Mr Justice Henderson:
Introduction
- Over six days between 1 and 8 April 2014 I heard the expedited trial of this action, in which the claimant Carewatch Care Services Limited ("Carewatch") seeks injunctive and other relief against a former franchisee, Focus Caring Services Limited ("Focus"), and the two individuals who have at all material times been the sole directors and shareholders of Focus, Mr Anthony (Tony) Grace and his daughter Miss Elaine Grace. The dispute principally relates to the provision of domiciliary care in three of Carewatch's franchise territories in East Anglia. It is common ground that the relevant franchise agreements between Carewatch and Focus were validly terminated at the end of January or the beginning of February 2014 by acceptance of a repudiatory breach of contract. Which party was in breach, however, and which party was entitled to accept the other's repudiation, are among the many questions which I will need to determine.
- Carewatch is the second largest provider of home care services in the United Kingdom. It operates through a combination of its own directly-owned corporate branches and outlets run by franchisees. Over the last five years, the balance has shifted significantly from the franchise side of the business towards an increase in directly-owned branches. At the end of 2013, Carewatch had approximately 50 branches, some of them covering more than one territory, and 49 franchisees operating in 76 franchised territories. By contrast, in 2009 Carewatch had 127 franchised territories, but only some 11 branches. According to Laing & Buisson's 2013 report on the UK domiciliary care market – described by Carewatch's chief executive officer, Mr Philip Pegler, in his written evidence as "the principal and most authoritative report on the domiciliary care market in the UK", and for which he regularly supplied information – "[t]he past years have seen Carewatch buying back a number of its former franchises and increasing its in-house portfolio" (page 191 of the report).
- Since 2008, Carewatch has been owned by Lyceum Capital, a UK-based private equity firm ("Lyceum"). Since May 2013 the chief operating officer of Carewatch has been Mrs Deborah Neill. In her oral evidence to me, Mrs Neill frankly accepted that Lyceum has acquired Carewatch in order to develop and expand the business with a view to its subsequent flotation or sale. Although she did not know what Lyceum's exit strategy was, she accepted that Lyceum would have one, and that they were not interested in retaining the business in the long term.
- I mention these points at this early stage because they form an important part of the background to the present litigation. Rightly or wrongly, a considerable number of Carewatch's franchisees have over the last few years become increasingly dissatisfied with the support provided to them by Carewatch, and the suspicion has grown that Carewatch is deliberately trying to run down the franchise side of its operations in favour of its own branches, which are free to (and in some cases actually do) compete with franchisees in the same areas, and may even do so under the same branding.
- The initial focus of this discontent was the Carewatch Franchisees' Association ("the CFA"), which was founded in November 2008 in response to the sale of Carewatch to Lyceum. The majority, but by no means all, of the franchisees are members of the CFA; the Graces are not. In February 2011, the CFA retained Mr John Pratt of Hamilton Pratt to act for it, and he continued to do so until about March 2013. Mr Pratt is a solicitor who specialises in franchise law. He is a former legal adviser to the British Franchise Association, and is the author of a book entitled Franchising: Law & Practice published by Sweet & Maxwell. He is also a past chairman of the International Bar Association's international franchising committee, and of the American Bar Association's international franchising division.
- During his retainer by the CFA, Mr Pratt acted for it in relation to matters such as revisions to Carewatch's standard form of franchise agreement. The changes which the CFA was able to negotiate did not, however, go as far as it would have liked, and on 31 January 2013 Mr Pratt wrote to Carewatch on behalf of the CFA setting out the Association's continuing areas of concern. He ended the letter by saying:
"The issues that we have set out above are fundamental and go to the core of the franchise relationship. Please forgive us for saying so, but we believe that Carewatch needs to decide whether it is a franchisor or a direct provider of care services. We really do not see how it can be both."
- At that time, a number of franchisees were holding over following the expiry of their previous agreements, and seeking to negotiate fresh agreements on terms which the CFA would regard as acceptable. Matters came to a head at the end of February 2013, when acting on Mr Pratt's advice at least four of them wrote letters to Carewatch, dated 27 February 2013, which purported to accept Carewatch's allegedly repudiatory breach of an implied term:
"… that Carewatch would offer a renewal agreement containing provisions which are not so disadvantageous to franchisees that they would not be able to continue to operate their franchise business profitably or would not be able to find a purchaser for their franchise agreement, who would be prepared to sign such an agreement."
The letter also sought to justify termination of the existing contract on the basis that, by potentially or actually competing with franchisees, Carewatch was derogating from its original grant of the franchise. As a consequence of Carewatch's allegedly unlawful conduct, it was pointed out that Carewatch would be unable to enforce the post-termination non-compete covenants against the franchisee. The draftsman of the letters, presumably Mr Pratt, probably thought it unnecessary to refer explicitly to General Billposting Co Ltd v Atkinson [1909] AC 118. Nor was that all. It was further alleged that the covenants would anyway be unenforceable "because Carewatch does not have any know how to protect", and that the agreement infringed various aspects of competition law.
- The defendants in the present case called as witnesses two of the franchisees who had served termination letters on Carewatch on 27 February 2013, Mr Timothy Wilson and Mr Andrew Key. It transpired that the termination had been something of a non-event for each of them. Having decided, on advice, to terminate his agreement, Mr Wilson found himself "completely lost" when it actually happened, and before long he agreed to rejoin Carewatch as a franchisee. He is now the vice chairman of the CFA. As for Mr Key, who had been a Carewatch franchisee for the areas of Blackburn and Hyndburn in Lancashire since 1999, he found that it was in practice a relatively simple matter to re-brand his business from Sky Futures Limited trading as Carewatch (Blackburn/Hyndburn) to Sky Futures Limited trading as Choice Care. For whatever reason, Carewatch did not seek to enforce any of the post-termination covenants against either him or his company.
- Although he ceased to act for the CFA in March 2013, Mr Pratt has continued to act for many individual franchisees, including the Graces by whom he was first instructed on 20 November 2013, the day before they were due to have a meeting with Carewatch. He also prepared the draft of a termination letter which, acting on his advice, they sent to Carewatch on 31 January 2014.
- Addressed to Mr Pegler, the termination letter was in the following terms:
"We refer to our franchise agreements with you dated 18 December 2006, 10 July 2009 and 19 April 2003 ("the Franchise Agreements"). Our 18 December 2006 agreement has expired but the other two agreements remain in force. You have given us until Monday, 3 February 2014 to renew our 18 December 2006 agreement. You have sent us a draft form of agreement but you have not yet sent us an agreement to execute. The draft form of agreement contains provisions which are materially more onerous than in our existing agreement. We are aware that the [CFA] has expressed concerns about these terms. We simply do not believe that on the terms of your proposed agreement we would be able to continue to operate our Norwich business profitably. For the purposes of this letter, to avoid this letter being over lengthy, we have not set out the specific provisions of your proposed renewal agreement which we consider to be onerous but would be happy to let you have details if you so require.
When we first became involved with Carewatch, we were joining a growing and successful franchise business. Since then the general approach and direction of travel for Carewatch has been to acquire other care businesses and operate them as company owned outlets and to convert franchise businesses to company owned. The situation that prevails is that less than a third of outlets are now franchised and, as far as we are aware, no new franchisees have been recruited from some five years. We are informed that as a matter of UK competition law there would be nothing to prevent Carewatch from tendering in our territory which of course is non-exclusive. When Carewatch was a proper franchisor with no more than a handful of company owned branches, this threat of competition was not significant. Now it is. We simply cannot see how a franchisor can maintain a franchise business when the franchisor is the largest potential competitor to franchisees.
We have been greatly concerned by the fact that for long periods of time Carewatch ceased to recruit franchisees, no mention of franchising was contained on the Carewatch website and Carewatch did not participate in franchising exhibitions or publicise its franchise in any way. During this period no franchise manual was provided and Carewatch failed to provide guidance and assistance. As a result we believe that Carewatch has been and remains in breach of clause 7.2, 7.3, 7.5, 7.9 and 7.10 of our Norwich franchise agreement and of similar provisions in the other franchise agreements. We also believe that Carewatch has been and remains in breach of the implied duty of good faith which we are informed applies to relational contracts such as franchise agreements. That implied duty of good faith must include an obligation to continue to franchise and seek to expand the franchise network, not to impose a renewal franchise agreement which it would simply not be commercially sensible for a franchisee to enter into, to maintain sufficiently expert and experience[d] head office staff to support franchisees, not to compete with franchisees and to communicate openly and honestly with franchisees. You are in breach of not only the express provisions of the Franchise Agreements but also these implied terms. Such breaches are so serious that they amount to a repudiatory breach of contract and accordingly we are writing to you to give you formal notice that from the date of receipt of this letter our Franchise Agreements with Carewatch will terminate. We are in the process of removing references to Carewatch and complying with our other post-termination obligations and, of course, we will work with you to ensure that those termination obligations are complied with as soon as practically possible and to your satisfaction. Perhaps a representative of Carewatch can make contact with us so that we can work together on this? Having said that we will not comply with your post-termination non-compete covenants because:
1. These covenants are unenforceable when franchise agreements are terminated for your breach;
2. Clause 22.2.1 does not comply with competition law requirements;
3. Elements of clause 22.2 would not be upheld at common law as reasonable restraints on us; and
4. Enforcement of these provisions would put the lives of the elderly and/or infirm at risk.
On a personal note we are desperately sad that a long and previously beneficial relationship has soured to such an extent that we simply do not believe that Carewatch is sufficiently committed to franchising for it to be sensible for this relationship to continue. Our future does not lie with a "franchisor" that appears to be determined to operate company owned branches rather than to assist in developing successful franchisees."
- It will be seen that the termination letter went further than the prototype letters of 27 February 2013 in that it alleged breach of five express provisions of the franchise agreements, as well as breach of a number of implied obligations under the umbrella of an alleged implied duty of good faith. It is also worth noting that, although the Graces made it clear that they would not comply with the post termination non-compete covenants, they expressed their willingness to comply with the other obligations arising on termination.
