Franchise covenant not in need of repair

Subscription service Lawtel picked this little post-franchising case up today: ChipsAway International Ltd v Errol Kerr [2008] EWHC 1887 (Ch) , a decision of the Chancery Division for England and Wales. The judge was Sir Andrew Park, who has presumably stepped out of retirement to help out his busy colleagues.

ChipsAway held the rights to a body of knowhow relating to a system for filling and restoring damage to the bodywork of cars, also supplying products for use in its SMART system (SMART = Small to Medium Area Repair Technology). The company didn't repair the damage itself but instead granted franchises to businessmen. Each franchisee was, as is often the case, given a locality in which it was authorised to use the ChipsAway name, paints and other products.

Kerr, a former franchisee, had previously signed an agreement with ChipsAway that contained restrictive covenants. One such covenant stipulated that, for a period of 12 months following the termination of the agreement, Kerr would not -- without ChipsAway's prior written consent -- be engaged in any capacity in any business "which competes" with ChipsAway's own business within his area. When the franchiser agreement ended, Kerr decided not to renew it but instead carried on a vehicle repair business at the same premises. ChipsAway sued for injunctive relief, alleging that, by continuing in business in the same area and providing the service he did, Kerr was in breach of the restrictive covenant. Kerr resisted, on the basis that ChipsAway did not have a franchisee in Kerr's area, nor did it appear that the company was specifically seeking to obtain one.

Sir Andrew Park dismissed ChipsAway's claim:

* Kerr's business did not compete with any of ChipsAway's car care businesses, since the latter had no such business in the area.

* The position would have been different if ChipsAway had enfranchised a new operator in the same area, and would indeed change if ChipsAway granted such a franchise to a new operator while the 12 months' term of the restrictive covenant was still running.

* The key words in the covenant were the term "which competes", which referred to competing on the facts as they were, not to the possibility that competition might begin to happen in the future if the facts changed.

* Since the covenant was not infringed by what Kerr had been doing since his franchise terminated, there was no basis on which to grant ChipsAway any relief.

The IPKat is left with that sinking feeling that this is yet another of those cases that should, and could, have been sensibly settled without the need for a day in court. Merpel wonders, would the court really enforce the covenant with an injunction if it was only towards the end of the period of the restriction that ChipsAway secured a fresh licensee in the area, seeing as the period in question would be small, the inconvenience substantial and any financial loss quantifiable.

Chips with everything here
Chip off the old block here
Repair your own car here
Another chips franchise here
How to pronounce Kerr here

Franchise covenant not in need of repair Franchise covenant not in need of repair Reviewed by Jeremy on Wednesday, August 06, 2008 Rating: 5

1 comment:

Anonymous said...

Isn't the moral of the story that the covenant is in need of repair (at least from the point of view of Chips Away)?

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