Dwyer (UK Franchising) Ltd v Fredbar Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 30 June 2022 |
| Neutral Citation | [2022] EWCA Civ 889 |
| Docket Number | Case No: CA-2021-000638 |
| Court | Court of Appeal (Civil Division) |
[2022] EWCA Civ 889
Sir Julian Flaux CHANCELLOR OF THE HIGH COURT
Lord Justice Arnold
and
Lady Justice Whipple
Case No: CA-2021-000638
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE BUSINESS AND PROPERTY COURTS OF ENGLAND AND
WALES
BUSINESS LIST (Ch)
INSOLVENCY AND COMPANIES COURT JUDGE JONES SITTING AS A JUDGE
OF THE HIGH COURT
BL-2020-001411
Royal Courts of Justice
Strand, London, WC2A 2LL
Nigel Jones QC and Paul Strelitz (instructed by Owen White Limited) for the Appellant
David E Grant QC and Anson Cheung (instructed by direct access) for the Respondents
Hearing dates: 24 and 25 May 2022
Approved Judgment
Introduction
This appeal concerns the enforceability of post-termination restrictive covenants in a ten year franchise agreement between the claimant (to which I will refer as “Dwyer”) and one of its former franchisees, the first defendant (to which I will refer as “Fredbar”). The second defendant (to whom I will refer as “Mr Bartlett”) was a director and shareholder of Fredbar and guarantor of its obligations under the franchise agreement.
Dwyer appeals, with the permission of Lewison LJ, against paragraph 3 of the Order dated 17 May 2021 of Insolvency and Companies Court Judge Jones, sitting as a Judge of High Court in the Business List, declaring that the restrictive covenants in the franchise agreement are unenforceable between Dwyer and Fredbar and Mr Bartlett.
Factual and procedural background
There were a number of matters in issue at the trial before the judge, but since the appeal is limited to the issue of the enforceability of the restrictive covenants, I will only set out in summary the facts relevant to that issue. Dwyer is a substantial company with more than thirty “Drain Doctor” franchises covering over sixty territories. It describes itself as the UK's largest full-service emergency plumbing and drainage company operating in commercial and domestic sectors, and its ultimate parent in Waco, Texas is described by Dwyer as the world's largest home service franchise business.
In contrast, Fredbar was incorporated on 24 September 2018 by Mr Bartlett with the intention of it becoming one of Dwyer's franchisees in parts of Cardiff, operating under the “Drain Doctor” name. He had no previous experience of plumbing and drainage work or of being a company director, although in December 2018 he did complete a course in plumbing provided by Dwyer.
Prior to entering the franchise agreement, Mr Bartlett completed a self-assessment report for Dwyer which the judge found was potentially relevant to the construction and application of the agreement. The information disclosed that the franchise would be his sole source of income once he left his current employment where he was earning £38,000 a year. He had a £134,000 mortgage on the family home. His partner had a relatively small income and his available assets of £20,000 subject to a £5,000 loan would inevitably be tied up in the business. The judge found at [86] of his judgment that it would have been obvious to anyone at the time the agreement was concluded that the reality was that the family home would be at risk if the business failed. This was a major decision for Mr Bartlett, giving up the security of his current employment for the purposes of achieving the benefits for franchisees promoted by Dwyer.
Mr Bartlett received a series of projections from Dwyer during the negotiations leading up to the agreement which set out a list of start-up costs, profit and loss accounts for months 0–12, 13–24 and 25–36 with cash flows for the same periods. Turnover was calculated using averages obtained from data regularly submitted by Dwyer's franchisees. There was no research specific to the Cardiff area where Dwyer did not have an existing franchise nor was there any filtering out to take account of how long a franchise had been in existence. We were informed during the appeal hearing that the nearest existing Drain Doctor franchise was at Avonmouth.
Originally, on 6 September 2018, Mr Bartlett decided not to proceed, so further projections were provided by Dwyer. He sought a loan from his bank, producing a business plan. As already noted, he incorporated Fredbar on 24 September 2018. On the same day, he was sent a copy of Dwyer's standard form franchise agreement, which ran to some 100 pages. His evidence was that he did not examine its terms, but, as the judge found at [107], he could have studied its contents and taken legal advice on it, although he did not do so.