- On 4 February 2014 Carewatch's solicitors, Field Fisher Waterhouse LLP, replied. The letter alleged that Focus and the Graces were themselves in breach of the franchise agreements, as follows:
"Carewatch wrote to you on 27 September 2013 to explain its concern that in breach of the 2006 Agreement you were operating a second care business outside the ambit of your relationship with Carewatch. In subsequent correspondence leading up to a meeting held on 11 December 2013 you confirmed that for some considerable time you had been operating a second care business known as Purely Care (formerly Poppy Care) (the "Undeclared Business"). This was a clear and profound breach of the 2006 Agreement … As a result Carewatch was entitled to terminate the Franchise Agreements immediately in accordance with clause 21.
Additionally, the 2006 Agreement was due to expire on 31 December 2013. In circumstances where you wished the 2006 Agreement to be renewed for a further seven-year term you were required to be in good standing (i.e. not in breach of the 2006 Agreement) and to notify Carewatch of your wish to renew no earlier than 30 June 2013 and no later than 30 September 2013. You had given no such notice and in any event, as set out above, you were not in good standing.
Following the meeting held on 11 December 2013 Carewatch agreed to extend your 2006 Agreement with the effect that it would expire on 3 February 2014. You had indicated your desire to continue to operate a Carewatch franchise, which Carewatch was prepared to discuss with you on the basis that you would account for the earnings from your Undeclared Business and in future not operate any such business outside your Carewatch franchise. A further meeting was held on 23 January 2014 and Carewatch wrote to you on a without prejudice basis on 27 January 2014 to confirm what was required of you. This involved you compensating Carewatch for losses incurred in relation to your Undeclared Business, in addition to signing a new franchise agreement to document the proposed renewal."
- The letter went on to deny the breaches of contract by Carewatch alleged by the Graces, concluding:
"It is clear to us that your allegations of breach of contract by Carewatch are a sham. They are a fiction designed solely to support your purported termination in circumstances where you did not wish to compensate Carewatch for the harm caused by your Undeclared Business, and where no doubt you were advised that the restrictive covenants in the 2006 Agreement would for a period after termination prevent you from operating a care business.
The irony of your reliance on an alleged duty of good faith is not lost on Carewatch: having made substantial profits from your Undeclared Business during the term of the 2006 Agreement, you now seek to rely on baseless allegations to escape your post-termination obligations. As a responsible franchisor, and to protect its franchise network as well as its own business, Carewatch is obliged to ensure that you are held to account."
The letter then said that the purported termination of each of the franchise agreements was itself a repudiatory breach of contract, which Carewatch elected to accept. It is now common ground that this was indeed the position, if the defendants were not themselves entitled to terminate the agreements by the letter of 31 January.
- Finally, Field Fisher Waterhouse gave notice of Carewatch's intention to enforce the non-compete and other restrictive covenants in the agreements, and to exercise its right under clause 22.6 of each agreement to "step in" to operate the businesses in place of Focus. Appropriate undertakings were sought, in default of which notice was given that injunctive relief would be sought in the High Court.
- Further correspondence ensued between the parties' solicitors, but it proved impossible to reach agreement and on 21 February 2014 Carewatch issued the claim form in the present action, accompanied by an application notice and evidence in support seeking interim relief. The defendants served evidence in answer, and the application came on for hearing on 7 March 2014 before Mr Edward Bartley-Jones QC sitting as a deputy High Court Judge of the Chancery Division. Having heard Mr Evans-Tovey for Carewatch and Ms Brie Stevens-Hoare QC for the defendants, the judge ordered an expedited trial of all issues in the proceedings except for the assessment of any damages for which either party might be found liable. Directions were given within a very tight timetable, with a view to the trial taking place between 31 March and 11 April 2014 with a four day time estimate. Meanwhile, undertakings were given on both sides to preserve the status quo.
- In the event, the case was prepared for trial with commendable speed and efficiency on each side, although one unfortunate side-effect is that no chronologically arranged bundle of the underlying documents has been produced and they are scattered in a number of different locations. Partly with a view to rectifying this deficiency, Mr Evans-Tovey opened his case for Carewatch on the first day of the trial by taking me on a tour through the main documents upon which his client relies in chronological order.
- The main oral advocacy on each side was undertaken by Mr Evans-Tovey and Ms Stevens-Hoare respectively, but I also had the benefit of submissions on the competition law aspects of the case from Mr Aidan Robertson QC for the defendants and Ms Victoria Wakefield for Carewatch. In addition, Mr Robertson stood in for Ms Stevens-Hoare on day four of the trial, when she was unavoidably absent; and Ms Wakefield cross-examined one of the defendants' witnesses, Ms Angela Mott.
Background
- I will now fill in some of the mainly uncontroversial background facts. I hope the Graces will forgive me if I refer to them individually as Tony and Elaine.
- Carewatch was founded in 1993. It began as a local service provider in Brighton, but the business rapidly expanded and by early 1999 it formed part of the Nestor Healthcare Group and already had 52 franchisees.
- In early 1999 Tony was 56 years old. He had taken early retirement in 1997, and was running a smallholding. His earlier career had been in administrative posts, for 22 years with the Army (where he rose to the rank of Warrant Officer, Class 1) and then for 12 years as administrative services manager at the London headquarters of RTZ. His home address was then, as it is now, at Eye in Suffolk.
- Tony is married to Maria Grace, and Elaine is his daughter by an earlier marriage. After leaving school at 18 with A levels in English, History and Sociology, Elaine worked in the civil service from 1986 to 1994, holding a number of jobs including one as a disablement resettlement officer. After leaving the civil service, she trained as a computer programmer and then held a number of posts in systems analysis and programming with (successively) a bank, an IT company, a firm of insurance brokers (Willis), and then the insurance company AXA by whom she was employed as a business systems consultant. She remained in full time employment until about 2001 when she left AXA in order to devote all her time and considerable energy to the franchise business.
- Having taken early retirement, Tony was interested in going into the care business. As he said in his oral evidence, he wanted to put something back into the community; he also wanted to make some money, although that was not the main consideration. He had no prior experience, skills or knowledge in relation to the care business, and recognised that he would need some help and support in order to get going. Carewatch was the second franchisor which he approached. On 1 March 1999 they sent him an introductory pack, saying:
"We are actively recruiting enthusiastic and dedicated professionals with or without care experience, who seek a challenging and rewarding business."
The introductory pack set out the benefits of being a Carewatch franchisee, and gave an indication of projected earnings. The cost of the franchise package was £15,750 plus VAT, in addition to which the franchisee would require a computer and office equipment, and working capital of the order of £10,000 to £15,000. Mr Grace then filled in an initial application form and attended a recruitment meeting in Brighton. He expressed interest in taking a franchise for the Ipswich and Suffolk Coastal area. He paid a deposit of £500 to reserve the franchise and on 15 March Carewatch wrote to acknowledge receipt. They said he would shortly receive two copies of the standard franchise agreement from their solicitors, and although they would be happy to explain any part of the agreement, no clause in it could be changed.
- By this stage it had been agreed that Elaine would join in taking the franchise with her father, and when the solicitors sent the two bound copies of the agreement to them on 17 March both Tony and Elaine were named as parties and together defined as "the Franchisee". The letter gave instructions for the signing, witnessing and return of both copies of the agreement, and ended with a recommendation that the Graces "should take independent legal advice before signing" it.
- Despite that recommendation, neither of the Graces took any legal advice before executing and returning the two copies of the agreement, which were then executed by Carewatch and dated 26 March 1999. I will refer to this agreement as "the first Ipswich agreement".
- I will return later to the detailed terms of the franchise agreements. It is enough to say at this stage that the first Ipswich agreement granted the Graces the right to operate the franchised care business within the territory (defined by reference to an annexed map) for a fixed period of seven years, with an option of renewal thereafter. The business was to be operated continuously throughout the year, at the premises specified in the schedule or such other premises within the territory as Carewatch might approve in writing. The schedule said that the location of the premises was "To be arranged (with the prior written approval of the Franchisor)".
- The business evidently got off to a good start, because little more than a year later the Graces expressed interest in taking over a second territory, Colchester and Tendring, which lay not far to the south of the Ipswich territory. Since this would be a second territory for the Graces, a reduced fee of £12,750 plus VAT would be payable. As before, copies of the standard form agreement were sent to the Graces by Carewatch's solicitors under cover of a letter dated 24 July 2000 recommending them to "take independent legal advice from a solicitor experienced in franchising" before signing it. As before, the Graces took no legal advice of any kind before signing the agreements on 7 November 2000. Carewatch's franchise manager, Hillary Adams, must have been involved, because it was she who returned the signed agreements to Carewatch's solicitors on 7 November. I will call this agreement "the first Colchester agreement".
- The first Colchester agreement was in materially identical terms to the first Ipswich agreement. Its initial seven year term ran from 7 November 2000, and the territory was again defined by reference to an annexed map. As before, the schedule said that the location of the premises was to be arranged with the prior written approval of Carewatch. The initial fee of £12,750 plus VAT was paid by Elaine from redundancy money which she had been paid on taking voluntary redundancy from Willis before joining AXA.
- In the early stages of the business, when Elaine was still working full time, she saw her main role as being to provide guidance to her father on administrative and employment issues. Initially, she had no interest in providing hands-on care herself, and said in her oral evidence that she "actually did not like the idea of old people at that time". The plan was therefore for Tony to employ a suitably qualified manager, although Elaine agreed to cover her absences on holiday because they "felt it was probably better to have a female voice answering the phone".
- On 3 February 2004 Focus was incorporated. Elaine's explanation for taking this step, which I accept, is that although Carewatch had initially been quite happy for franchisees to operate as partnerships, their advice for new starters by this stage was that they should operate through a limited company. She and her father therefore agreed to incorporate the business.
- In March 2006 the initial seven year term of the first Ipswich agreement came to an end. It was renewed by a second agreement dated 26 March 2006 ("the second Ipswich agreement"), in accordance with the then current version of Carewatch's standard franchise agreement. This differed in only minor and immaterial respects from the terms of the first Ipswich agreement. Once more, the schedule said that the location of the premises was to be arranged with the prior written approval of Carewatch. Because this was a renewal, there was no initial fee to pay. The franchisee was now Focus, but the Graces were also parties to the agreement and gave covenants and guarantees (contained in clause 24) that Focus would duly observe and perform all its obligations under the agreement.
