Franchise Focus: A recent decision confirms there is no implied duty of good faith and upholds a non-compete restriction against a franchisee

In the recent case of Carewatch Care Services Ltd v Focus Caring Services Ltd & Ors (2014), the court found for the franchisor and enforced restrictive covenants and step-in provisions in franchise agreements in a decision that confirms judicial reluctance to imply a duty of good faith into franchise agreements (or indeed any commercial contracts).

The claimant, Carewatch Care Services (Carewatch), is the second largest provider of home care services in the UK and has many franchisees across the country. The defendants, Tony and Elaine Grace, later incorporated as Focus Caring Services Limited (Focus), operated three franchises from locations within East Anglia. Focus submitted that Carewatch had breached various implied terms of the franchise and that consequently the restrictive covenants were not valid at common law. Carewatch argued that Focus was in breach of the franchise agreement and sought damages accordingly. The court found that Focus had breached the agreement as they had opened a competing business called “Poppy Care” (later “Purely Care”). Arguments from Focus that this business was not ‘similar’ were given short shrift and Focus were ordered to pay damages.

Although generally accepted that covenants in the restriction of trade are contrary to public policy and unenforceable, it has long been established that where they seek to protect the legitimate business interests and where they extend no further than is necessary they may be enforceable. The Commission in Promptia de Paris v Promptia de Paris Ermgard Schillgalis (1986) acknowledged that the protection of reputation and know-how can be vital to franchisors. Accordingly, the court sided with Carewatch and awarded injunctive relief to enforce both the restrictive covenants and the step-in provisions.

For franchisors this decision is a welcome development after the observations of Leggatt J in Yam Seng Pte Ltd v International Trade Corporation (2013) which left unanswered many questions in connection with an implied duty of faith in the franchisor/franchisee relationship. Franchisors should welcome the decision that franchisees cannot rely on an implied term of good faith in an attempt to avoid the restrictive covenants contained in their franchise agreements. Further, this decision should serve as a warning to franchisees looking to operate a competing or similar business outside of the system. If you would like any further information about this case or guidance on any legal aspect of franchising then please contact any member of our Franchising team.