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Doctrine of severance and franchise agreements

Citation: Francotype-Postalia Ltd v Whitehead & others [2011] EWHC 367 (Ch)

Keywords: Doctrine of severance – post-termination covenants – restraint of trade – drafting of franchise agreements

The issue

Whether part of a defined term could be severed from a post-termination covenant contained in a franchise agreement where that defined term also appeared elsewhere in valid and enforceable parts of the agreement.

The facts

The claimant company was a franchisor of a franking machine franchise business. The defendants were directors of one of the claimant’s ex-franchisees. Following the termination of the claimant’s franchise agreement with that franchisee, during the course of the subsequent action between the claimant and the defendants, an issue arose as to the enforceability and severability of certain post-termination covenants contained in the franchise agreement.

In particular, the franchise agreement contained an “area covenant” which purported to restrain the franchisee, after the termination of the agreement, from being involved anywhere within the “Restricted Area” in any business which was competitive with the franchisor’s business. The “Restricted Area” was defined in the second-half of the area covenant, and was drafted so as to comprise “the Territory [i.e., the territory granted to the franchisee under the franchise agreement], [and also] any other territory (in the UK) covered … by the Franchisor …”. The franchise agreement also contained a “non-solicitation covenant” which purported to restrain the franchisee, after the termination of the agreement, from soliciting, anywhere within the “Restricted Area” (as defined in the area covenant), any former customers of the franchisor’s business.

It was accepted by both parties that (i) the definition of the “Restricted Area” was so broad that the area covenant constituted an unreasonable restraint on trade and was therefore unenforceable, but that (ii) for the purposes of the non-solicitation covenant the definition of the “Restricted Area” was not excessively wide, and the non-solicitation covenant was therefore both valid and enforceable.

The claimant contended, however, that the area covenant could be saved by the application of the doctrine of severance to the definition of “Restricted Area” within the area covenant. The claimant proposed that the doctrine should be applied by striking out the words following the phrase “the Territory” in the definition of the “Restricted Area”, using the blue pencil test, in order to confine the scope of that area to “the Territory” alone (i.e., to the original franchise territory), and contended that this would render the area covenant valid and enforceable.

The issue of the severability of those words from the area covenant was tried by the court as a preliminary issue of law.

Held:  (Peter Smith J)

If the definition of the “Restricted Area” had appeared only within the area covenant then the relevant words could have been severed. However, the words in question could not permissibly be severed from the area covenant because those words formed part of a definition of a phrase (“Restricted Area”) that appeared not only in the area covenant but also in another part of the agreement (i.e., the non-solicitation covenant) that was agreed by both parties to be valid and enforceable.

Consequently, the court could not sever the relevant words from the definition of the phrase “Restricted Area” in the area covenant, simply for the purpose of narrowing the scope of the area covenant, without also necessarily modifying the meaning of that phrase as it appeared in the non-solicitation covenant, which would have fallen foul of the first condition for the application of the doctrine of severance approved in Beckett Investment Management Ltd v Glyn Hall [2007] EWCA Civ 613 (i.e. that the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains).

Principal authorities

Beckett Investment Management Ltd v Glyn Hall  [2007] EWCA Civ 613 – applied

Comment

This case is a reminder of the importance of drafting post-termination covenants in franchise agreements with the full requirements and effects of the doctrine of severance firmly in mind. If a party envisages relying upon the doctrine of severance in order to save a post-termination covenant from unenforceability, it is crucial to ensure that the potential severance will not modify the interpretation of any other remaining parts of the agreement. In particular, it would be unwise to use a defined term in any post-termination restraint where that term also appears elsewhere in the agreement, and where it is envisaged that the defined term may ultimately have to be cut down in order to save that restraint (or indeed any other restraint).