- In December 2006 the Graces acquired their third franchise, for the territory comprising the Norwich area. The agreement was dated 18 December 2006 ("the Norwich agreement"). It was in very similar terms to the second Ipswich agreement, and the franchisee was again Focus with supporting covenants given by Tony and Elaine in their personal capacities. Yet again, the schedule said that the location of the premises was to be arranged with the prior written approval of Carewatch. There was an initial fee to pay of £11,500 plus VAT, comprising a licence fee of £8,000 and a fee of £3,500 in respect of software and first year support.
- In September 2008, as I have already said, Lyceum acquired Carewatch from Nestor Health Care Group Plc.
- In July 2009 the first Colchester agreement was renewed, for a further term of seven years. The renewal agreement was dated 10 July 2009, and was in similar terms to the Norwich agreement. I will call it "the second Colchester agreement". The schedule contained the usual description of the premises. No fee was payable.
- In January 2010 Focus purchased the freehold of a former government vehicle testing station in Hellesdon, near Norwich, for £185,100. The property was renamed Focus House, and was then used to run the Norwich franchise business. No steps were taken, however, to have it formally designated as the premises under the Norwich agreement.
- In or about April 2011, Focus began to provide live-in residential care under the separate trading name of Poppy Care and (at least to some extent) with separate branding, including a logo of poppies. This business was always intended by the Graces to fall outside the Carewatch franchise, even though it was carried on by the franchisee company (Focus), its staff never had separate contracts of employment, and no separate financial records were kept for it, with the result that the business was included without differentiation in the accounts of Focus. With a view to establishing the Poppy Care business, Elaine had in March 2011 bought a package of standard form domiciliary policies and procedures from a supplier trading as The Pines Group for £460.
- Unsurprisingly, the Royal British Legion was unhappy about the use by Focus of the trading name Poppy Care, not least because it was the registered proprietor of the trade mark "Poppy" and itself provided care home services under the mark "Poppy Home". After an exchange of solicitors' correspondence, and a fruitless personal appeal by the Graces to the chairman of the British Legion, the Graces reluctantly decided to climb down and to re-brand their business as "Purely Care". On 14 November 2011 they applied to register the UK trade mark "Purely Care" in respect of the following services under classes 43 and 44: "provision of care services, including domiciliary care services and live-in care services".
- Meanwhile, in July 2011 Focus purchased for £260,000 a former shop at 26 Cromer Road, Hellesdon ("the Old Shop") which it then used to run the business of Poppy Care and Purely Care. There appears to have been a period of overlap when both trading styles were in use, but for present purposes nothing turns on this.
- According to Elaine's unchallenged evidence, the Ipswich business was run from four different addresses in Ipswich in succession between June 1999 and February 2008. The same premises were also used to run the Colchester business. In February 2008, Focus took a lease of premises at 1a Norfolk Road, Ipswich, and since that date the Ipswich and Colchester businesses have been run from that address ("Norfolk Road"). The current lease is for 5 years from 6 April 2013, at or slightly below a full market rent, and with the security of tenure provisions in the Landlord and Tenant Act 1954 excluded.
- The second Ipswich agreement was due to expire on 26 March 2013. About two months before, on 29 January 2013, Carewatch's solicitors, who by now were Clyde & Co, wrote to Focus enclosing two bound copies of the proposed renewal agreement for a third term of seven years. This form of agreement incorporated revisions which had recently been agreed following consultation with the CFA and had been circulated to franchisees on 14 January. Clyde & Co said they looked forward to receiving the signed agreements as soon as possible, but recommended "that you should take independent legal advice from a solicitor experienced in franchising before signing the enclosed document".
- On 13 March 2013, Clyde & Co wrote again to Focus explaining that certain further changes to the standard form of franchise agreement had been agreed following a meeting with the CFA on 26 February. A marked up copy of the standard form was enclosed, to show what the changes were. Two bound copies of the proposed renewal agreement for Ipswich were also enclosed, incorporating the recent changes. Focus and the Graces were invited to execute them in the usual way, which they did on 19 April 2013 without having taken legal advice ("the third Ipswich agreement").
- By this date a first tranche of franchisees represented by Mr Pratt, including Mr Wilson and Mr Key, had written termination letters to Carewatch. This development was addressed by Mr Pegler in a communication which was circulated to all franchisees on 14 March 2013. The following extracts cover the main points:
"New Franchise Agreement
We started the consultation on the updated Franchise Agreement on 13 November of last year and after taking into consideration all the points raised and making a number of concessions. The agreement has been drafted by a BFA Affiliate solicitor Clyde & Co and ratified by the British Franchise Association (BFA), representing a fair offer to new and existing Franchisees.
It was not our intention to make any further changes to this new agreement that was distributed to the network on 14 January 2013, however following the discussions with the CFA, it was appropriate to make some minor updates and amendments to the Agreement. Where we felt this was necessary these have been incorporated into the Franchise Agreement that will be offered to all Franchisees …
Franchisee Self Terminations
Unfortunately a small number of Franchisees have decided not to renew their agreements and we received notification letters of self-termination. We were surprised this action was taken, as when a franchise agreement is terminated the Franchisee ultimately has no rights under the franchise or no business to sell.
…
We are keen to support positive Franchisees who want to work with Carewatch to grow their business and develop a positive relationship; sadly this is not the case for everyone. Those Franchisees who want to work collaboratively with us; we have offered them an opportunity to renew the new Franchise Agreement and to withdraw their termination. Those who feel they cannot work with us, we are writing to advise them that we will be [in]voking Clause 22 of the agreement and take over their business in an effort to protect the Carewatch brand and business.
However, we are doing our utmost to speak to the Franchisees in question and make sure they understand the grave positions they have put their businesses and themselves in. Through further discussions, we have been able to convince some of these valued members of the network that remaining part of the network and working collaboratively with us is within their best interests and that of the business as a whole. We will continue to have dialogue with those who have terminated and are hopeful to resolve the situation. We are pleased to confirm over the last three weeks we have now completed 7 new Franchise renewal agreements, 4 of which were Franchisees who had chosen to terminate.
…
On Going Support
To help us provide a more focused level of support to Franchisees, I am pleased to advise you that we are in the final stages of recruiting two new Business Development Managers (BDM) for the franchise team. We will be making sure that these BDM's are seasoned professionals that have the skills and attributes to build solid working relationships whilst adding value to your business …"
- On 8 April 2013 Carewatch announced the appointment of two franchise business development managers, John Wilberforce for the centre and north of the network and Pat Thompson for the south. The three Focus territories fell within Mr Wilberforce's province, and on 1 July 2013 he had a review meeting with the Graces at the Norfolk Road premises. A further meeting between Mr Wilberforce and Elaine took place at Focus House on 23 September 2013, following which Mr Wilberforce sent a report to Elaine on 27 September.
- By this stage Carewatch had become aware of the Purely Care business and its status was being actively discussed in correspondence. On 15 November Carewatch's acting general counsel wrote to the Graces, saying that the operation of the Purely and Poppy Care businesses was a material breach of the franchise agreements and asking for specified remedial action to be taken within seven days. He pointed out that the Norwich agreement was due to expire in December, and that no notice of intention to renew it had been received at least three months before its expiry date, as required by clause 3.1. Warning was given that Carewatch was entitled to terminate the agreement immediately for breach, in which case it would seek to enforce its rights, including the restrictive covenants in clause 22. Nevertheless, he said that Carewatch would prefer "an amicable and commercial solution", as a result of which a further meeting had been requested on 21 November to discuss "the current breach and the renewal process".
- It was on the eve of this meeting, as I have already said, that the Graces instructed Mr Pratt. The meeting took place at Focus House, and was attended by Tony, Elaine, Mr Wilberforce and Carewatch's franchise development director, Mrs Jacqueline (Jackie) Moody-McNamara. The purpose of the meeting, from Carewatch's point of view, was to bring the Purely Care business into the fold, and to receive historical and future payments of management service fees ("MSF") relating to the undeclared business. It was explained to the Graces that Carewatch would be willing to renew the Norwich agreement if the breach was remedied. During the meeting the Graces sought to explain and justify the Poppy and Purely Care businesses, and they also made various criticisms of the level of support provided by Carewatch in recent years. They did not, however, suggest that Carewatch was currently in breach of any of its obligations under the franchise agreements, and still less that they were entitled to repudiate them. Matters were left on the basis that a further meeting would take place on 4 December 2013.
- Before that meeting took place, the Graces wrote to Carewatch on 1 December 2013 giving their answers to certain questions which Carewatch had previously raised in correspondence. Among other things, they acknowledged that the income from Purely Care was not being declared in their MSF submissions; that there were currently eight Purely Care clients, in receipt of 1,512 care hours per week; and that the areas currently serviced by Purely Care were Swaffham, Ipswich, Chelmsford, Norwich, Lowestoft, rural East Norfolk and Diss. Figures were also given for the total revenues of Focus and Purely Care from March 2011 to October 2013. These showed that the total revenue of Focus had been approximately £2 million in each of the 12 month periods from March 2011 to February 2012 and March 2012 to February 2013, while the revenue of Purely Care in those periods had increased from £171,746 in the first to £418,210 in the second. In the eight months from March to October 2013, the revenue of Focus had been just over £1 million, while Purely Care's had been £325,396. These figures suggested that the income of Focus was declining while that of Purely Care was steadily increasing.
- Further detailed discussions took place at the meeting on 4 December, but matters remained unresolved. There was also some discussion of renewal of the Norwich franchise. Carewatch said it could not offer a renewal while the Graces were in breach, but it would be willing to grant an extension while the Purely Care negotiations were continuing. On 13 December Mrs Moody-McNamara rang Elaine, who confirmed her interest in extending the renewal deadline. It was agreed that there would be an extension of a little over one month to Monday, 3 February 2014. On 18 December Elaine emailed Mrs Moody-McNamara asking for confirmation in writing of the extension. This does not seem to have been provided, but there is no suggestion that it had not already been agreed orally.
- There is one further development which I need to mention. On 8 January 2014 a company called Mayfield Care and Therapy Limited ("Mayfield") was incorporated, with Tony's wife, Maria Grace, as a director. On 20 January, two Land Registry transfers in form TR1 were completed, the ostensible purpose of which was for Focus to transfer Focus House and the Old Shop to Mayfield for a nil consideration but with full title guarantee. Each transfer appears to have been signed by Elaine on behalf of Focus, and by Maria Grace on behalf of Mayfield. All the signatures were witnessed by the same person. These steps only make sense, in my judgment, on the footing that this was a misguided attempt by the Graces to place Focus House and the Old Shop beyond the reach of Carewatch. Whether as a result of legal advice or because the Graces belatedly thought better of it, however, no further steps were taken to attempt to register the transfers. Around the same time, alterations were also briefly made to the Purely Care website to indicate that the Purely Care business was being run by Mayfield.
