Do your non-compete clauses protect your franchise?

In the recent case of Francotyp-Postalia v Whitehead and others the High Court considered whether to sever a non-compete clause from a franchise agreement.

Non-compete clauses (which are also referred to as restrictive covenants) help protect a franchisor from unfair competition from former franchisees. They may cover the non-solicitation of staff or customers and prevent competition with the franchise business. Such clauses are enforceable by a franchisor, or any other type of business, providing that they are reasonable.

Like most commercial contracts, franchise agreements will usually contain a severance clause which allows a court to remove an offending clause (or part of it) provided that it can be deleted without any re-writing. These clauses reflect the common law position (known as the “blue pencil test”) that if you can remove an offending clause without any rewriting, and without distorting the rest of the bargain, the contract survives.

In Francotyp-Postalia the court held that it was not possible to sever the offending wording in one (unenforceable) restrictive covenant because it would have the effect of modifying other (enforceable) restrictive covenants. The consequence was that the franchisor was unable to prevent his former franchisee from competing in the same area.

The case shows the limitations of severance clauses and the blue pencil test. Franchisors are therefore recommended to ensure that the non-compete clauses in their franchise agreements are carefully drafted, paying particular attention to the scope of each restriction. What may be a reasonable geographical area for one restrictive covenant may be unreasonable for another. If you are a franchisee who wants to set up a competing business once your franchise agreement has terminated then you should ask a solicitor to check whether the restrictive covenants in your contract are reasonable and enforceable. 

If you would like further advice on non-compete clauses or any other issue relating to franchise agreements, whether you are a franchisor or franchisee, please contact [email protected].