Carewatch Care Services Ltd v Focus Caring Services Ltd and Others

JurisdictionEngland & Wales
JudgeMr Justice Henderson
Judgment Date11 July 2014
Neutral Citation[2014] EWHC 2313 (Ch)
Docket NumberCase No: HC14B00794
CourtChancery Division
Date11 July 2014
Between:
Carewatch Care Services Limited
Claimant
and
(1) Focus Caring Services Limited
(2) Anthony J Grace
(3) Elaine C Grace
Defendants

[2014] EWHC 2313 (Ch)

Before:

Mr Justice Henderson

Case No: HC14B00794

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Rolls Building

Royal Courts of Justice

Fetter Lane, London, EC4A 1NL

Mr Jason Evans-Tovey and Ms Victoria Wakefield (instructed by Field Fisher Waterhouse LLP) for the Claimant

Ms Brie Stevens-Hoare QC and Mr Aidan Robertson QC (instructed by Hamilton Pratt) for the Defendants

Hearing dates: 1 – 4 and 7 – 8 April 2014

Mr Justice Henderson

Introduction

1

Over six days between 1 and 8 April 2014 I heard the expedited trial of this action, in which the claimant Carewatch Care Services Limited ("Carewatch") seeks injunctive and other relief against a former franchisee, Focus Caring Services Limited ("Focus"), and the two individuals who have at all material times been the sole directors and shareholders of Focus, Mr Anthony (Tony) Grace and his daughter Miss Elaine Grace. The dispute principally relates to the provision of domiciliary care in three of Carewatch's franchise territories in East Anglia. It is common ground that the relevant franchise agreements between Carewatch and Focus were validly terminated at the end of January or the beginning of February 2014 by acceptance of a repudiatory breach of contract. Which party was in breach, however, and which party was entitled to accept the other's repudiation, are among the many questions which I will need to determine.

2

Carewatch is the second largest provider of home care services in the United Kingdom. It operates through a combination of its own directly-owned corporate branches and outlets run by franchisees. Over the last five years, the balance has shifted significantly from the franchise side of the business towards an increase in directly-owned branches. At the end of 2013, Carewatch had approximately 50 branches, some of them covering more than one territory, and 49 franchisees operating in 76 franchised territories. By contrast, in 2009 Carewatch had 127 franchised territories, but only some 11 branches. According to Laing & Buisson's 2013 report on the UK domiciliary care market – described by Carewatch's chief executive officer, Mr Philip Pegler, in his written evidence as "the principal and most authoritative report on the domiciliary care market in the UK", and for which he regularly supplied information – "[t]he past years have seen Carewatch buying back a number of its former franchises and increasing its in-house portfolio" (page 191 of the report).

3

Since 2008, Carewatch has been owned by Lyceum Capital, a UK-based private equity firm ("Lyceum"). Since May 2013 the chief operating officer of Carewatch has been Mrs Deborah Neill. In her oral evidence to me, Mrs Neill frankly accepted that Lyceum has acquired Carewatch in order to develop and expand the business with a view to its subsequent flotation or sale. Although she did not know what Lyceum's exit strategy was, she accepted that Lyceum would have one, and that they were not interested in retaining the business in the long term.

4

I mention these points at this early stage because they form an important part of the background to the present litigation. Rightly or wrongly, a considerable number of Carewatch's franchisees have over the last few years become increasingly dissatisfied with the support provided to them by Carewatch, and the suspicion has grown that Carewatch is deliberately trying to run down the franchise side of its operations in favour of its own branches, which are free to (and in some cases actually do) compete with franchisees in the same areas, and may even do so under the same branding.

5

The initial focus of this discontent was the Carewatch Franchisees' Association ("the CFA"), which was founded in November 2008 in response to the sale of Carewatch to Lyceum. The majority, but by no means all, of the franchisees are members of the CFA; the Graces are not. In February 2011, the CFA retained Mr John Pratt of Hamilton Pratt to act for it, and he continued to do so until about March 2013. Mr Pratt is a solicitor who specialises in franchise law. He is a former legal adviser to the British Franchise Association, and is the author of a book entitled Franchising: Law & Practice published by Sweet & Maxwell. He is also a past chairman of the International Bar Association's international franchising committee, and of the American Bar Association's international franchising division.

