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ADVICE FOR FRANCHISORS Making sure the network is

safe from ex-franchisees ByManzoor Ishani and Barney Laurence, Sherrards

The authors, two franchise lawyers from Sherrards, report on a High Court case, brought by a franchisor, that raised the question of the validity of a post- termination, non-compete clause in a franchise agreement.

The situation was

unusual in that the franchisee had continued in its franchised business on what is known as a “holding over” basis for well over a year after the franchise agreement had expired, whilst at the same time running a competing business.


he situation that led to the case was that a husband and wife, Lydia and

David Darby operated a franchise of PSG, a property legal search service, for some10 years and in 2006 had signed a franchise renewal agreement with the company for a five-year term, expiring in 2011. The Darbys subsequently claimed that their marriage was deteriorating, such that Mrs Darby distanced herself from the franchise in October 2010 although Mr Darby continued in the business. Following the expiry of the franchise

agreement in 2011, the parties continued in business on the same terms as set out in the franchise agreement, on what is commonly known as a “holding over” basis.

In May 2012, Mr Darby approached PSG and said he would like to leave the network as he was struggling to make a success of the franchise following problems with his marriage, and that he had generally lost interest in the business. After a period of discussions the

parties in August 2012 reached a mutual agreement to bring the franchise to an end. In doing so, the couple agreed to be bound by the restrictions in the franchise agreement that prevented them, amongst other things, from competing against PSG for a year after termination. Almost immediately afterwards, PSG

made alarming discoveries which showed that the Darbys had, in fact, been operating a competing search business since at least September, 2011. PSG understandably felt cheated by


the Darbys and it consulted Barney Laurence, the co-author, who quickly wrote to them asking them to cease their competing business, and stating that PSG would be bringing a claim for damages for the breaches that had occurred. The Darbys defended the action. The

case went to a two-day trial that PSG won on all issues.

40 April/May 2013 So legally what steps can a franchisor

take to stop franchisees, like the Darbys, from competing?

The interests of the franchisor and franchisee on termination are similar, although each sees them from a different point of view. Each is concerned to safeguard his commercial and financial interests.

The franchisee will be concerned to

recover as much as he can financially, and minimise the extent to which his future business activities will be restricted by the fact that he had been a franchisee. The franchisor will be concerned to ensure not only that its name, system, know-how and goodwill are protected and preserved, so that it can appoint a replacement franchisee but also that it and its network are protected from a rogue ex-franchisee. The franchisor expects its ex- franchisees not to compete with it, or its franchisees, once they have left the network. It does not expect them to set up a copycat operation, or poach their former customers, and it believes that they should be engaged in a business that is different and not use the know-how they gained when they were franchisees.

Termination clauses The franchisor hopes to achieve

this by means of various clauses in the franchise agreement that are intended to apply to ex-franchisees on termination. Typically, this is achieved as follows.

● By providing in the franchise agreement, promises by the franchisee that when he ceases to be a franchisee, he will not compete with the franchisor or any of its franchisees for a certain period of time, and that he will not carry on any business which is similar to the franchised business from his premises or in his former territory for a certain period after termination.

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