Franchising - United Kingdom

Facts

Fleet Mobile Tyres Limited franchised a mobile tyre-fitting business. Traditionally, Fleet's franchisees obtained work from two sources: local customers who responded to the franchisees' own marketing and advertising, and national account customers whose business was secured by Fleet and which was performed by franchisees in their territory. While franchisees fixed the price for the work they secured themselves, Fleet fixed the price at which they did national account work. Franchisees paid royalties based on their sales. In 1999 Fleet became conscious of the power of the Internet and set up a website, E-Tyres, through which potential customers could place jobs that franchisees could perform if the potential customer was in their franchised territory. However, Fleet had not, it would appear, evolved its franchise agreement sufficiently to reflect the changes to its business systems necessitated by the introduction of its internet business.

The defendants took franchises from Fleet in 2003 for two territories in Kent. After 2003, Fleet focused increasingly on its internet E-Tyres business. Fleet pressed the defendants to take more E-Tyres business and instructed them to rebrand their vans so that they ostensibly promoted only the E-Tyres business. This was of concern to the defendants as they considered that the E-Tyres business was less profitable for them, as the jobs were often disparately spread over their territory and the amount they received from Fleet for the job had deducted from it certain of Fleet's costs of operating the E-Tyres business. Furthermore, the rebranding of the defendants' vans meant that the E-Tyres contact details were promoted ahead of the defendants' contact numbers and their non-internet business.

The defendants eventually decided they could no longer continue in business with Fleet and therefore started the process of establishing their own tyre-fitting business. The defendants sought to terminate the franchise agreement for Fleet's repudiatory breach, prior to Fleet terminating the franchise agreement for various breaches by the defendants.

Decision

Fleet sought injunctive relief to restrain the defendants from continuing their competing business. Fleet succeeded at first instance.

On appeal to the Court of Appeal, the franchisees were successful. The court found that there was a repudiatory breach by Fleet as it should not have made deductions from the price paid by customers for jobs placed through E-Tyres. Furthermore, relying on the decision of Justice Clarke in Paperlight Limited v Swinton Group Limited (1996) (a franchising case that involved, among other things, derogation from grant) and applying Esso Petroleum Company Limited v Addison (2003), the court found that the insistence that the franchisees rebrand their vehicles so as to promote the E-Tyres business was a substantial derogation from the grant of the right to them to use the Fleet tyres trademarks.

Leave to appeal to the House of Lords has been refused.

Comment

Fleet failed to manage properly the change in its business as it evolved from one that relied on national accounts and franchisees winning business in their local areas to one that was internet-driven. Fleet failed to ensure that its franchisees bought into the process (from the reports, it seems that Fleet failed to consult sufficiently on its proposed changes). The court's decision emphasizes the need for good communication between franchisors and franchisees and for franchisors to manage continually and thoughtfully the process of evolution in their business model.

The lessons to be learned by franchisors (and those advising them) are as follows:

• Ensure open and regular communication with franchisees so that they adapt positively to business change.
• Keep your agreement under review so that if you make a change to your business you can adapt your agreement accordingly.
• Allow for flexibility in your agreement. Fleet was unable to pray in aid any provisions that entitled it to change its business model by improvement. 
• Take care before seeking injunctive relief. If an individual franchisee wishes to leave the network, it is necessary to balance the risk of the departure causing a ripple of unrest in the network against the risk of a court decision that a standard operating practice could amount to a repudiatory breach which entitles the entire network to exit the system and claim damages.
• As a postscript, the judge at first instance dealt with certain noteworthy points that were not considered on appeal. Firstly, he accepted that in the context of a franchise agreement, entire agreement clauses and clauses that require franchisees to specify in writing at the time of the contract any representations they relied upon in entering into the contract were reasonable. Secondly, in the context of a mobile franchise business with a territory with a radius of 170 miles where the market price of the service changed frequently, if the franchisor had the benefit of a post-termination non-solicitation covenant then a separate post-termination covenant not to operate a competing business in the territory would be a reasonable (ie, enforceable) restraint only if it were for a period of six months or less.

ILO