Franchisor obtains injunction for ex-franchisee's breach of restrictive covenants

A franchisor successfully obtained an injunction to prevent an ex-franchisee from breaching restrictive covenants in the franchise agreement, in Senior Care at Home Ltd v Adult Home Care Ltd & Anor [2021] EWHC 3586 (QB).

Restrictive covenants are used in franchise agreements to protect goodwill and customer relationships by limiting the franchisee’s right to operate a competing business both during the agreement and for a specified period after termination. They normally involve undertakings of non-solicitation, non-dealing, confidentiality and non-competition.

This case is interesting because of the emphasis the judge placed on how important it is for franchisors to be able to enforce restrictive covenants to protect their interest, their name and their way of doing business.

Background facts

The franchisee had operated the franchise business of care services in the home for the Swansea region from 2017. In early 2021 however various performance concerns about the franchisee had been raised by both staff and the local authority including complaints about compliance and standards of care. The franchisee claimed that the problems were not serious and should be looked at in the context of the pandemic which had been particularly challenging in the care sector, and that one of the complaining employees had misconduct issues themselves.

The franchisee also claimed that the franchisor, in having discussions with the local authority behind its back about the handing back of local authority care packages, had undermined the franchisee’s  position and in doing so was in repudiatory breach of the franchise agreement which entitled the franchisee to terminate the contract. The franchisor and franchisee then met and discussed two options, a formal investigation of the allegations or a mutual deed of termination. The franchisee chose the investigation but this concluded that the allegations were well founded, and the franchisor terminated the contract.

The franchisee intended to carry on providing care services in the home in the Swansea area, claiming that the restrictive covenants were not binding because of the franchisor’s alleged repudiatory breach which the franchisee had accepted. It also claimed that the restrictive covenants were poorly drafted and vague so as to be meaningless and were therefore unenforceable. The franchisor applied for an injunction to prevent the franchisee from carrying on with the care services in breach of the restrictive covenants.

The injunction

When considering whether to grant an interlocutory injunction, the court will apply the “American Cyanamid” principles, which means it will ask itself:

• Is there a serious question to be tried?
• Would damages alone be an adequate remedy?
• Where does the balance of convenience lie? The court will seek to preserve the status quo pending a trial, but if the cost and inconvenience caused by granting an injunction outweighs the benefits and justice for the applicant, it is unlikely that an injunction will be granted.
• Are there any other special factors to be considered in the particular circumstances of the case?

Here, the question of whether or not the franchisee was in breach of the franchise agreement was considered to be a sufficiently serious issue. The judge did go on to say that, although it was not something the court had to determine at that stage, the franchisee’s argument that the franchisor was in repudiatory breach of contract seemed “at best wafer thin”, and the meaning of the restrictive covenants was clear and they would therefore be enforceable.

As for damages, the judge was very strongly of the opinion that they would not be an adequate remedy. The Swansea local authority had told the franchisor that it had no confidence in the franchisee. It was important for the franchisor to maintain a close relationship with the Swansea local authority as it was a significant customer of its services, as were other local authorities around the UK who may come to hear about these problems. The judge said that point of a franchise is to enable a franchisor to allow businesses to conduct business in their name, and it is therefore important for it to be able to protect that interest, its name and its way of doing business. Awarding damages for a franchise model such as this could be seen as a ‘green light’ to franchisees to break their contracts. These breaches went to the heart of the franchise operating model and purpose of a franchise, so damages could not be an adequate remedy - it was important for a franchisor to be able to be seen to police their brand and their franchise effectively.

As to the balance of convenience, the franchisee sought to argue that the status quo involved it continuing to provide care to its service users. It said that imminent intervention by either the local authority or CIW (the regulatory care body in Wales) was vastly exaggerated and it was restoring and rebuilding the relationship with both. The judge however did not read the correspondence with the local authority and CIW with such a “rosy glow” and noted that the council was observing the hearing, ready to take steps to ensure continuity of care for the service users. The judge said the balance of convenience lay firmly with the franchisor in light of the seriousness of the issues to be tried, the strength of the evidence against the franchisee and the role of the franchisor in providing reputable care under its franchises for those in need of care at home, and that the balance lay in favour of granting the injunction.

This case shows how important it is for franchisors to be able to enforce reasonable restrictive covenants in their franchise agreements to protect their franchise business and manage reputational risk and that they should take a robust approach when doing so.