In a recent ruling in the Court of Appeal, a car repair company won its case to prevent a former franchise holder from operating a competing business in breach of a restrictive covenant.

The company offered franchises which allowed other businesses to use its name, products and expertise in certain areas. The franchise agreement included a restrictive covenant that prevented any business that terminated the franchise agreement from setting up a rival car repair firm in the same area for a 12 month period.

In this particular case, the franchisee chose not to renew his franchise, but still continued to operate as a car repair business from the same premises, although without using the franchise company’s name or products.

The company took legal action against the former franchisee. In the original case, the judge decided that the restrictive covenant only restricted the ex-franchisee from competing once a new franchisee took over the area. If the franchise business did not have a representative in the area, the covenant did not apply.

This ruling has now been overturned in the Court of Appeal. It decided that the purpose of the covenant was to protect goodwill, and that it was nonsensical to deny that protection just when it was most needed. The ex-franchisee would have built up his own goodwill while trading under the company’s brand, and would be a commercial threat to the company if he was allowed to continue to operate.

The true purpose of the restrictive covenant was to give the company the time it needed to find a new franchisee to cover the area in question.

Technorati Tags: Franchise Agreement, Restrictive Covenant