- Under cross-examination, the Graces ended up virtually admitting that the motivation of the transfers and the changes to the website had been to protect the properties and the business of Purely Care, in advance of a further meeting with Carewatch which was scheduled to take place on 23 January 2014. In her written closing submissions, Ms Stevens-Hoare invited me to accept that the Graces' "short lived and incomplete actions in transferring the properties and using the Mayfield website speak of fear and panic rather than calculated breaches of contract and other provisions". My assessment would be rather less charitable than that, but I do not need to pursue the matter further because the transfers were fortunately abortive.
- The further meeting on 23 January duly took place, attended by Mr Pegler and Mrs Moody-McNamara for Carewatch, Tony and Elaine. It is now common ground that it was a without prejudice meeting, and privilege has not been waived. I have therefore heard no evidence about it, or about subsequent without prejudice correspondence between Mr Pegler and the Graces.
- There matters rested until on 31 January 2014, without any prior warning, the Graces sent their termination letter to Mr Pegler.
The witnesses
- The main witnesses for Carewatch were Mrs Moody-McNamara, Mrs Neill and Mr Pegler. Subject to the slight reservations mentioned below, I found each of them to be an honest and reliable witness. In evaluating their evidence, I also need to bear in mind that their involvement with Carewatch is relatively recent.
- Mrs Moody-McNamara joined Carewatch as franchise development director in February 2012. Her main previous experience had been in the hospitality sector, where she worked for 21 years and held senior positions which required her to oversee about 500 independent small businesses – as she said, in many ways not unlike a network of franchises. Immediately before joining Carewatch, she was regional director at Remploy, a specialist employment provider helping those with disability and long-term unemployment. Her role as franchise development director at Carewatch is to support the franchise network, and she spends a lot of time visiting franchisees' offices, either alone or with one of her two franchise business development managers (Mr Wilberforce and Ms Thompson).
- Mrs Moody-McNamara gave her oral evidence clearly and carefully, doing her best to answer the questions put to her. Just occasionally, I felt that her answers were a little defensive, or that she was unwilling to recognise the obvious implications of something which she had accepted. She also found herself out of her depth when asked to comment on the application of the Working Time Directive to live-in care.
- Mrs Neill joined Carewatch as chief operating officer in May 2013, with 11 years' previous experience at director level in the health and social care sector, both public and private. As chief executive officer of Home Choice Care Limited from 2008 to 2012, she had experience of moving in to operate two failing businesses at the request of local authorities, in each case at very short notice. Her task had been to ensure that vulnerable customers were protected and that each business was able to function efficiently during and after the step in process. She also has long-standing relationships with all three of the local authorities who commission services from Focus, that is to say Norfolk County Council, Suffolk Council and Essex County Council. The main purpose of her evidence was to explain that Carewatch is ready, able and willing to step in to operate the franchise businesses carried on by the defendants. She also gave evidence, as I have already mentioned, about Lyceum's future plans for Carewatch. I have no reservations in accepting her evidence.
- Mr Pegler took up his position as chief executive officer of Carewatch in September 2011. He is an experienced businessman, and before joining Carewatch he had over 20 years' experience of senior management in three different industries. Most recently, he had been managing director for hospital operations, and then for business development, with General Healthcare Group, the UK's largest private hospital group. Before that he was operations director for Punch Taverns Plc.
- Mr Pegler gave his oral evidence clearly, precisely and confidently. On one point, I am satisfied that his evidence was a little over-confident. In answer to a question from myself at the end of his cross-examination, he said that where Carewatch has a branch in a territory where there is already a Carewatch franchisee, the branch always trades under a different name from Carewatch. He said Carewatch would like to re-brand those branches under the Carewatch name, "but I am very aware of our franchisees". He then accepted, however, in answer to further questions from Ms Stevens-Hoare, that the branches in question have a presence on the Carewatch website, under their separate brand names, and they also have Carewatch email addresses. On the following day, Mr Pegler was re-called to answer some questions about entries in the Kent Carewatch directory for 2013/2014. He accepted that there was a Carewatch franchisee based in the Ashford and Maidstone area, and that Carewatch also had a branch, called Safe Hands, which had its office in Folkestone and provided some care in Ashford. The directory contained advertisements both by the franchisee and by Safe Hands, the latter of which used the brand name Carewatch in its email and website addresses, and also the Carewatch logo to show that Safe Hands was part of the Carewatch family. Mr Pegler accepted that this had been a cause of concern to the franchisee, who had written to him to complain about it. A number of meetings had taken place, at which Carewatch had indicated that it was not their intention to confuse the public. Mr Pegler said that steps were in hand to brand the entirety of the Safe Hands operation under that name, and the email address had already been changed.
- Carewatch also called one of its franchisees to give evidence, Mr David Sillito. He owns two franchises in Scotland, one for Fife and the other for Stirling. Having started the Fife franchise in 2003, and acquired the Stirling franchise in the following year, Mr Sillito has made a considerable success of both businesses. The annual turnover of the two combined is about £2.5 million, and they employ about 200 staff. Before acquiring the Fife franchise, he had very little knowledge of, or experience in, the care sector. But Carewatch provided him with the necessary training and materials to overcome the initial challenges and establish the businesses.
- In his witness statement, Mr Sillito said this about the restrictive covenants in the franchise agreements:
"15. … To my knowledge these are well-known amongst the franchisees. They are both a burden and a benefit. They are a burden in that we know that we cannot take the Carewatch system, leave the network, re-brand and set up on our own and solicit without a period having elapsed and we know that Carewatch can step-in. But they are also a benefit because we know that our fellow franchisees cannot do likewise. The practical effect is that we share ideas and information and work or pull together as a network which is usually to the greater good. The idea that for years a franchisee has taken advantage of the effect of restrictive covenants and then ignores them when it suits him galls me.
16. I have also been asked about corporate-owned branches. My view is that it does not matter whether the branch is a franchisee or corporate-owned. Provided both are properly run, both push the brand and contribute to market awareness and goodwill which help me recruit new clients. In my experience clients often do not appreciate that my businesses are franchises. They see my business as "Carewatch" and my fortunes are affected by the reputation of the brand and the system. "
I accept this evidence, none of which was challenged in cross-examination.
- Mr Sillito accepted that he had sometimes been unhappy with the support provided to him by Carewatch, and that he had been a member of the CFA for a period, although he left it after becoming concerned about its sense of direction in 2012. Discussions about the proposed new form of franchise agreement had taken place between Carewatch and the CFA, and Mr Sillito had attended a meeting in Taunton at which Mr Pegler and Mrs Moody-McNamara were present. One of the matters discussed at the meeting was a long letter which Mr Pegler had sent, answering the issues raised by the CFA. Mr Sillito found the answers satisfactory, but others disagreed, and there was a difference of opinion about how aggressive the CFA's response should be. Mr Sillito favoured the less aggressive approach, but the question was put to a vote, and the more aggressive approach was approved on the chairman's casting vote. As far as Mr Sillito was concerned, the issue was not just one of the intensity of the approach to be adopted by the CFA, but also one of substance. As he said (page 295 of the transcript):
"It was very difficult, for me, certainly (and a number of others), to find out precisely what the CFA members' concern was as far as Carewatch's performance or responses were."
- Mr Sillito was also asked a number of questions by Ms Stevens-Hoare about 24 hour care on a shift basis, which he provided, and live-in care, which he did not, with a view to establishing that with the limited support provided by Carewatch he would find it impossible to work out a package of live-in care for a client or to implement it. Mr Sillito disagreed, saying (page 307):
"I most certainly could have. I cannot see why that would be a problem."
Again, I accept this evidence.
- For completeness, I should note that Carewatch also relied on a short witness statement of Mr James Seadon, a senior associate solicitor with Field Fisher Waterhouse. Subject to certain redactions, his evidence was agreed and he was not required to attend for cross-examination.
- I now turn to the defendants' evidence. The principal witnesses were Tony and Elaine, each of whom was subjected to a searching but entirely fair cross-examination by Mr Evans-Tovey, for approximately half a day in the case of Tony and nearer to a full day in the case of Elaine. Before coming to their oral evidence, I must first say a word about their witness statements. These were drafted for them by Mr Pratt or persons working under his direction. Unfortunately, scant regard appears to have been paid to the important principle that a witness statement "must, if practicable, be in the intended witness's own words": see PD 32 paragraph 18.1, appendix 9 to the Chancery Guide (January 2013 edition) and the discussion in the White Book, 2014 edition, volume 1, at paragraph 32.4.5. As a result, large tracts of the statements are written in lawyer's language, or contain the fruits of research carried out by Mr Pratt and his team, or set out legal submissions, often in tendentious terms. When these points were put to Tony and Elaine in cross-examination, they readily admitted that they were not the authors of the relevant passages, but said they had discussed them with Mr Pratt and were content to adopt them. That, however, is not the point. Not only is the production of witness statements in this form a clear breach of the rules, but it makes it much harder for the trial judge to assess the credibility and reliability of the witness. Particularly in a case like the present, where there are many other disgruntled franchisees in the background, many of whom have also instructed Mr Pratt, it is difficult to escape the impression that, to a significant extent, the Graces are being used as a front to ventilate the grievances of their colleagues as well as their own. Apart from making my task harder, these deficiencies in their written evidence are liable to undermine their own case, and leave me less disposed than I might otherwise have been to give them the benefit of any doubt.
- That said, Tony gave his oral evidence with considerable charm and good humour, and for the most part with complete candour. He is now 71, and has recently suffered a prolonged period of ill health which left him unable to play any significant role in the business. He would also be the first to agree that his memory is not as good as it once was. I therefore need to treat much of his evidence with some care, even when I feel sure he was doing his best to help me. On a few occasions only, I felt that he was not being entirely frank, and was saying what he thought his lawyers would like him to say, or was trying to put a favourable gloss on something which he thought might damage the defendants' case. In particular, I found his evidence in relation to the Mayfield episode to be evasive and contradictory before he wisely admitted the truth in re-examination.
