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CONVENIENCE CO LTD v ROBERTS

Franchise agreement – Restrictive covenants – Whether UK-wide restriction enforceable – Buy back option – Whether operative on expiry of agreement by effluxion of time.

The claimant ran a business of supplying high class mobile lavatories for use at private functions, usually held under marquees supplied by others. It operated in the Midlands area. It had also granted nine franchises throughout the United Kingdom. The franchises were granted on a three-yearly basis and conferred on the franchisee the right to operate in a designated area. The franchisee was obliged to buy such mobile lavatory units from the claimant as the claimant considered reasonable and to pay for them. On termination of the agreement, the franchisee was, by clause 18.3 of the agreement, deemed to have served notice on the claimant offering to sell the units back to the claimant at a price not more than their original cost written down on a straight line basis over four years. The clause then provided that the claimant had 14 days from the date of the deemed notice to accept the offer by written notification to the franchisee.

Clause 8.2.1. of the agreement was as follows:

The franchisee covenants during the term of this agreement and for a period of one year after the expiration or termination for any reason of this agreement, whether itself or together with any other person, firm or company in any capacity whatsoever, save as authorised hereunder directly or indirectly not to be engaged or interested or concerned in the sale of the units, provision of services relating to mobile toilets and/or shower units or any like units or services or in any business similar to or competitive or in conflict with the business.

Two franchise agreements expired by the effluxion of time. The defendants claimed that the restrictive covenant was unenforceable as being an undue restraint of trade having regard to the fact that it was not limited by territory. The claimant argued that because there were only nine franchisees who met once a year to freely exchange information the restriction was necessary in order to prevent an ex-franchisee from pitching his prices lower than a continuing franchisee. The defendants also claimed that clause 18.3 only applied when there had been an act of termination by one of the parties and did not cover expiry by effluxion of time and that the claimant had not exercised the option in time.

Held, finding the restrictive covenant void:
(1) A franchise agreement was closer to a vendor-purchaser agreement than to an employer/employee agreement.
Dyno-Rod plc v Reeve [1999] F.S.R. 148 followed.
(2) The restrictive covenant, properly construed, was limited to the United Kingdom and was not a world-wide covenant.
(3) The defendant franchisee was not entitled to nor did it operate outside the franchised territory and the restriction could not be justified on the ground that it was no more than was required to enable the claimant to attract a new franchisee to the departing franchisee’s territory.
Dyno-Rod plc v Reeve [1999] F.S.R. 148 distinguished.
(4) There was extensive competition in most parts of the United Kingdom from similar providers of good class mobile lavatory units and the knowledge gained by a franchisee of the claimant’s business during the annual conferences or at other times would not materially enhance the ability of a franchisee to compete outside this territory with the business of continuing franchisees.
(5) The territorial scope of the restriction was far wider than was reasonably required for the protection of the legitimate business interests of the claimant and was void.
(6) The agreement terminated by effluxion of time just as much as when it was brought to an end by an act of one of the parties and clause 18.3 was operative but on the facts the claimant had not exercised the option within the time period allowed.

“Fleet Street Reports” September 2001