PSG Franchising Ltd v Lydia Darby Ltd

In this action the claimant seeks to enforce post termination restrictive covenants contained in a franchise agreement. The present hearing is for the determination of various preliminary issues and is concerned with the meaning of the restrictive covenants in question; whether they are unreasonable and therefore unenforceable; whether they will continue to apply until 31 August 2013 or have already expired; and whether they should be enforced by an injunction.

The claimant, PSG Franchising Ltd, is the franchisor of a local property search business by which its franchisees use its system and know how to provide the property search information typically required by conveyancers and lenders within particular franchised territories.

Following a series of earlier franchise agreements, on 13 May 2006 the parties entered into a new agreement for a term of five years from 31 March 2006. The first defendant, Lydia Darby Ltd, was the franchisee. The second and third defendants, who were husband and wife and directors of the first defendant, acted as guarantors. The defined territory covered the postcode areas in and around Milton Keynes. The agreement contained a number of restrictions on competition by the defendants, some of which applied during the term of the agreement, while others applied after termination (which included expiry by lapse of time).

The fixed term of five years (“the Term”) expired on 31 March 2011. However, the parties continued to operate the franchise as if the agreement were still in place, with the defendants continuing to use the claimant's system and to account to the claimant in accordance with the terms of the agreement. By May 2012 there had been a noticeable reduction in business and a meeting took place to discuss the position. At that meeting the third defendant, David Darby, explained that since his wife had left him he had struggled with the marketing side of the business and that he had been thinking about whether he wanted to continue with the franchise. This led to further discussions and eventually to an agreement that the franchise would be terminated. This termination was accomplished by a deed of surrender dated 6 August 2012 between the claimant and all three defendants. The termination was to be effective as of 31 August 2012 in order to allow a new franchisee covering the defendants' territory to be put in place.

It is the claimant’s case that far from the defendants having lost interest in the property search business, they had in fact since at latest September 2011 been operating a competing business in breach of their in-term obligations under the franchise agreement, and that they continued to do so after the termination. The claimant says, in short, that the defendants lied about what they had been doing and about their future intentions. Hence the claimant’s application to enforce the post termination restrictive covenants.

The post termination restrictions which the claimant seeks to enforce are contained in two provisions of clause 18.3 of the franchise agreement. These provided:

“Upon Termination neither You nor any Guarantor must...

18.3.1

for a period of 1 year after Termination be directly or indirectly engaged concerned or interested in any capacity whatsoever (except as the holder of not more than 5% of the shares in any company whose shares are listed or dealt in on The Stock Exchange) in any business which provides any services which compete with any of the Services provided by the Company or any of its franchisees within the Territory ...

18.3.3

for the period of 1 year after Termination for the purpose of selling any products or services which are the same as or similar to any of the Services directly or indirectly solicit or tout for business from any person who was during the period of 1 year prior to Termination a customer of or in the habit of dealing with the Business ...”

These provisions included a number of defined terms. Thus:

“Termination” meant "the expiry determination or termination of this agreement”; accordingly, unless determined earlier, for example for breach, Termination would occur on 31 March 2011 on expiry of the five year Term;

“You” meant the first defendant, Lydia Darby Ltd;

“Guarantor” meant the second and third defendants, Lydia Darby and David Darby; accordingly, as well as imposing an obligation on the first defendant as franchisee, whose performance the second and third defendants guaranteed, the clause also imposed a direct personal obligation on the second and third defendants;

“Services” meant "the provision of search reports and such other services in addition to, or in substitution of, them as may be specified in the Operations Manual from time to time”;

“Company” meant the claimant, PSG Franchising Ltd;

“Territory” was defined in the agreement as:

“the geographical area within the following post codes as set out in Collins Bartholomew in association with the Royal Mail - Post Code District Maps (including information up to the Royal Mail Release 40 dated October 2005) Ml to M6 inclusive; M28; M30; M41 and M44”.