- Elaine I found to be in general a reliable witness, although at times her understandable desire to advance the defendants' case led her to adopt untenable positions or to draw implausible linguistic distinctions. For example, she refused to accept, in the teeth of much evidence and common sense, that Purely Care competes with Carewatch. Again, she sought to advance the wholly implausible argument that the Carewatch system somehow prevented Focus from providing live-in care safely under the Carewatch banner. She also refused to accept the obvious implications of a business structure chart prepared for the induction of Poppy Care workers which showed the care workers spread across the three Carewatch franchise businesses and Poppy Care. Nor am I able to accept her explanation, or rather non-explanation, of why there are no Poppy Care or Purely Care employment documents in existence, even though the business has been in existence for some three years. She said she knew from her civil service experience that the staff should have written employment contracts, but she had not prepared them. In response to the question "Is that because the carers are employed using the Carewatch name?" she replied "No" (page 505). In my judgment a more truthful answer would have been "Yes", or at least that the employment status of the Purely and Poppy Care staff was deliberately left opaque.
- As an example of unconvincing verbal distinctions, Elaine complained in her first witness statement about a "train the trainer" programme offered by Carewatch in 2012 for a revised Carewatch care worker induction course. She said that the trainer had no care knowledge, she stumbled over her delivery, and was unable to add value or deal effectively with queries from the experiences trainers who attended. In her second statement, she referred again to this training session as having been "unsuccessful". Yet in a contemporary posting on the Carewatch intranet she described the content of the session as "ok". When this was put to her in cross-examination, she first sought to draw a distinction between saying that the training was "ok" and saying that it was "good", and then that the burden of her complaint had been about the delivery, rather than the content, of the training. But that is impossible to square with the assertion in her first statement that the trainer "had no care knowledge". In short, I am satisfied that Elaine's complaint was either unjustified or exaggerated, but she was not prepared to admit this.
- I am afraid I also have difficulty in accepting Elaine's version of events when she said, in relation to the Mayfield transfers, that they were prepared in the heat of the moment, and after she and her father had got them witnessed "then, by the time we got home, we had calmed down and we stuck them in the file and honestly forgot about them" (page 588). I suspect that Tony came a good deal closer to the truth when he said (page 433) that "having taken advice after this, we were told that, you know, you should not do anything with it anyway".
- Apart from Tony and Elaine, evidence was given on behalf of the defendants by Mr Pratt and three franchisees or former franchisees of Carewatch, Mr Wilson, Mr Key and Mrs Angela Mott. There are no issues about the credibility of the three franchisees, and I will refer to their evidence as and when it is relevant. A good deal of Mr Pratt's intended evidence was potentially controversial, in that it appeared to be evidence of opinion rather than fact, when no directions had been given for expert evidence, and Mr Pratt would have been disqualified from acting as an expert because he is conducting the case for the defendants under a conditional fee agreement. In the event, however, the relevant passages in his statements were redacted by agreement before he was called to give evidence, and his cross-examination by Mr Evans-Tovey was relatively brief. In answer to supplementary questions in chief from his own counsel, he explained the process by which Tony and Elaine's witness statements had been drafted. In cross-examination, he confirmed that he was well aware of the rule that witness statements should only contain the evidence of the witnesses themselves in their own words, and apologised if (as in my view is undoubtedly the case) the rule had been infringed.
The Norwich agreement: relevant provisions
- It is agreed that the Norwich agreement may be taken as representative for the purposes of all the issues apart from those relating to competition law. The parties to the Norwich agreement were Carewatch (defined as "the Franchisor"), Focus (defined as "the Franchisee") and Tony and Elaine (together defined as "the Principal").
- The recitals are important, partly because they contain a number of key definitions:
"WHEREAS:-
(A) The Franchisor as a result of extensive research and practical business experience has developed a successful business of the provision of care and support services and training services ("the Business") which is carried on under the name "Carewatch" ("the Trade Name");
(B) The Franchisor has built up a substantial reputation and goodwill in the Trade Name which is associated with the highest standards of service;
(C) The Franchisor has developed specialised care and support services and training services ("the Services") to be supplied by the Business;
(D) The Franchisor is the owner of confidential information on the management and operation of the Business and in methods of conducting marketing and promoting the Business ("the System");
(E) The Franchisor is the registered owner of the trade mark set out in the Schedule ("the Trade Mark") [i.e. the mark "Carewatch"] which is associated with the Services and the Franchisor will licence the Franchisee to use the Trade Mark; and
(F) The Franchisee wishes to acquire from the Franchisor the right to provide the Services and to operate the System in accordance with the terms of this Agreement."
- Further definitions are set out in clause 1.1. They include:
(a) the "Franchisee's Business", defined as "the business of providing care and support services and training services operated by the Franchisee in accordance with the provisions of this Agreement";
(b) the "Manual", defined as "the operating manual of the Franchisor as amended from time to time setting out the way in which the Franchisee shall operate the Franchisee's Business";
(c) the "Premises", defined by reference to the schedule in the way I have already explained, which states that their location is to be arranged with the prior written approval of the Franchisor;
(d) the "Service Fee", defined as 5% of the Gross Monthly Income, which is in turn defined;
(e) the "Term", defined as "the period specified in clause 2.3"; and
(f) the "Territory", defined as the territory set out in the schedule by reference to an annexed map of the Norwich area.
- Clause 2, headed "Franchise Rights and Term", provides as follows:
"2.1 The Franchisor grants to the Franchisee the right:-
2.1.1 to operate the Franchisee's Business within the Territory;
2.1.2 to use the Trade Name and the Trade Marks;
2.1.3 to operate the System;
2.1.4 to use the Stationery and all other material emanating from the Franchisor which is the subject of copyright; and
2.1.5 to provide the Services from the Premises or such other premises within the Territory as may be approved in writing by the Franchisor.
2.2 The Franchisor grants to the Franchisee a non-exclusive licence to use the Software [defined in clause 1.1 in terms which include "any upgrades to or modifications of the Software"] during the Term.
2.3 The Term shall commence on 1 January 2007 and shall be for a fixed period of 7 years (subject to the provisions of clause 21) continuing thereafter if the renewal option set out in clause 3 below has been exercised.
… "
- Clause 3 confers the right to renew the franchise at the expiry of the Term, subject to various conditions, including (by virtue of clause 3.1) that Focus shall by notice in writing to Carewatch, given not more than six nor less than three months before the expiry date, request the Term to be renewed, and (by virtue of clause 3.2.1) that "there have been no material breaches of this Agreement and there are no breaches of this Agreement outstanding" at the date of service of the clause 3.1 notice, or at any time thereafter until the Term expires.
- Clause 4 provides for payment of the Initial Fee set out in the schedule on execution of the agreement, and the monthly Service Fee thereafter.
- Clause 5.1 sets out the material which Carewatch is obliged to provide to Focus before the Opening Date, comprising one copy of the Manual on loan, for use exclusively by Focus and its staff; uniforms; stationery to the value of £1,000; a two week training programme; one copy of the Software in object code form; and a launch and promotion pack. Clause 6 then deals with training, and clause 7 sets out the Franchisor's continuing obligations. The obligations are expressed to be subject to compliance by Focus with the terms of the agreement at all times. The obligations cover matters such as: (clause 7.2) the prompt provision of members of Carewatch's staff for "on site" advice in connection with the System and the Software when reasonably required; (clause 7.3) the provision of advice and guidance on all aspects of the Franchisee's Business, including finance, management, operational and promotional matters, and reasonable problem solving facilities "so as to enable the Franchisee to operate the Franchisee's Business efficiently"; (clause 7.5) the provision of such further training as Carewatch may from time to time reasonably require; (clause 7.7) the provision of products, services and equipment described in the Manual on the terms therein specified; and (clause 7.8) to organise and convene an annual conference.
- Clause 8 then sets out at length the Franchisee's operating obligations during the Term, including:
"8.2.7 not during the term of this Agreement be directly or indirectly interested or concerned in any business except:
8.2.7.1 with the prior written consent of the Franchisor or
8.2.7.2 under the terms of this Agreement or any other agreement with the Franchisor currently in force or
8.2.7.3 as the holder of less than 5% of the issued share capital of a company which does not compete with the Business or with the businesses of other franchisees of the Franchisor.
8.2.8 not directly or indirectly solicit or tout for business outside the Territory;
…
8.3.1 not make use other than exclusively for the purposes of the Franchisee's Business of any information relating to the Business, the Franchisee's Business or any other confidential information supplied by or on behalf of the Franchisor …
…
8.4.3 continuously operate the Franchisee's Business every day of the year, 24 hours a day;
…
8.4.6 be entirely free to determine its pricing levels for the provision of the Services but the Franchisor shall be entitled to recommend the pricing levels to be charged;
8.4.7 sell or provide only such products or services as may be described from time to time in the Manual upon the terms and conditions therein set out;
…"
- Clause 12 contains obligations relating to the Premises, including that they be kept clean and tidy and open to the public during specified operating hours. There follow clauses dealing with staffing, advertising and promotions, trade marks, improvements, the Manual, and the Franchisor's right to communicate with customers.
- Clause 19 deals with sale of the Franchisee's business. Clause 19.1 says that the agreement may not be assigned, but the Franchisee's Business may be sold with the prior written consent of the Franchisor, such consent not to be unreasonably withheld provided that the Franchisee fully complies with various specified terms and conditions. Clause 19.2 obliges the Franchisee to submit to Carewatch a copy of the proposed purchaser's written offer to purchase the Franchisee's Business, and confers a right of pre-emption on Carewatch for the same amount and on the same terms.
- Clause 21 deals with termination. It provides that Carewatch may terminate the agreement immediately by written notice to the Franchisee if, inter alia, the Franchisee fails to operate the Franchisee's Business in accordance with the agreement and fails to remedy such breach (where it is capable of remedy) within seven days, or if the Franchisee "fails to obtain any prior written approval or consent of the Franchisor expressly required by this Agreement".
