ABG Commercial Newsletter – March 2013

Franchise agreements and restrictive covenants

Franchise agreements often contain post-termination restrictive covenants which prevent the franchisee from becoming involved in a competing business for a specified period after the end of the franchise. Sometimes when a franchise agreement expires, the parties continue with the franchise relationship without formally extending the written agreement and the question then is what terms govern the continuing relationship.

Often franchisees try to challenge restrictive covenants arguing that they are unreasonable and too widely drawn. However, in a recent case the High Court enforced restrictive covenants against the ex-franchisee, dismissing his arguments that the covenant was ambiguous and was too wide.

The franchisee had entered into a franchise agreement relating to property search services for a fixed term of 5 years. The agreement contained a number of post-termination restrictions, including a one year non-compete clause and a one year non-solicitation clause.

After the end of the 5 years the parties continued with the franchise without entering into a new agreement. The Judge ruled that the terms of the original agreement continued to apply, including the post-termination restrictions, which the Judge was prepared to enforce against the franchisee by granting an injunction.

Proposed changes to TUPE – service provision changes

The Government has initiated a consultation on a number of proposed changes to the TUPE Regulations. One of the most significant of the proposed reforms is the repeal of the current provisions relating to service provision changes which are contained in the Regulations. The Government has said that, if the proposed changes go ahead, there will be a lead in period on the proposed repeal of the service provision changes and so their repeal is unlikely to take effect before October 2013 at the earliest.

The Government is also contemplating a relaxation in the current rule which prevents any variation to the terms of employment which are connected with a TUPE transfer. The Government suggests that the parties should be able to agree any change that they could have agreed had there not been a transfer and that they should also be able to agree a variation in terms for an economic technical or organisational (ETO) reason.

Exclusion clause did not cover failure to perform contract

The Court of Appeal has ruled that an exclusion clause in a contract which on the face of it excluded liability for the supplier’s loss of profits did not apply when the customer had refused to perform the contract.

In a fully negotiated contract a court is normally reluctant to interfere with any exclusion clause or limitation of liability clause which the parties have agreed. However, the decision in this case does indicate the court’s general hostility towards upholding an exclusion clause where a party refuses to perform the contract, as opposed to the exclusion simply covering defective performance.

In this case a supplier had a 5 year catering services agreement with a major customer. The agreement was terminated 2 years early after the customer had lost confidence in the supplier. The supplier then brought a claim for loss of profits of over £1 million.

The customer attempted to rely on an exclusion clause which excluded liability for loss of profits. However the Court of Appeal ruled that in the circumstances of the case the customer’s liability for loss of profits was not excluded by the clause in question. Although the Court’s decision was based in part on the specific wording of the exclusion clause, it does illustrate the Court’s hostility to upholding a blanket exemption and the willingness of the Court to find a way of deciding the case on the basis of broad justice. The Court noted how wide the exclusion was and commented that, if the customer was not liable for loss of profit, there was no sanction against it if it simply refused to perform the contract. It said that upholding the clause would have effectively reduced the contract to merely a statement of intent.

Retention of instalment payments following termination of sale contract

In a recent case the Court held that the seller of two gas plants was entitled to keep instalments paid by the buyer and to receive the outstanding purchase price even though the seller had rescinded the contract and ownership of the plants had not passed to the buyer.

The general legal rule is that performance of contractual obligations must be complete and entire and that a contract is discharged when both parties fully perform their contractual obligations. A party which does not fully perform its contractual obligations remains bound to perform them. If there is no forfeiture clause in a contract, a buyer who makes part payments of the purchase price but defaults as to the balance cannot claim back the instalments paid, although if the seller rescinds the contract due to the buyer’s default, the buyer is entitled to recover its money.

In this case the Court ruled that, under the wording of the contract, the seller was in fact entitled to keep the instalment payments which the buyer had paid and was also entitled to claim the further instalments which the buyer had failed to pay.

The decision in this case demonstrates that in contracts involving the sale of goods or property, where the contract has been rescinded before ownership has passed from the seller to the buyer, the forfeiture of instalment payments may be unfair to the buyer. A buyer should protect its interests by ensuring that, where the contract is rescinded, the buyer is released from its accrued obligations and has the right to claim back any instalments that were paid before termination.

 

The comments in this note are of a general nature only. Full advice should be sought on any specific problems.

Tim Sisson
tsisson@abg-law.com
+44 (0)115 934 3333

Andrew Sutton
asutton@abg-law.com
+44 (0)115 934 3303