It was common ground, however, that the listing of these post codes, which are Manchester and not Milton Keynes post codes, was a mistake, but until the morning of the hearing before me the parties were in disagreement about which post codes should have been specified. The defendants’ case was that the only mistake was the omission of a “K”, thus referring in error to Manchester instead of Milton Keynes, but that the post codes intended were the MK post codes with the same numbers as the Manchester post codes listed. The claimant's case was that the post codes intended were those which had been listed in the parties' earlier agreements, namely MK1 to 19 inclusive, MK43, MK44 and MK46. On the morning of the hearing the defendants conceded that the claimant was correct on this issue. That concession was inevitable. There had never been any suggestion of reducing the defendants’ existing Territory when the 2006 franchise agreement was concluded; the defendants had always provided their services to customers in the post codes identified by the claimant; and post codes MK28 and MK30 do not even exist. It is hard to see how the defendants can have put forward their original case in good faith;

“Business” meant “the business carried on by You pursuant to and in accordance with this agreement”.

Clause 18.3.2, which the claimant does not seek to enforce and which therefore need not be set out, was a prohibition for a period of one year after Termination on engagement in any business anywhere in the United Kingdom in competition with any franchisee of the claimant or the claimant itself.

The claimant’s case is that clause 18.3.1 is geographically limited and only prohibits the defendant from competing with the claimant or its other franchisees within the specified Territory and that, so construed, the restriction is reasonable and lawful. The defendants, however, contend that the clause extends to prohibit competition with the claimant throughout the United Kingdom, and that such a wide geographical prohibition is unreasonable because the goodwill which the claimant had a legitimate interest in protecting is limited to goodwill built up within the Territory. They say also that because the definition of “Services” includes new services which may be introduced by the claimant "from time to time”, the prohibition on its true construction extends to prohibit competition with services introduced only after termination, from which the defendants will never have benefited, and that such a prohibition is also unreasonable. On one or both of these two grounds the defendants say that clause 18.3.1 is unreasonable and unenforceable. They accept, however, that if they are wrong on these points, the one year duration of the post termination restraint is reasonable.

The issues of construction of clause 18.3.1 represent the first group of issues to be decided. If the wider construction contended for by the defendants is adopted, the second issue arises, namely whether the post termination restraint is reasonable, and therefore enforceable.

The defendants raise no issue as to the meaning or reasonableness of clause 18.3.3, the non-solicitation clause. However, they contend that both this provision and also (however construed and whether or not reasonable) clause 18.3.1 had expired on 31

Finally, if the claimant succeeds on the issues identified above, the question arises whether an injunction should be granted.

In order for these issues to be determined the parties agreed a series of preliminary issues. In the light of the parties' submissions before me, I consider that those issues can best be reformulated as follows:

On its true construction does clause 18.3.1 of the franchise agreement dated 13 May 2006 prohibit the provision of relevant services only within the Territory as defined in the Agreement?

On its true construction does clause 18.3.1 prohibit the defendants from competing with property search services introduced by the claimant after Termination of the Agreement?

Is clause 18.3.1 reasonable and enforceable at common law?

On the true construction of the franchise agreement and the deed of surrender dated 6 August 2012 will the defendants remain bound by clauses 18.3.1 and 18.3.3 until 31 August 2013?

Is the claimant entitled (subject to any defence which it may have that the restrictions in clauses 18.3.1 or 18.3.3 are unlawful on competition law grounds) to an injunction restraining the defendants from acting contrary to clauses 18.3.1 and 18.3.3 until after 31 August 2013?

I turn first to the issues of construction of clause 18.3.1. In order to put this clause into context it is necessary to refer to some of the other provisions of the franchise agreement and to note also that the agreement identified the premises from which the defendants were to conduct their business as being an address in Daventry (“the Premises”), which is outside the specified Territory.

The agreement contained a number of recitals, including recital (E):

“You have been providing the Services pursuant to a franchise agreement and have asked for the right to continue providing the Services using the Intellectual Property from the Premises and within the Territory upon the terms set out in this agreement.”

After numerous definitions in clause 1, some of which I have already set out, the rights granted were specified in clause 2:

“2.1

In consideration of Your paying the Franchise Renewal Fee, the IT Support Fee and the Continuing Franchise Fee promptly You have the right and obligation to provide the Services using the Intellectual Property only in connection with the Business and subject to and in accordance with the terms of this agreement.”