Mr Bartlett attended an orientation or induction day at the end of September 2018. At [108] of his judgment the judge referred to the evidence of Mr Jeannes, the “managing director” (although not on the board of directors) of Dwyer, that having met Mr Bartlett before and at that event he: “knew … he required more support and hand holding than any other franchisee in getting set up, including help with quite simple tasks … he struck [him] as someone who was overactive and tended to be easily agitated … he was needy, prone to agitation and had had difficulty in building relationships, including [subsequently] with customers”. As the judge said, on the basis of that assessment, one might have expected him to be rejected as a franchisee and that is plainly what Mr Jeannes thought, since he found it necessary to justify his acceptance of Mr Bartlett on the basis that: “everybody deserves a chance”.
After that event, the agreement in a form to be signed, together with a side letter concerning a contribution by Dwyer to the purchase of vans by Fredbar, were emailed to Mr Bartlett on 3 October 2018. On 4 October 2018 Mr Barton of Dwyer went to Mr Bartlett's house with the original agreement which Mr Bartlett signed. There was controversy at trial about this meeting, Mr Bartlett saying he was put under pressure and told that it was a “take it or leave it” decision. The judge found at [128] that the terms of the agreement made clear that the franchisee should seek legal advice, but Mr Bartlett had not done so. He did not accept Mr Bartlett's evidence that he told Mr Barton he wanted to consult a solicitor. The judge found at [129] that Mr Bartlett had only received the agreement the day before which would not have given him time to study it properly or seek advice, but it was in the same form as the draft sent on 24 September 2018 which he could have studied and taken advice upon since then. The judge rejected any suggestion that there was improper pressure or coercion.
The relevant restrictive covenants were in clause 18.2.1 of the franchise agreement and provided as follows:
“Post termination restrictions on the Franchisee
18.2.1 Following termination or expiration of this Agreement, the Franchisee will not for a period of one (1) year thereafter directly or indirectly:
18.2.1.1 be engaged concerned or interested in a business similar to or competitive with the Drain Doctor Business within the Exclusive Marketing Territory (save for a financial interest which does not allow the Franchisee to influence the economic conduct of such a business);
18.2.1.2 be engaged concerned or interested in a business similar to or competitive with the Drain Doctor Business which operates within a radius of five (5) miles from the Exclusive Marketing Territory;”
The franchise agreement became effective on 22 October 2018 after payment of the franchise fee of £35,000 plus VAT, although Mr Bartlett had started preparation before then. Trading began in January 2019. In the first year of trading the net profit was some £35,000 on a turnover of £81,816 in contrast with the projected turnover of £147,913 plus National Account work (accounts which Dwyer had nationally such as JD Wetherspoons). The judge made detailed findings to the effect that the business was nothing like as profitable as anticipated and Mr Bartlett could not afford a second van and employee (projected to be taken on after eight months). By March 2020 he was looking to sell the franchise.
The pandemic then intervened. On 24 April 2020 Mr Bartlett notified Dwyer that he would be self-isolating for three months on his doctor's advice (and in accordance with government COVID-19 advice) because his son was vulnerable. Dwyer then suspended any payments due from Fredbar and Mr Bartlett on the basis that the business was not operating during this period.
On 16 July 2020, Mr Bartlett emailed Dwyer purporting to terminate the agreement. The email alleged conduct by Dwyer including misrepresentation and undue influence at the time of entering the agreement and subsequent breach (misapplying “MAP” funds and failing to comply with the force majeure clause when he needed to self-isolate) said to justify termination. He also asserted that, even if he was not entitled to terminate the agreement, he no longer intended to be bound by its terms.
At around the same time in July 2020, Mr Bartlett ceased operating the Drain Doctor business and began to operate a competing business, “Daily Drains”, offering materially the same services as the Drain Doctor franchise within the territory specified in the franchise agreement and elsewhere.
On 19 August 2020, Dwyer wrote to Mr Bartlett saying that his purported termination of the agreement was ineffective and constituted a repudiatory breach of the agreement, which it accepted as terminating the agreement.
On 4 September 2020 Dwyer then issued a Part 7 claim form and sought an interim injunction restraining the defendants from carrying on the competing business. On 17 September 2020, Nugee J (as he then was) declined to grant an injunction, but ordered an expedited trial which took place before ICC Judge Jones on 18, 19,...
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