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High Court refuses to grant order to stop franchisee trading

Posted: 22nd September 2016   In: Corporate Commercial

The High Court has refused to grant a company an order preventing a franchisee from trading following a dispute over the ending of a contract.

The judge held that if the company won its case, it could be awarded damages, which would be an adequate way for it to recover any loss.

The case involved a blinds company that entered into a franchise agreement with a partnership in 2003. The agreement contained covenants preventing the partnership selling blinds at the end of the agreement for 12 months. The franchise agreement ended in 2008 but both parties carried on as if it were still in place.

They then entered into various other agreements relating to other areas in 2011. These agreements stated that the onus was on the franchisee to obtain a new agreement at the end of five years by serving notice not more than nine months and not less than six months before the expiry date.

No notice was served and the agreements terminated in 2016. The company sought to enforce the restrictive covenants.

The franchisee argued that the agreement did not automatically end at the expiry date and that it was entitled to a new franchise without having served notice. Following the behaviour of the two parties at the expiry of the 2003 agreement, there was an implied term that the company should have reminded the franchisee about the notice period.

The court declined to grant an injunction. It held that there were important issues that could only be decided by a full trial, but that did not necessarily mean that the restrictive covenants should be enforced.

If the company succeeded at trial the franchisee would have to cease operating in the relevant area for a period. If the franchisee succeeded the franchisor might lose customers and goodwill. However, damages were unlikely to be significant and, although goodwill might be difficult to assess, they would be identifiable and an adequate remedy.

If the franchisee had to cease trading it would suffer more significantly and would find it more difficult to recover. The balance was in favour of not granting an injunction.

Please contact Simon Porter if you would like more information about the issues raised in this article or any aspect of contract law and protecting your business.