6

During his retainer by the CFA, Mr Pratt acted for it in relation to matters such as revisions to Carewatch's standard form of franchise agreement. The changes which the CFA was able to negotiate did not, however, go as far as it would have liked, and on 31 January 2013 Mr Pratt wrote to Carewatch on behalf of the CFA setting out the Association's continuing areas of concern. He ended the letter by saying:

"The issues that we have set out above are fundamental and go to the core of the franchise relationship. Please forgive us for saying so, but we believe that Carewatch needs to decide whether it is a franchisor or a direct provider of care services. We really do not see how it can be both."

7

At that time, a number of franchisees were holding over following the expiry of their previous agreements, and seeking to negotiate fresh agreements on terms which the CFA would regard as acceptable. Matters came to a head at the end of February 2013, when acting on Mr Pratt's advice at least four of them wrote letters to Carewatch, dated 27 February 2013, which purported to accept Carewatch's allegedly repudiatory breach of an implied term:

"… that Carewatch would offer a renewal agreement containing provisions which are not so disadvantageous to franchisees that they would not be able to continue to operate their franchise business profitably or would not be able to find a purchaser for their franchise agreement, who would be prepared to sign such an agreement."

The letter also sought to justify termination of the existing contract on the basis that, by potentially or actually competing with franchisees, Carewatch was derogating from its original grant of the franchise. As a consequence of Carewatch's allegedly unlawful conduct, it was pointed out that Carewatch would be unable to enforce the post-termination non-compete covenants against the franchisee. The draftsman of the letters, presumably Mr Pratt, probably thought it unnecessary to refer explicitly to General Billposting Co Ltd v Atkinson [1909] AC 118. Nor was that all. It was further alleged that the covenants would anyway be unenforceable "because Carewatch does not have any know how to protect", and that the agreement infringed various aspects of competition law.

8

The defendants in the present case called as witnesses two of the franchisees who had served termination letters on Carewatch on 27 February 2013, Mr Timothy Wilson and Mr Andrew Key. It transpired that the termination had been something of a non-event for each of them. Having decided, on advice, to terminate his agreement, Mr Wilson found himself "completely lost" when it actually happened, and before long he agreed to rejoin Carewatch as a franchisee. He is now the vice chairman of the CFA. As for Mr Key, who had been a Carewatch franchisee for the areas of Blackburn and Hyndburn in Lancashire since 1999, he found that it was in practice a relatively simple matter to re-brand his business from Sky Futures Limited trading as Carewatch (Blackburn/Hyndburn) to Sky Futures Limited trading as Choice Care. For whatever reason, Carewatch did not seek to enforce any of the post-termination covenants against either him or his company.

9

Although he ceased to act for the CFA in March 2013, Mr Pratt has continued to act for many individual franchisees, including the Graces by whom he was first instructed on 20 November 2013, the day before they were due to have a meeting with Carewatch. He also prepared the draft of a termination letter which, acting on his advice, they sent to Carewatch on 31 January 2014.

10

Addressed to Mr Pegler, the termination letter was in the following terms:

"We refer to our franchise agreements with you dated 18 December 2006, 10 July 2009 and 19 April 2003 ("the Franchise Agreements"). Our 18 December 2006 agreement has expired but the other two agreements remain in force. You have given us until Monday, 3 February 2014 to renew our 18 December 2006 agreement. You have sent us a draft form of agreement but you have not yet sent us an agreement to execute. The draft form of agreement contains provisions which are materially more onerous than in our existing agreement. We are aware that the [ CFA] has expressed concerns about these terms. We simply do not believe that on the terms of your proposed agreement we would be able to continue to operate our Norwich business profitably. For the purposes of this letter, to avoid this letter being over lengthy, we have not set out the specific provisions of your proposed renewal agreement which we consider to be onerous but would be happy to let you have details if you so require.

When we first became involved with Carewatch, we were joining a growing and successful franchise business. Since then the general approach and direction of travel for Carewatch has been to acquire other care businesses and operate them as company owned outlets and to convert franchise businesses to company owned. The situation that prevails is that less than a third of outlets are now franchised and, as far as we are aware, no new franchisees have been recruited from some five years. We are informed that as a matter of UK competition law there would be nothing to prevent Carewatch from tendering in our territory which of course is non-exclusive. When Carewatch was a proper franchisor with no more...

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