Clause 3 provided that:

“This agreement shall subject to the provisions for termination set out in this agreement subsist for the Term.”

Clause 4 set out a procedure for a new franchise agreement to be entered into at the end of the Term. However, when the time came, the parties did not operate this procedure.

The franchisee’s obligations were set out in clause 7 and included the following provisions:

“7.1

You will: ...

7.1.12.3 diligently carry on the Business at the Premises and use Your best endeavours to promote the Business within the Territory and not outside its boundaries

7.1.12.4 not in any way actively solicit or tout for business to provide any Services to or for anyone at any address which is outside the Territory

7.1.12.5 ensure that there are employed in the Business such number of staff as in the opinion of the Company are sufficient to enable the Business to operate efficiently and to meet the demand for the Services in the Territory ...

7.1.12.13 notify the Company of any customer or prospective customer who has any office or offices outside the Territory and comply with the Company’s procedures and scheme for providing such customer with the Services as set out in the Manual from time to time ...”

The combined effect of these provisions was that although the rights granted by clause 2 were not limited by reference to the Territory, the franchisee had the obligation to promote the business within but not outside the Territory, and was prohibited from actively soliciting business from anyone at any address outside the Territory, but that in the event of enquiries from customers or prospective customers with offices outside the Territory a procedure existed to ensure that such customer would be able to obtain the relevant services.

It is apparent also that the significance of the defined Territory is that it identified the location of customers’ offices. Obviously it could not refer to the defendants’ place of business since that was itself outside the Territory. These provisions, however, show that what mattered in determining whether a service was provided within or outside the Territory was the location of the customer’s office. Since customers would invariably be conveyancers, typically solicitors or mortgage lenders, who would have an office, which office would have an address with a post code, it would be a straightforward matter to determine where services were provided for the purpose of this agreement and in particular whether they were provided to a customer within one of the post codes which comprised the Territory.

Clause 9, headed “Improvements”, provided for the claimant to use reasonable endeavours to conceive and develop new and improved methods of conducting business and to make them available to the franchisee at the earliest possible opportunity. Such improvements were to be included in the Operations Manual.

Clause 18.1.1 provided that upon Termination, which included expiry by lapse of time, the defendants must immediately discontinue conducting the Business.

The agreement contained a guarantee by the second and third defendants who each signed it in their individual capacities as well as on behalf of the franchisee.

Finally there were a number of more or less “boilerplate” clauses, including an “entire agreement” clause, provisions for severability in the event that some provisions were held to be unenforceable, and acknowledgements that the defendants had been advised to obtain independent legal advice before signing the agreement and that the restrictions which it contained were fair and reasonable. Mr Robert Duddridge for the claimant placed some limited reliance on these provisions in the course of his submissions as to the reasonableness of clause 18.3.1, but I have reached my conclusion on that issue without needing to rely on these provisions and therefore need not set them out. In any event whether a clause is void as an unreasonable restraint of trade is a matter of law.

Mr Duddridge submitted that the post termination restriction in clause 18.3.1 applied only to prohibit the provision of Services within the defined Territory. What the defendants were prohibited from doing was engaging in any business which provided any services “which compete with any of the Services provided by the Company or any of its franchisees within the Territory”. On this reading the words “within the Territory” qualify “the Services provided”. So the clause protected the claimant and any new franchisee from competition “within the Territory”, but left the defendants free to compete with the claimant or with its other franchisees outside the Territory. The word order could have been changed to make this even clearer (“which compete with any of the Services provided within the Territory by the Company or any of its franchisees”), but this was not necessary as the existing wording was sufficiently clear to show that this is what it meant.

