment, raises a question of breach rather than of validity of the covenant. I do not regard the extension of the prohibition to similar business, or to any business which competes with Pirtek (UK)’s business as making the RC itself an unreasonable restraint of trade.

It follows from the foregoing that all the challenges to the validity of the RC raised by the defendants fail.

It will be apparent from my findings of fact that I reject the defendants’ main argument under this heading, to the effect that Mr Vickers was not sufficiently involved in the business (both actual and planned) of Vetech to be capable of being regarded as “directly or indirectly … engaged or concerned or interested in any capacity whatsoever in” Vetech’s business. While I have accepted the defendants’ case that Vetech was beneficially owned, and in law, controlled by Ms Garratt, I am satisfied that both during its short period of trading prior to the grant of the injunction, and in terms of what was planned, Mr Vickers was indeed to be engaged and concerned in Vetech’s business. It was essential for Vetech’s plans for him to be the principal source of the experience and business skill necessary for the carrying on of any business involving the manufacture or sale of hydraulic hoses, or for that matter, other engineering products or services.

I am equally satisfied that Vetech’s business was both planned to, and did, compete with Pirtek (UK)’s business. I have already set out how over-the-counter sales formed a significant albeit never preponderant part of the business of Pirtek (UK)’s franchisees. In the case of Joinplace, over-the-counter sales had amounted to approximately 25% of turnover. I am also satisfied that it ought properly to be regarded as a similar business to that of Pirtek (UK), in the sense that, at least initially, it was trading in precisely the same products as Joinplace had been, and in fact using Joinplace’s closing stock for that purpose, even though it traded purely over-the-counter and, as I have accepted, had no plans to mount a mobile van operation.

There was therefore amply sufficient evidence of breach of the RC by Mr Vickers to justify Pirtek (UK) seeking and obtaining an injunction against him, both for actual and threatened breach of the RC.

The pleaded case against Vetech was that it was liable with Mr Vickers as a conspirator. Although this was not precisely spelt out in the Particulars of Claim, I infer that the cause of action intended to be identified was a conspiracy to injure Pirtek (UK) by unlawful means. In closing submissions Mr Berragan added the tort of inducement to commit a breach of contract, on the basis that it was, like conspiracy, justified by the facts alleged and proved.

Both causes of action require it to be shown that Vetech knew of the terms of the RC during the short period between its incorporation and the obtaining by Pirtek (UK) of the injunction. It is clear from the written dealings between the parties (including their correspondence) that Vetech knew through Ms Garratt of the terms of the RC, at the latest when the without notice injunction was served on or about 27^th March 2009, and that it was the injunction rather than the knowledge of the terms of the RC which inhibited Vetech from continuing to make use of Mr Vickers’ assistance in the fulfilment of its business plans. In my judgment it is probable that Vetech through Ms Garratt knew of the terms of the RC from the moment of Vetech’s incorporation. Their hope was that, by confining their activities to over-the-counter sales, Pirtek (UK) and its neighbouring franchisees would not think it worth taking enforcement action against them.

Both the torts of inducement and conspiracy alleged against Vetech require it to be shown that Vetech through Ms Garratt not only knew of the RC, but knew that Mr Vickers’ conduct in assisting the establishment of Vetech’s business was a breach of it. An honest but misguided belief that his conduct was not a breach of the RC would be a defence to claims in inducement or conspiracy: see OBG v. Allan [2008] 1 AC 1, (inducement) and Meretz Investments v. ACP Limited [2008] Ch 244 (conspiracy). Mr Vickers and Ms Garratt sought to meet that allegation in two ways. First, they denied that Mr Vickers was materially assisting Vetech at all. I have already rejected that defence as a fabrication. Secondly, they alleged that they had received advice from an unnamed solicitor to the effect that the post-termination restrictions in the Franchise Agreement were not watertight. Thirdly, they said that they considered that Vetech’s activity was neither in competition with that of Pirtek (UK), nor a similar business. Finally they suggested that, at a meeting on 9^th March 2009, Mr Dunlop and/or Mr Martin of Pirtek (UK) had consented to Mr Vickers working for a competing business, providing that he did not take any part in any provision of a mobile service.

