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● By requiring the franchisee not to use or disclose any confidential information imparted to him while he was a franchisee.

The law recognises the need for a franchisor to extract such promises, but the wording in the franchise agreement has to be clear and the restrictions have to be reasonable if the clauses are to be enforceable.

The enforcement of such clauses is therefore important not only to the franchisor but also its franchisees, who buy the franchise on the basis that the franchisor will protect them from unfair competition from ex-franchisees. If every ex- franchisee can break away and engage in unfair competition, making use of the knowledge he acquired as a former franchisee, the network could unravel very quickly.

So a franchisor needs to be confident that the non-compete clauses in its franchise agreement are enforceable. PSG v Darby involved the court

scrutinising a franchise agreement drafted by Manzoor Ishani, the co-author, who specialises in such agreements. The judge examined very carefully and thoroughly, word by word, the clauses on which the franchisor was relying to protect itself and its network. He found in favour of PSG on all issues, and came to the conclusion that the non-competition clauses, which dealt with what an ex-franchisee could or could not do after termination, were well enough drafted to enable him to make an order preventing the ex-franchisee from carrying on a similar business. The case is therefore very important in the sense that it shows that the court will, if it is satisfied that the restrictive clauses are enforceable, grant an order to protect a franchisor from the actions of its former franchisees.

It should be noted that the judge found that the Darbys had in some respects acted in bad faith in defending the case. More fundamentally, however, the decision is of crucial importance because it signals a probable shift in the law where the franchise agreement between the parties has expired. Frequently, where for example the franchisor is in the process of having its franchise agreement updated, there is no “new” agreement for the franchisee to sign, but the parties carry on in business exactly the same as previously. Before the decision in PSG v Darby,

the law - according to a case called “Flat Roof” - was that the restrictive clauses in the franchise agreement start to run from when the agreement expired, even though the parties are carrying on in business as usual whilst a new agreement is being prepared.

This could be catastrophic for a franchisor because, if he waits too long before issuing the new agreement, the franchisee could decide to walk away from the franchise and set up a copycat operation free from any restrictions. This was an issue in PSG v Darby.

The Darby’s franchise agreement had expired well over a year before the parties terminated their franchise relationship and there was a question over whether PSG could therefore rely on the non-compete provisions in the (expired) franchise agreement. However the High Court took the

view that it is doubtful whether the “Flat Roof” case was correctly decided. As such, franchisors, who are in the

situation where franchise agreements have expired but their franchisees are continuing with their franchise as before, can now rest assured that they probably will not lose their right to stop the franchisee from leaving and setting up in competition because the restrictive clauses will only start to run once the parties’ relationship actually comes to an end.

Need for review

The lesson to be learned from this is that the franchisor should not take it for granted that its franchise agreements are fully enforceable in such circumstances and it should therefore have them reviewed in the light of this very important decision. It is clear that when it comes to contract enforcement, the franchisor should ensure that the relevant clauses are very carefully worded, and furthermore that, if the matter should ever come before a judge, it engages knowledgeable and experienced lawyers who can forcefully and successfully argue its case. Furthermore, the franchisor need not

now be overly concerned if its franchisee is out of contract but continuing to operate his franchise because it is now highly doubtful that the restrictions in the expired franchise agreement will have started to run from the date of expiry. However, it remains best practice to ensure that franchisees are signed-up to a properly-constructed franchise agreement at all times.

● Manzoor Ishani

● Barney Laurence

● Manzoor Ishani, who is a senior consultant solicitor with the law firm, Sherrards has specialised in franchising for more than 30 years, and is a former member of the legal committee of the BFA. He is co-author of Franchising in the UK, Franchising in Europe, and Franchising in Canada.

He also has practical franchising

experience as international director of the franchise, Stagecoach Theatre Arts. Barney Laurence, a senior associate

at Sherrards, is a commercial litigator and specialises in franchise dispute resolution. He has particular expertise in cases involving High Court injunctions and has achieved notable success with them in both the High Court and the House of Lords.

FW April/May 2013 43

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