Mr Jason Evans-Tovey for the defendants contended that on its true construction the clause was seeking wider protection for the claimant, and that the wider prohibition which it contained was unreasonable, with the consequence that the clause was void and unenforceable. In his written opening submissions Mr Evans-Tovey’s submission was that “clause 18.3.1 is unreasonable ... because clause 18.3.1 restricts the First Defendant from providing search reports, etc. not merely within the Territory but UK- wide, such that there is no functional correspondence between (i) the area of restriction under the covenant (viz. ‘the Territory and beyond’) and (ii) the area within which the franchisee was licensed to operate (viz. ‘the Territory’)”. I understood this as a submission that on its true construction the clause prevented the defendants from engaging in a business which provided search report services anywhere in the United Kingdom (Mr Evans-Tovey explained that although there is no express wording in the clause limiting the restriction to the United Kingdom, this would be implicit: see eg Convenience Co Ltd v. Roberts [2001] FSR 35 at [12]).

In oral submissions, however, Mr Evans-Tovey contended for a more complex construction of the prohibition, namely that the defendants were prohibited from providing such services (a) in the Territory and (b) in any other part of the United Kingdom where the claimant itself was providing such services, but that (c) there was no prohibition on providing such services in a part of the United Kingdom where the claimant was not providing them itself, whether or not another franchisee was doing so. This was said to be the natural, indeed the only possible, meaning of the words of the clause.

On this reading of the clause the words “within the Territory” do not qualify “Services provided” as the claimant contends. Instead they qualify the words “or any of its franchisees”. Thus, broken down into its constituent parts, the clause prohibits engagement in a business providing services which compete with any of the Services provided (a) by the claimant, by implication within the United Kingdom, or (b) by any of its franchisees within the Territory.

In construing the clause I apply the well-known principles of construction set out in such cases as Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896 and The Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900 which are too well-known to need detailed citation. In outline, the clause has to be given the meaning which it would convey to a reasonable person having all the background knowledge reasonably available to the parties in the situation in which they were at the time of the contract, and where as a matter of language a clause is capable of two meanings it is appropriate to have regard to considerations of commercial common sense in resolving the question what a reasonable person would have understood the parties to have meant.

Further, in the case of a post-term restriction such as clause 18.3.1, which will be unenforceable as a restraint of trade unless it is intended to protect a legitimate business interest of the covenantee and is no more extensive than reasonably necessary to achieve that end (Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535), a further consideration applies. This is that in choosing between two possible meanings, and without re-writing the clause, it is legitimate to adopt a construction which limits the clause to reasonable protection of a legitimate business interest, with the consequence that the clause will be valid and enforceable, and to reject a construction which would render the clause void (Littlewoods Organisation Ltd v. Harris [1977] 1 WLR 1472 at 1481D-H, 1483C-E, 1486B- 1488E). No doubt this latter consideration should not be pushed too far, and has less force in the context of a contract which does contain what appear to be other unduly wide restrictions (such as clause 18.3.2 in the present case), but in principle it makes sense to suppose that commercial parties of equal bargaining power were seeking to provide reasonable protection for a legitimate business interest rather than to assume the opposite, that is to say that they were seeking to provide protection where no such legitimate business interest existed or that they intended to agree unreasonably wide restrictions.

Applying these principles I have no hesitation in preferring the claimant’s construction. I do so for the following reasons.

First, I consider that the natural meaning of the clause is that the words “within the Territory” qualify the words “the Services provided”, as the claimant contends. The defendants’ proposed construction, in contrast, appears to me to be somewhat strained and artificial as a matter of the language of the clause. Moreover the defendants' construction suggests that it is significant whether the other franchisee is “within the Territory”, whereas the agreement as a whole makes clear that what matters is not the location of the franchisee but the address of the customer.

Second, the claimant’s construction is at least a possible construction and should therefore be preferred. It produces a result which is straightforward and workable, whereas the defendants’ construction requires the defendants to know where in the United Kingdom the claimant itself is providing such services as distinct from licensing a franchisee to do so. The defendants may have no means of knowing this, and therefore will not know to what extent they are prohibited from providing services in particular areas. Limitation of the prohibition to the provision of services to customers within the Territory is therefore in accordance with business common sense.

Third, such a limitation also means that the clause is limited to the reasonable protection of the claimant’s legitimate interest in its goodwill in the Territory and is therefore (so far as this particular point is concerned) valid and enforceable (see ChipsAway International Ltd v. Kerr [2009] EWCA Civ 320 at [22] to [24]).