In relation to the assertion that Pirtek (UK) consented, I prefer Mr Dunlop’s and Mr Martin’s evidence about that meeting to the evidence of Mr Vickers and Ms Garratt. I find that no consent was given by Pirtek (UK), whether by Mr Dunlop, Mr Martin or anyone else, to any breach of the RC by Mr Vickers, or to participation in any such breach by Ms Garratt or Vetech.

As to the defence based upon legal advice, while it may be that the defendants did receive some sort of advice from a person with some legal qualifications, I am by no means persuaded by Ms Garratt and Mr Vickers’ evidence either that they were advised that the conduct of Vetech did not involve any breach by Mr Vickers of the RC, or that they believed that it did not. In circumstances where (as I have found) there was a plain breach of the RC by Mr Vickers, encouraged and participated in by Vetech through Ms Garratt, and where the RC was framed in simple and unambiguous language, I consider that at least some persuasive burden falls upon the defendants to prove an innocent but mistaken belief to the contrary. I have already described their evidence as lacking in reliability, and in honesty in certain respects. In my judgment they failed to displace the natural inference which flows from Vetech’s participation in a plain breach of the RC by Mr Vickers, and Ms Garratt’s knowledge of the terms of the RC, namely that Vetech through Ms Garratt knew that his conduct amounted to such a breach. In my judgment, the most that can be said of the defendants’ state of mind is that they hoped that, because their competitive activity did not include a mobile van service, Pirtek (UK) would not take steps to prevent it. It follows that Vetech is liable at least for inducing a breach of contract by Mr Vickers, and that by its conduct prior to the grant of the injunction was threatening to persist in that inducement.

As for conspiracy to injure by unlawful means, there is the additional requirement that Vetech through Ms Garratt had an intention (albeit not necessarily a predominant intention) to injure Pirtek (UK) (see Bank of Tokyo-Mitsubishi v. Baskan Gida & ors [2009] EWHC 1276 (Ch) at paragraphs 825 - 833. As to that, the unlawful means in question consisted precisely of prohibited competition with Pirtek (UK). Where the benefit sought to be achieved by the defendant is calculated to cause, as the necessary obverse of the coin, a corresponding injury to the claimant, the necessary intention is, generally, sufficiently demonstrated: see OBG v Allan (supra) at paragraphs 164 – 167 and Meretz (supra) at paragraphs 115, 146 and 172. While Vetech’s gain may not have been matched, pound for pound, by a corresponding loss to Pirtek (UK), in a case of unlawful competition it seems to me that the loss is nonetheless still sufficiently within the ‘obverse of the coin’ analysis.

The conclusions thus far are sufficient to show that the injunction was properly granted and continued against Vetech, so that it can have no claim against Pirtek (UK) on its cross-undertaking as to damages. Plainly, Ms Garratt can have no such claim. She was not the subject of any injunction, nor was the cross-undertaking given to her. Furthermore, her loss would be that of a shareholder in Vetech, and therefore purely reflective of its loss.

Finally, against the possibility that a higher court might take a different view of Vetech’s liability for inducement or conspiracy, I must make it plain that I would have concluded in any event that, even if the injunction had been wrongly granted against Vetech, but rightly granted against Mr Vickers, Vetech would have suffered no loss recoverable under the cross-undertaking. This is because, even if Vetech had in theory been at liberty to continue to trade as planned, it could not have done so profitably without assistance from Mr Vickers of a type which was properly prohibited by the injunction granted against him. The alternative claim for compensation for losses, mainly based on rent payable between March and November 2009, would require it to be shown that, without assistance from Mr Vickers, Vetech would at least have derived sufficient income from its trading with which to pay that rent. Vetech advanced no evidence of any kind to prove its alleged loss, and I have not been persuaded, for the reasons already set out, that it would have been able to trade at all without Mr Vickers’ assistance, of a type prohibited by the injunction granted against him.

My findings that the injunction granted against Mr Vickers and Vetech was properly sought and obtained by Pirtek (UK) is sufficient to demonstrate that this claim by the defendants is wholly unfounded.

Since the injunction granted against Mr Vickers and Vetech has now served its purpose and been discharged, and indeed protected Pirtek (UK) from suffering any loss for which it now needs monetary compensation, the result of the trial is that it is unnecessary to grant any relief to Pirtek (UK), and that Ms Garratt and Vetech’s cross-claim for compensation against Pirtek (UK) must be dismissed.