- Clause 22 is headed "Conditions following Termination". The post-termination restrictive covenants are contained in clauses 22.2 to 22.4, as follows:
"22.2 On termination of this Agreement neither the Franchisee nor the Principal (or any of them) shall:-
22.2.1 for a period of 12 months thereafter engage in be employed by or be concerned or interested directly or indirectly in any business which competes with the Business or the Franchisee's Business or in any business similar to the Business in the Territory;
22.2.2 for a period of 9 months thereafter engage in be employed by or be concerned or interested directly or indirectly in any business which competes with the Business or the Franchisee's Business or in any business similar to the Business within the Territory of another franchisee of the Franchisor and in which a customer of the Franchisee shall have its address or place of business;
22.2.3 for a period of 12 months thereafter indirectly or directly solicit or tout for business from customers who were customers of the Franchisee at any time in the 12 months period prior to termination; and
22.2.4 for a period of 12 months thereafter indirectly or directly solicit, interfere with or endeavour to entice away or employ any employee of the Franchisor or any of the Franchisor's franchisees or any employee which in the period of 6 months before the said termination was an employee of the Franchisee's Business.
22.3 The Franchisee agrees that each of the restrictions contained in clauses 22.2.1 to 22.2.4 is reasonable.
22.4 Each undertaking contained in clauses 22.2.1 to 22.2.4 shall be construed as a separate undertaking and if any one or more of such undertakings is held to be against the public interest or unlawful or in any way an unreasonable restraint of trade, the remaining undertakings shall continue in full force and effect and shall bind the Franchisee."
- The step-in provisions are then set out in clauses 22.6 to 22.8:
"22.6 Immediately upon termination of this Agreement, the Franchisor and/or its nominees shall have the right to enter upon the Premises with such other personnel as it deems reasonably necessary and operate the Franchisee's Business in place of the Franchisee provided that written notice of its intent to do so shall be given to the Franchisee within 7 days following the date of termination. The benefit of the Franchisee's Business shall vest in the Franchisor or its nominee absolutely from the date on which the Franchisee's Business is operated by either or both of them provided that the Franchisee shall be indemnified against liability for any expense of the Franchisee's Business from such date excepting any expense or liability referred to in clause 22.9 below.
22.7 Upon receipt of written notice from the Franchisor in accordance with clause 22.6 above the Franchisee shall take such steps as are necessary to give up possession of and/or transfer to the Franchisor or its nominees any lease of the Premises and the assets of the Franchisee's Business or, if so required by the Franchisor, the obligation to pay for any lease, hire purchase, rent or other charges in relation to the Franchisee's Business. The following items shall be excluded from such transfer unless otherwise agreed by the Franchisor:-
22.7.1 the bank account of the Franchisee and all monies belonging to the Franchisee;
22.7.2 the right to receive the debts of the Franchisee; and
22.7.3 all liabilities of the Franchisee except as otherwise agreed.
22.8 The consideration payable to the Franchisee pursuant to any written notice under clause 22.6 shall be:-
22.8.1 for all materials used in the Franchisee's Business, not itemised in the latest audited accounts of the Franchisee's Business, the current cost price to the Franchisee or the price which was payable by the Franchisee at the date of delivery of the said terms [sic] or the market value as at the date of termination whichever shall be the lower;
22.8.2 for all other items used in the Franchisee's Business the net written down value in the latest audited accounts of the Franchisee or the market value as at the date of termination whichever shall be lower, provided that such items are wholly owned by the Franchisee. If not wholly owned but subject to a lease, hire, hire purchase or other form of rental or credit agreement the Franchisor or its nominee at no cost to the Franchisor may but shall not be obliged to take over the obligations and benefits under any such agreement as from the date of termination of this Agreement … and the Franchisee shall take such steps and execute such documents as are required to complete an assignment or novation as required by the Franchisor."
- Clause 24 contains the covenants and guarantees given to Carewatch by Tony and Elaine in their capacity as the Principal. They include a covenant by each of them to devote their full time, attention and effort to the Business, except as previously agreed in writing with Carewatch.
- Clause 25 contains acknowledgments by the Franchisee, including one in clause 25.2 that the Franchisor:
"… does not give any guarantee or warranty … generally in connection with the sales volume, profitability or any other aspect of the Franchisee's Business."
The step-in clauses: incorporation
- There is an issue about the incorporation into the Norwich agreement (and the other two agreements in force at the date of termination) of the step-in provisions contained in clauses 22.6 to 22.9. The issue is alluded to – it can hardly be said to be properly pleaded – in paragraph 13 of the amended defence, where it is alleged that Carewatch did not draw the attention of the defendants to clauses 22.2, 22.6 to 22.9 and 38.1 to 38.3 (entire agreement). In her closing submissions, Ms Stevens-Hoare made it clear that the issue was being pursued only in relation to the step-in provisions.
- I will deal with the contention briefly, because it is in my judgment a hopeless one both on the facts and on the law, quite apart from the failure to plead it properly. The relevant principle of law is that it may in certain circumstances be unfair or unreasonable to hold a person bound by a written contractual term of an unusual and stringent, or particularly onerous, nature, unless it has fairly been brought to that person's attention: see Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433 (CA) at 438F-439A per Dillon LJ and 439H-445C per Bingham LJ. Questions of this nature typically arise in a consumer context, where the offending provision is hidden in the small print and the consumer has no option but to contract on the proffered terms. The issue may, however, arise in other types of contract, although it is always necessary to have full regard to the context and the respective bargaining positions of the parties.
- I will need to examine the step-in provisions in more detail later in this judgment, but viewed as a whole I do not think they can possibly be characterised as particularly stringent or onerous. They are intended to deal with the position on the ground after the agreement has been terminated, at a time when the franchisee will be prevented by the restrictive covenants in clause 22.2 from carrying on the former business himself. It is clearly essential in such circumstances that there should be continuity in the provision of care, and the general purpose of the clauses is to enable Carewatch to take over the franchisee's business in return for payment of the consideration specified in clause 22.8. The clauses come where one would expect to find them, towards the end of the agreement, under the heading "Conditions following Termination". They are in the same format and typeface as the rest of the agreement, and clause 22 is included in the index at the beginning.
- Furthermore, the Norwich agreement, like its predecessors, was signed by each of the Graces and was the product of a voluntary decision by them to expand their profitable franchise business. They were educated people, with significant business experience. They had entered into agreements containing materially similar terms dating back to 1999, and they had consistently decided to ignore recommendations that they should seek legal advice from a solicitor experienced in franchising before signing any of them. Tony readily accepted in cross-examination that he had read through the first Ipswich agreement with some care before signing it, and that he was aware of the post-termination provisions, including the step-in clauses. When asked whether he was running the incorporation argument for the benefit of other franchisees, he replied (page 333):
"A. No, I have signed the documents, so I have obviously agreed with those clauses in it.
Q. Yes, and you have accepted that they are incorporated in the documents?
A. Yes, of course."
- Elaine was not quite so forthcoming in her oral evidence, but she too accepted that she would probably have read the first Ipswich agreement before signing it, and she appreciated that she was entering into a commercial contract for a minimum term of seven years. She said that she regarded her role in the business as a supporting one for her father, because she still had a full time job of her own. She added, however (page 466):
"So, yes, I signed the agreement, yes, I was part of the business, but I felt the detail of the contract was not particularly relevant to me, which, in hindsight, is probably the wrong thing to have thought."
Issues of interpretation: express provisions
- The following issues of construction arise in relation to the express terms of the agreements:
(1) Do the defined terms "the Business" and "the Services" refer only to the business and the services which had been the subject of research and practical experience by Carewatch, and/or had been developed by Carewatch into a successful business, at the time when each agreement was made?
(2) Does the provision of live-in care fall within the scope of the agreements?
(3) For the purposes of the Norwich and the second Colchester agreements, are "the Premises" Focus House and Norfolk Road respectively?
- There is no dispute about the general principles of contractual interpretation by reference to which these questions have to be answered. The leading cases, at the highest level, are Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 (HL) and Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900. It is enough for present purposes to cite the following brief extracts from the judgment of Lord Clarke of Stone-cum-Ebony JSC (with whom the other members of the Court agreed) in Rainy Sky:
"21. The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.
…
23. Where the parties have used unambiguous language, the court must apply it …"
(1) The meaning of "the Business" and "the Services"
- In reliance on the definitions contained in recitals (A) and (C), the defendants submit that these terms refer only to the business and the services as developed and in existence at the date of entry into each franchise agreement. They deny that either term can embrace further developments or improvements introduced by Carewatch during the currency of the agreement. In short, the submission is that the content of each term is immutably fixed by reference to circumstances as they existed at the date of entry into the agreement.
- I reject this submission, which appears to me to fly in the face of commercial common sense. Although the meaning contended for by the defendants is linguistically a possible one, I find it far more natural to read the relevant recitals as merely descriptive of the current position, and as not carrying any implication that the content of the Business and the Services is, so to speak, set in stone at that date. I cannot think of any sensible reason why the parties would have wished to adopt such a rigid approach, in an agreement which was intended to run for a minimum period of seven years, and when the provision of care and support services and training services were inherently of an ongoing nature and might need to be adapted to changing circumstances.
- This impression is reinforced by a number of specific provisions in the body of the agreement. For example, "the System" is defined as including confidential information on the management and operation of the Business, and clause 7.9 obliges Carewatch to "continue its research and development so as continually to improve the System". Again, the definition of the Manual expressly envisages that it may be "amended from time to time", and clause 7.9 obliges Carewatch to update it. Further, although the definitions of the Business and the Services are, by virtue of clause 1.1, "as defined in the Recitals", clause 1.1 itself provides that the definitions only apply "where the context so admits". For present purposes, the most immediately relevant context is that of the in-term and post-termination restrictive covenants, particularly those contained in clauses 8.2.7 and 22.2. In those contexts, the parties must in my view have intended "the Business" to mean the business as it is carried on by Carewatch at the relevant time, rather than the business as it was historically carried on by Carewatch at the date of entry into the agreement.
- Similar points could be made about a number of other provisions in the agreement. I give two examples. When clause 8.4.6 says that the franchisee shall "be entirely free to determine its pricing levels for the provision of the Services", the reference must be to the services as provided for time to time during the currency of the agreement, not to the services which were supplied on 18 December 2006. Again, the prohibition in clause 8.3.1 on making use of "any information relating to the Business" save exclusively for the purposes of the franchisee's business must in my view have been intended to refer to any information relating to the Business as it existed from time to time.