Fourth, if the clause extends to prohibit competition within the United Kingdom as a whole, it duplicates substantially the scope of clause 18.3.2, although as I have indicated this is a clause which the claimant does not seek to enforce, presumably because it recognises that it would not be able to justify a United Kingdom-wide restriction.

Mr Evans-Tovey identified two scenarios in which he suggested that the claimant’s construction might cause problems or uncertainty. One was the example of a firm of solicitors with an office in Milton Keynes and another office in (say) Southampton. In that case, however, the provision of services to the Southampton office would be to a customer outside the Territory (and therefore permitted), while the provision of services to the Milton Keynes office would be to a customer within it (and therefore prohibited). So if for some reason a search request from a conveyancer at the Milton Keynes office was routed through the Southampton office, so that it was the Southampton office with which the defendants dealt, that would be a supply of services to a customer outside the Territory and would not be caught by the clause. The second scenario was that a conveyancer with an office in Milton Keynes might send a clerk to the defendants’ Daventry address in order to collect physically the search results which it required. I regard that as an unrealistic scenario in these days of electronic communication. Conducting business in that way is not likely to be attractive to customers. For what it is worth, however, I consider that this example would constitute provision of services within the Territory because what matters is the customer’s address. No doubt examples can always be given which will require a nice exercise of judgment as to whether they constitute prohibited conduct, but there is nothing in these examples given by Mr Evans-Tovey which calls into question the claimant’s construction of the clause.

The franchise agreement contemplates, not surprisingly, that over time the claimant will develop and improve its system for doing business and that such developments will be shared with the franchisee by the provision of an updated Operations Manual. For example, such developments might include new kinds of search which may be required (eg environmental reports or reports relating to flooding risks) or new methods for providing reports as a result of technological developments. Because the definition of “Services” refers not only to the provision of search reports and services existing at the date of the franchise agreement, but also to the provision of such reports and other services “in addition to, or in substitution of, them as may be specified in the Operations Manual from time to time”, the question arises whether the prohibition in clause 18.3.1 is limited to competition with those services being provided by the claimant at the end of the franchise term.

The defendants’ case is that as a matter of construction the clause extends to prohibit competition by the defendants with services provided by the claimant which were not part of the franchise being operated at the end of the franchise term. That is because competition with “Services” would include competition with services which were only introduced by the claimant after the Termination of the agreement. The claimant’s primary case is that the clause does extend this far and that the restriction is reasonable, although its alternative case if necessary to save the clause is that it refers only to services provided at the date of Termination.

In my judgment the “Services” referred to in the definition must be limited to services concerned with the business of providing search reports. That limitation is inherent in the clause. It would not enable the claimant to restrict competition in the event that after Termination it began to carry out an entirely different kind of business and I did not understand Mr Duddridge to suggest otherwise. Subject to that, however, a new kind of search report provided by the claimant after Termination of the agreement or a new way of providing the same kind of reports as were already provided would fall within the definition of “Services”. Accordingly the clause on its true construction does potentially prohibit the defendants from competing within the Territory and for a period of one year after Termination with services introduced by the claimant for the first time only after the end of the franchise agreement.

So far as the evidence before me goes, however, this point is entirely hypothetical. It is not suggested that there is any new service which the claimant has in fact introduced since 31 August 2012. The argument is purely legal, aimed at striking down the clause so that the defendants can compete with the claimant's existing services.

In view of my decision as to the limited territorial scope of clause 18.3.1, the question whether it is unreasonably wide on that ground does not arise.

The defendants say that a restriction capable of applying to new services introduced after Termination was unreasonable. However, it must be remembered that the prohibition (a) only lasts for one year after Termination, and therefore any such unreasonableness would only affect new services introduced by the claimant during that one-year period, (b) only applies to services which form part of the business of providing property search reports, and (c) extends only to prohibit the provision of such services to customers within the Territory.