(2) Is the provision of live-in care excluded?
- As pleaded in paragraph 7 of the amended defence, the contention is put in this way:
"(iii) Until at least March 2012 the Business as advertised by the Claimant was predominantly related to the provision of domiciliary care and did not include live-in care in the services. [I]t is to be inferred the Business as operated by the Claimant also did not include live-in care;
(iv) In about March 2012 the Claimant began to include live-in care in the services it advertised and it may have offered that service through some of its own Carewatch owned offices …"
The defendants therefore accept that, since about March 2012, Carewatch has advertised the provision of live-in care, and may have offered it through some of its branches. This does not provide a promising start for the contention that, as a matter of construction of the agreements, live-in care is excluded from their scope. I should add that the defendants define "live-in care" in their defence as "care provided by a carer who lives in the client's home for a period of days or more or on an indefinite basis". They contrast it with "domiciliary care", which is described as "care provided in the home of the client in the form of attendance by carers for short periods of time, usually 30 minutes or less, and sometimes multiple times a day".
- In my view no trace can be found in the agreements of a distinction of that nature. The agreements refer consistently, either directly or through use of the defined terms "the Business" and "the Services", to "care" and the provision of "support services". Both are wide terms of general import, and they are used without express qualification. I accept the submission of Carewatch that they are apt to describe a type of service, namely care in a person's own home, and are not concerned with the particular structures or systems by which care or support services may be delivered. Domiciliary care is naturally viewed as a spectrum, in my judgment, with live-in care at one extreme and irregular visits of short duration at the other. The relevant distinction is not between live-in care on the one hand and domiciliary care on the other, but rather between all types of domiciliary care, where the client remains in his or her own home, and residential care in a care home. Nor would it make any business sense for a major provider of domiciliary care, such as Carewatch, to draw the line at the provision of live-in care. Not only is such care indistinguishable in effect from the provision of 24 hour care on a shift basis, which everybody agrees would fall within the scope of the agreements, but it might in practice be very awkward to have to explain to a client, in deteriorating health, that live-in care (which is agreed to be much cheaper than 24 hour care) could not be provided. It would in my view require clear words to exclude live-in care from the scope of the agreements, but no such distinction can be found.
- If regard is had to the surrounding circumstances, the contention becomes even more implausible. The 2003 version of the Manual contained references to live-in care, and in 2004 Carewatch's master list of documents included a document headed "Terms of Business for the provision of Live In Care". Furthermore, it is clear from the Graces' own evidence that they themselves provided live-in care, under the Carewatch banner, from about 2003 or 2004 onwards, if not earlier. Tony accepted in cross-examination that they definitely had a few cases of the provision of live-in care by that date, and that they "dabbled in it" thereafter. The position is put beyond any possibility of doubt by client lists disclosed by the defendants in the litigation, which give details of the clients for whom Focus provided live-in care from 2004 onwards. Elaine accepted in cross-examination that all of this live-in care had been provided by Focus under the Carewatch brand, and that Carewatch forms had been used for these clients.
- Against this background, it seems to me regrettable that the defendants should have persisted in the allegation that the provision of live-in care somehow falls outside the scope of the franchise agreements. The truth is that there is nothing in the wording of the agreements which is apt to exclude live-in care, and as a matter of fact such care was consistently provided by the defendants, under the Carewatch brand, from at least 2004 onwards. The provision of such care by Focus was on a relatively small scale, but it was certainly not negligible.
(3) Focus House and Norfolk Road
- The issue here is not so much one of construction of the Norwich and second Colchester agreements, but rather whether Focus House and Norfolk Road are respectively the Premises for the purposes of those agreements, notwithstanding the absence of any prior written approval by Carewatch. There is no dispute that those are the premises from which the two franchises were in fact administered by Focus, following the acquisition of Norfolk Road in February 2008 and of Focus House in January 2010. They were the addresses shown for the franchises on the Carewatch website, and to which correspondence was sent by Carewatch. They were also the addresses shown and used by the defendants on their own promotional material. The suggestion that they are not the Premises for the purposes of the two agreements therefore rests on nothing apart from the absence of prior written approval by Carewatch.
- I will deal with the point briefly, because it is in my judgment entirely devoid of merit. The requirement of prior written approval is one inserted for the benefit and protection of Carewatch alone. It is clear from its conduct that Carewatch did in fact approve the two properties as the premises from which the franchises were to be operated. There is no doubt that they were in fact so operated, and there are no alternative premises which might have been used. Thus it all comes down to the absence of writing to evidence Carewatch's approval. In my opinion this was a requirement that it was open to Carewatch to waive, and which Carewatch has waived by its conduct.
- If that is wrong, I would anyway hold that the parties are estopped by convention from denying that Focus House and Norfolk Road are the Premises for the purposes of the two agreements. Both sides proceeded on the footing that the properties were the places from which the franchises were being operated, and in my view they must thereby be taken to have agreed that they were also the Premises for the purposes of the respective agreements. The alternative, that Focus was throughout operating the two franchises in breach of contract, is one from which Ms Stevens-Hoare did not shrink in her closing submissions, when I put it to her, but is not an intention which I would readily impute to the parties when it was plainly open to them to proceed on the common understanding that the properties were indeed the Premises within the meaning and contemplation of the agreements.
Implied terms
- Paragraph 20 of the amended defence alleges that the nature of the contractual relationship under the franchise agreements "required a significant commitment of time, money, mutual trust, confidence and loyalty between the parties". Paragraph 21 goes on to plead an implied term of each of the agreements, as follows:
"21. Further it was an implied term of each of the Agreements that:-
(i) The purpose of the same was to:-
(a) enable [Carewatch] to carry on business with a view to making a profit as a franchisor; and
(b) enable Focus at the same time to carry on business with a view to making a profit as a franchisee; and/or
(c) enable Focus to build up, retain or realise the capital value of the franchise business or to have something to sell; and/or
(d) work to improve and develop the franchise network for the mutual benefit of [Carewatch] as franchisor and Focus as franchisee.
(ii) [Carewatch] would not derogate from the grant of the franchise in particular by acting or failing to act so that the consequence was the reduction or diminution in the viability or value of the franchise network or the viability, value or marketability of the franchise business operated by Focus;
(iii) [Carewatch] would give the Defendants reasonable notice of any change that would be likely to adversely affect the viability, value or marketability of the franchise business operated by Focus;
(iv) Neither party is entitled to benefit from their own breach of contract or other wrong;
(v) The parties would conduct themselves in a manner which was supportive of and did not frustrate, obstruct or inhibit the purposes of the same;
(vi) The parties would at all times operate the terms of the Agreement on an open and collaborative basis for their mutual benefit and so as to allow them each to maximise profits; and
(vii) The parties would conduct themselves as franchisor and franchisee in good faith and/or dealing with each other fairly and in particular not in a manner that would damage each other's business interests in the franchise businesses operated by Focus under licence from [Carewatch]."
- Counsel for Carewatch prefaced their written opening submissions on this part of the case with two comments. First, the terms alleged to have been implied are far from clear. For example, sub-paragraph 21(i) alleges a multi-faceted purpose which is hardly a contractual term. They might have added that sub-paragraphs (iv) and (v) are essentially propositions of law, and not really contractual terms at all. Secondly, it is not readily apparent how the alleged implied terms are material to the issues in this case. It is not even clear which of them the defendants allege Carewatch to have breached.
- In my view there is force in both these points. As to the second point, the only expressly pleaded breach of any of the alleged implied terms (in paragraph 25(iv) of the amended defence) is of the implied term that Carewatch is not entitled to benefit from its own wrong, which as I have already said is not really an implied term at all. That apart, the allegations of repudiatory breach of contract by Carewatch in paragraph 32, which are repeated but not expanded in the counterclaim, do not refer explicitly to any of the implied terms, or indeed to any of the express terms of the agreements. The closest that the allegations come to a clearly pleaded breach of the implied terms is perhaps to be found in the allegations that Carewatch "was in the process of converting its franchisees' businesses to Owned Offices [i.e. branches]" and "had created a situation where the only possible purchaser of franchisees' businesses" was Carewatch. In these circumstances, I am again left with the strong impression that these proceedings are to a considerable extent being used to promote the wider agenda of Mr Pratt's other clients. But this is not group litigation, or a designated test case, and my task is to concentrate on the pleaded issues between the parties. I therefore decline to be drawn into a lengthy consideration of the law on implied terms, or a detailed examination of each and everyone of the terms pleaded by the defendants.
- The leading modern authority on the implication of terms is the judgment of the Privy Council in Attorney General of Belize v Belize Telecom Ltd [2009] UK PC 10, [2009] 1 WLR 1988: see the judgment of the Board, delivered by Lord Hoffmann, at paragraphs [17] to [27]. This passage powerfully states and illustrates the basic proposition that the implication of terms "is an exercise in the construction of the instrument as a whole" (paragraph [19]). I will confine myself to quoting the first two paragraphs of Lord Hoffmann's exposition:
"17. The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.
18. In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means."
- The Court of Appeal has subsequently confirmed that necessity remains the touchstone for the implication of any term: see Mediterranean Salvage & Towage Ltd v Seamar Trading & Commerce Inc [2009] EWCA Civ 531, [2009] 1 CLC 909, at [15] per Lord Clarke MR. The question which always has to be asked is whether the proposed implied term is necessary to make the contract work: ibid. at [15] and [18].
- I was also helpfully referred by Mr Evans-Tovey to the decision of Dyson J (as he then was) in Bedfordshire County Council v Fitzpatrick Contractors Ltd [1998] 62 Con LR 64, where he declined to imply a term of trust and confidence into a four year highway maintenance contract awarded by the Council to the defendant contractor. After holding that the proposed term did not satisfy the test of necessity, Dyson J said this:
"Secondly, the court should in any event be very slow to imply into a contract a term, especially one which is couched in rather general terms, where the contract contains numerous detailed express terms such as the contract in this case. In my judgment, in such a case, the court should only do so where there is a clear lacuna. The parties in this case took a great deal of trouble to spell out with precision and in detail the terms that were to govern their contractual relationship. The alleged implied term is expressed in broad and imprecise language. I can see no justification for grafting such a term onto a carefully drafted contract such as this."