In my judgment such a restriction was no more than was reasonable to protect the claimant’s legitimate business interest. In reaching this conclusion I have in mind the principle identified by Cross LJ in Home Counties Dairies v. Skilton [1970] 1 WLR 527 at 538:

“It is in practice extremely difficult to frame conditions which will adequately protect a trade connection and may not at the same time cover some cases where a breach will not injure the trade connection. If the court can see that the restriction has been carefully framed for a legitimate purpose, I do not think that it should hold it void as contrary to public policy in favour of an ex-employee who is in flagrant breach of it on such narrow grounds as those relied on in this case.”

This principle was stated by reference to the position of an ex-employee, whose position the courts have generally been astute to protect. Restrictions in commercial contracts have been more readily enforced and a franchise agreement has been regarded as closer to a commercial contract such as a sale of a business than an employment contract (Dyno-Rod Plc v. Reeve [1998] FSR 148 at 153). Subject to that, I consider that this principle applies in this case. It may be possible to think of hypothetical examples where it could be said that a restriction on competition by the defendants with some new service introduced by the claimant during the year after Termination would be unreasonable. However, the restriction as it stands has been carefully limited as to both period and territorial scope and is, as I have held, limited to the provision of property search reports. To hold the clause to be void because of the mere possibility that in some as yet unidentified circumstances it might operate unreasonably would be wrong.

I conclude, therefore, that clause 18.3.1 is reasonable and enforceable at common law. I should note that the defendants have reserved the right to contend that enforcement of this clause and clause 18.3.3 would infringe provisions of competition law, but their case on that has not yet been pleaded and does not form part of the preliminary issues which I am deciding.

At one stage it appeared that a separate point might arise as to the position of the second and third defendants as guarantors, but in the end this fell away. It was notdisputed, and in any event I would have concluded, that if clauses 18.3.1 and 18.3.3 remain binding on the first defendant until 31 August 2013, they remain likewise binding on the second and third defendants.

As noted at the outset, the question whether the defendants remain bound by these post termination restrictions until 31 August 2013 depends upon the status of the franchise agreement after its expiry on 31 March 2011, which involves consideration of the decision in the Flat Roof case and the effect of the deed of surrender dated 6 August 2012. That deed of surrender, to which all three defendants were parties, provided in relevant part as follows:

“WHEREAS:-

(1)

By an Agreement dated 13^th May 2006 made between the Franchisor of the first part and the Franchisee of the second part and the Guarantors of the third and fourth parts (hereinafter called “the Agreement”) the parties entered a franchise agreement which granted the Franchisee the right to operate the Franchisee’s business and the Franchisor’s System and to provide the Services to clients within the Territory and the right to use that Trade Name and Trade Marks.

(2)

Unless otherwise defined all terms used in this deed shall have the meaning given to them in the Agreement.

(3)

IT is hereby agreed and declared that in this deed where the context so requires the singular shall be deemed to include the plural and vice versa and the masculine gender shall be deemed to include both the feminine gender and the neuter gender.

(4)

The Agreement subsists beyond its own expiry date by consent between the parties hereto.

NOW THIS DEED WITNESSES as follows:-

(1)

IN consideration of the release by the Franchisor hereinafter contained the Franchisee HEREBY SURRENDERS to the Franchisor ALL THOSE rights granted to it in Paragraph 2 of the Agreement and the effect shall be that the franchise is terminated on 31^st August 2012 (“the Termination Date”).

(2)

THE Franchisor HEREBY RELEASES the Franchisee from the obligations set out in the Agreement from the Termination Date save for those specified in (3) below.

(3)

The parties agree that save as released and surrendered the provisions of the Agreement shall subsist as appropriate following Termination of the franchise and

specifically the provisions of paragraphs 18 to 25 inclusive of the Agreement.

(4)

The Franchisee agrees to pay to the Franchisor the amount invoiced prior to the Termination Date in relation to Professional Indemnity Insurance Premium and that sum shall be applied to satisfy the run-off cover payment specified in the Agreement.

(5)

The Franchisor agrees that after the Termination date it will indemnify the Franchisee against all Professional Indemnity claims for matters arising from the Franchisee’s PSG business during the time of the Agreement.

(6)

The Franchisee and Guarantors hereby agree and acknowledge that they have no and waive any current and future claims and rights of action against the Franchisor pursuant to the Agreement or in relation to the operation of the franchise business as defined in the Agreement and that the Franchisor is hereby released from all and any of its obligations under the Agreement.”

It was held by Sir John Lindsay in Flat Roof that post termination restrictive covenants in a franchise agreement do not ordinarily extend beyond their contractual expiry dates when the parties continue the franchise informally after expiry of its contractual term. That was a case where the franchise agreement was to last for seven years with a post term restriction which was to last for a further year. As in the present case, when the term of the franchise agreement came to an end the parties continued informally to perform in accordance with its terms, but without agreeing any express extension. This continued for more than a year, and therefore beyond the expiry of the post term restriction, before the franchisee indicated that he had decided to retire. In fact that was not true and he continued in the flat roofing business. The claimant sought to enforce the post term restrictive covenant, but Sir John Lindsay held that there was no remaining covenant to enforce. The covenant in the original agreement had expired one year after the expiry of the seven year term, and Sir John rejected the various ways in which the claimant submitted that it (or a new provision to the same effect) continued to apply. These included an analogy with the law of landlord and tenant whereby tenants can often be taken to have held over on the like terms as those contained in their original tenancy and an attempt to imply a restrictive covenant into the parties’ relationship by reference to tests such as the officious bystander or business efficacy.

The claimant’s case is that, whether or not Flat Roof was rightly decided, as to which it reserves its position, the present case is different because the deed of surrender shows that the parties were treating the franchise agreement as subsisting until 31 August 2012 with the effect that the post-termination restrictive covenants would apply for one year from that date.

The defendants’ case is as follows:

The franchise agreement terminated in accordance with its terms on 31 March 2011 and the post-termination restrictive covenants in clauses 18.3.1 and 18.3.3 therefore ceased to be operative after 31 March 2012.

The parties continued to operate the franchise after 31 March 2011, but this was pursuant to a new implied arrangement, distinct from the previous agreement, which Mr Evans-Tovey described as a “franchise-at-will”.

In accordance with the decision in Flat Roof, the terms of this franchise-at-will did not include clauses 18.3.1 or 18.3.3 or equivalent provisions to the like effect.

The deed of surrender terminated the franchise-at-will as of 31 August 2012 but did not reinstate clauses 18.3.1 or 18.3.3. There were three reasons why the deed did not have that effect. The first was that in accordance with recital (2) “Termination” in the deed of surrender was given the same meaning as in the franchise agreement, which included its expiry by lapse of time which had already taken place on 31 March 2011. The second was that the effect of the deed was to terminate the franchise-at-will, but not the franchise agreement which had already terminated in accordance with its terms. In support of this construction of the deed of surrender it was submitted that the decision in Flat Roof was known in the franchising industry and constituted part of the background for the purpose of construing the deed of surrender, and that in the light of that decision the parties cannot reasonably have intended to reinstate post term restrictions which had already ceased to apply. The third was that clauses 18.3.1 and 18.3.3 were particularly unusual and onerous provisions which, if they were to apply, needed to be brought specifically to the defendants’ attention in much the same way as was held to be necessary in the case of the clauses considered in Interfoto Picture Library v. Stiletto Visual Programmes [1989] QB 433.

Flat Roof does not appear to have been referred to in any subsequent English decision, but it has been mentioned in two textbooks concerning franchising. Kamerling, Restrictive Covenants and Competition Law, 6^th edition (2010), refers to the decision without comment at page 253. Hamilton Pratt, Franchising Law & Practice (2012) also refers to the case at pages 9024-5, but with the warning that "a diametrically opposite decision” had been reached in Scotland, in the case of SJD Group Ltd v. KJM (Scotland) Ltd [2010] CSOH 13. In that case Lord Glennie stated his conclusion at [22]:

“In short, my conclusion is that the parties as reasonable businessmen and, more relevantly, the reasonable detached observer, would have assumed that they were continuing to do business after 31 July 2008 on the same terms as before, though not for another five year period. ... I conclude, therefore, that after 31 July 2008 the parties continued in business together under an implied agreement which was on the same terms as the 2003 Franchise Agreement, with this exception, that the agreement was to last for an indeterminate period and be terminable upon reasonable notice. One consequence of this is that some of the provisions which turn on there being a five year term would have to be adapted to fit a contract for anindeterminate period of terminable upon reasonable notice. There is, in principle, no difficulty in this, though the court is careful to remember that it is not its task to make a contract to the parties.”

There is no evidence before me that the decision in Flat Roof represents a widely shared understanding of the legal position generally held by those concerned in the franchising industry. The text books to which I have referred do not support any such conclusion and suggest, if anything, that the position is still open. I do not accept, therefore, that the law as stated in Flat Roof forms part of the background to the deed of surrender.

Further, I am with respect inclined to doubt whether the decision is correct and to prefer the analysis of Lord Glennie. It seems to me that if the parties continue to operate a franchise after the expiry of the contractual term, the likely inference is that they intend their relationship to continue to be governed by the terms of their original contract. If not, it is hard to see on what basis they are continuing. To say, as the defendants do, that the “franchise-at-will” is on the terms of some but not all of the original contract seems productive of great uncertainty which is not a very commercial approach, while the objection to restrictive covenants stated by Sir John Lindsay at [17] in Flat Roof, that they are “inherently contrary to public policy” seems to me with respect to have only limited force. If, as in the present case, the restrictions in question constitute a reasonable protection of a legitimate business interest, this objection to them falls away, while if they are unreasonable they will be void and unenforceable in any event.

However, it is unnecessary to reach a final decision about this because I accept the claimant’s submission that the deed of surrender clearly proceeds on the basis, and the parties thereby agreed, that the franchise agreement continued in force and would be terminated as at 31 August 2012, with the consequence that the post term covenants would run for one year from that date. This is the inescapable result of recital (4), which expressly negatives any understanding by these parties that the law is as stated in Flat Roof while the operative provisions of the deed make it absolutely clear that what is to terminate on 31 August 2012 is the franchise agreement and not some notional franchise-at-will with an existence independent of the franchise agreement. I regard the argument that the parties intended to draw a subtle distinction between the franchise agreement and the franchise, recognising that the former had already terminated more than a year ago and that the deed of surrender was solely concerned with the latter, as far-fetched.

I reject also the argument based on Interfoto which, apart from anything else, seems to me to be circular. If, as I have held, the clauses in question are reasonable, it is hard to see how they could be properly characterised as being either particularly unusual or particularly onerous. On the contrary, they are a common type of clause intended to protect a legitimate business interest and are reasonable in scope. Conversely, if they were void and unenforceable as constituting an unreasonable restraint of trade, there would be no need for the Interfoto principle to be invoked. In any event clauses (2) and (3) of the deed of surrender expressly draw attention to the fact that some provisions of the franchise agreement will continue in effect after the Termination on 31 August 2012 and mention specifically the provisions of clauses 18 to 25 inclusive. While it is true that those clauses contained very much more than post term restrictive covenants, the defendants were alerted to the need to review the franchise agreement before agreeing to the terms of the deed of surrender.

I conclude, therefore, that the defendants continue to be bound by clauses 18.3.1 and 18.3.3and will continue bound until 31 August 2013, one year after the termination date provided by the deed of surrender.

No compelling reason was advanced by the defendants why, if they will continue bound by the clauses until 31 August 2013, an injunction should not be granted. The conclusions reached so far mean that the claimant has a legitimate business interest to protect and that the clauses constitute no more than is reasonable to achieve that objective. It was not suggested that damages would be an adequate remedy and clearly they would not. Because the defendants have reserved the possibility of a competition law defence, an injunction cannot at this stage be final, but subject only to that possibility I conclude that an injunction should be granted against each of the defendants.

Accordingly the answer to each of the questions identified in [13] above is “Yes”. There will be an injunction to restrain the defendants (a) from providing property search reports to customers with an address within the specified Milton Keynes post codes and (b) from soliciting business from any person who was a customer of or in the habit of dealing with the first defendant during the period from 1 September 2011 to 31 August 2012. That injunction will continue until whichever is the earlier of (a) 31 August 2013 or (b) further order following determination of any competition law defence to be pleaded by the defendants.