- This passage was adopted and applied by His Honour Judge Coulson QC (as he then was) in a franchise case, Jani-King (GB) Ltd v Pula Enterprises Ltd and others [2007] EWHC 2433 (QB) at [49]. The term which it was sought to imply into the franchise agreement in that case was that the franchisor would not act so as to destroy or seriously damage the relationship of trust and confidence between the parties. The judge held that no analogy could be drawn with the implied term of trust and confidence in contracts of employment, saying at [51]:
"I am in no doubt that, as a matter of common sense, and on the authorities, the relationship is much closer to an ordinary commercial relationship, than one between employer and employee."
I respectfully agree.
- I was also referred to some observations of Norris J in Hamsard 3147 Ltd v Boots UK Ltd [2013] EWHC 3251 (Pat), where one of the issues was whether there should be implied into a contract for the supply of children's wear to Boots a requirement "that the parties should at all times act in good faith towards one another in relation to the operation of the contract, and approach one another on an open and collaborative basis, so as to ensure that they maximised the net profits generated under the agreement" (see paragraph [4]). Having considered the recent decision of Leggatt J in Yam Seng Pte Ltd v International Trade Corporation [2013] EWHC 111 (QB), [2013] 1 CLC 662, and having held that no "good faith" term of the type contended for could be implied into an interim arrangement reached between Boots and Hamsard, Norris J continued:
"86. I would maintain that view even if the arrangement between Boots and Hamsard is to be regarded as some sort of nascent joint venture in the course of negotiation. I do not regard the decision in Yam Seng Pte Ltd v International Trade Corporation as authority for the proposition that in commercial contracts it may be taken to be the presumed intention of the parties that there is a general obligation of "good faith". I readily accept that there will generally be an implied term not to do anything to frustrate the purpose of the contract. But I do not accept that there is to be routinely implied some positive obligation upon a contracting party to subordinate its own commercial interests to those of the other contracting party. Boots was not obliged as a matter of "good faith" to order from Hamsard goods that it did not want … simply because if it had done so the nascent joint venture would have been more profitable."
Again, I respectfully agree.
- In the light of these principles, the first point to make about the Norwich agreement is that it contains very detailed express terms, dealing with all aspects of the franchised business from its inception to its termination. The agreement is for a commercial relationship, from which both parties hoped to profit, and where both sides had interests of their own to protect. I can find no "clear lacuna" in the detailed provisions of the agreement which has to be filled if the agreement is to work commercially, let alone by terms framed in such wide and imprecise language as those which are pleaded.
- Secondly, many of the proposed implied terms would be inconsistent with express provisions of the agreement. Thus, the acknowledgements by Focus in clause 25.2 include:
"… that [Carewatch] does not give any guarantee or warranty … generally in connection with the sales volume, profitability or any other aspect of the Franchisee's Business …"
and
"that no representation, warranty, inducement or promise, express or implied, has been made by [Carewatch] or relied upon by [Focus] in entering into this Agreement save such as may have been notified … in writing and are annexed to and incorporated in this Agreement."
Again, clause 29 states expressly:
"Nothing in this Agreement shall be construed as making the parties hereto partners or joint venturers or render either party hereto liable for any of the debts or obligations of the other party and [Focus] shall in no way be considered as being an agent, employee or representative of [Carewatch] in any dealings which [Focus] may have with any third party … "
- Finally, at least the first three of the proposed implied terms appear to assume obligations on the part of Carewatch to maintain or expand the scope of its franchise operations in ways that go beyond the express requirements set out in clause 7 of the agreement. But I am wholly unpersuaded that any such obligations would pass the stringent test of necessity, and if pushed to their logical conclusion they would seem to entail the extreme result that Carewatch is obliged either to remain in franchising indefinitely, or to give reasonable notice (of unspecified duration) if it wishes to scale down its franchise business in any material respect. It seems clear to me that any obligation of that nature would have to be stipulated for expressly, and that in the absence of such stipulation Carewatch is free to have regard to its own commercial interests in deciding how to run its franchise business, provided always that it complies with the express terms of its current franchise agreements. Compare the observations of Clarke J in Paperlight Ltd v Swinton Group Ltd [1998] CLC 1667 at 1674-5.
- To conclude, I am satisfied that none of the franchise agreements should be construed as containing the alleged implied terms. In so concluding, however, I do not rule out the possibility that principles of law which are wrapped up in some of the alleged terms (for example non-derogation from grant, and the principles reflected in sub-paragraphs 21(iv) and (v)) may have a part to play in the resolution of disputes between Carewatch and its franchisees.
Issues relating to performance
(1) Breach of contract by the defendants
- It is no longer disputed that Focus breached clause 8.2.7 of the Norwich agreement, and identical or materially similar provisions in the relevant Colchester and Ipswich agreements, by carrying on the business of Poppy Care, and then Purely Care, from about April 2011 onwards. The business was carried on without the prior written consent of Carewatch, and none of the other exceptions in the clauses applies. Focus is therefore liable to pay damages in respect of the breach. The Graces are also personally liable to pay damages by virtue of their covenant in clause 24.1.5 "to observe and perform as Principal all the restrictions and obligations on the part of the Franchisee to be observed and performed under the terms of this Agreement". If it matters, I would also hold that each of the Graces was in breach of the covenant in clause 24.1.4 "to devote his full time, attention and effort to the Business", except as previously agreed in writing with Carewatch.
- The assessment of damages is excluded from the present trial, and their amount must therefore be determined (if not agreed) on a subsequent occasion. I would also reserve to that occasion a fuller inquiry than was conducted before me about the precise nature and extent of the services provided by Poppy Care and Purely Care. I will merely say that I am not satisfied, on the evidence which I have heard, that those services went beyond the provision of live-in care, but I certainly cannot exclude the possibility that they did.
(2) Was Carewatch in repudiatory breach of the agreements?
- I phrase the question in these terms, because the only breach of contract pleaded against Carewatch is that it was in repudiatory breach of the agreements, thereby justifying their termination by the defendants. The alleged breach is pleaded in this way in paragraph 32 of the amended defence:
"32. On 31 January 2014 [Carewatch] was in repudiatory breach of the Agreements and the Defendants accepted that breach and lawfully terminated the Agreements, which termination was caused by [Carewatch's] breach. Further [Carewatch] was in repudiatory breach in that:-
(i) it was requiring the Defendants to enter into a new franchise agreement for Norwich which:
(a) was not a current franchise agreement in that it was not offered to anyone other than an existing franchisee renewing;
(b) was void under the [Competition Act 1998];
(c) expressly permitted [Carewatch] to compete with Focus in the Territory as defined in the agreement offered; and
(d) imposed a minimum level of management fee and was otherwise more disadvantageous to a franchisee;
(ii) had ceased, since at least 2008, to support or develop its franchise business;
(iii) had ceased, since at least 2008, to support or develop its franchise network;
(iv) was in the process of converting its franchisees' businesses to Owned Offices;
(v) was, since at least 2006, providing no support or know how to the Defendants;
(vi) had created a situation where the only possible purchaser of franchisees' businesses was [Carewatch]."
- The above particulars are also relied upon in paragraph 45 of the counterclaim, but again only in the context of an allegation that Carewatch was in repudiatory breach. There is also a claim for damages caused by the alleged breaches. The only particulars of breach given at this stage are as follows:
"The value of Focus' franchise businesses operated pursuant to the Agreements has been reduced by [Carewatch's] breaches. The value of those businesses, as part of a supported and developing franchise network would be in excess of £300,000. If the value of those businesses is confined to the value of the assets it is likely to be less than £50,000."
- In her written closing submissions, Ms Stevens-Hoare made it clear (for the first time, so far as I am aware) that repudiatory breach is alleged on the basis of the implied terms only. Since I have held that none of the pleaded terms is to be implied into the agreements, it must follow that the allegation of repudiatory breach is bound to fail. I will, however, briefly examine the pleaded particulars of breach to see how far (if at all) they are made out on the facts, in case I am wrong about the incorporation of one or more of the implied terms into the agreements.
(i) The Norwich Renewal Agreement
- Under clause 3.1 of the Norwich agreement, Focus had the right to renew the franchise on expiry of the initial seven year term, but only if notice in writing requesting the renewal was given by Focus to Carewatch "not more than 6 months, nor less than 3 months before the expiration of the Term". By virtue of clause 39.2, time was of the essence of this requirement. No such notice was given by Focus before 1 October 2013, from which it follows that Focus had no contractual right to renew the Norwich agreement. Thus, although Carewatch was in principle willing to offer Focus a renewal agreement for the Norwich franchise, if the dispute relating to Poppy Care and Purely Care was resolved to its satisfaction, and although Carewatch was willing to grant an extension of time for this purpose until 3 February 2014, there is in my judgment no answer to the simple point that any renewal agreement offered or concluded would have been outside the contractual scope of the Norwich agreement itself, and therefore could not have breached any implied term in the Norwich agreement. That apart, there is also no way in which a breach of the Norwich agreement, assuming it somehow to be established, could have breached the current agreements for the other two franchises.
- I am also satisfied that, in any event, there is no substance in the features of the renewal agreement which are said to have infringed the Norwich agreement. I will return later to the position under the Competition Act 1998. As to paragraph 32 (i)(a) of the defence, the right which Focus would have enjoyed under clause 3 of the Norwich agreement was to enter into a new agreement in Carewatch's "then current form of franchise agreement": see clause 3.2.3. I can see no reason to doubt that the form of agreement offered by Carewatch to Focus was indeed Carewatch's then current standard form. The fact that Carewatch was not currently offering it to new franchisees is immaterial. There was no different form for new franchisees, and Carewatch was under no obligation to expand its franchise network by recruiting new franchisees. As to paragraph 32 (i)(c), it is true that the agreement on offer expressly permitted Carewatch to compete with Focus in the franchised territory, but nothing in the Norwich agreement precluded the inclusion of such a term in a renewal agreement. Furthermore, there is nothing in the express terms of the existing agreements and their predecessors which prevents Carewatch from competing with the franchisee, and I can see no basis for the implication of a term to prevent such competition. The answer to paragraph 32 (i)(d) is essentially the same. Nothing in the Norwich agreement prevented the imposition of a minimum level of management fee in a renewal agreement, and there is no basis for implying such a restriction.
(b) Support and Development of the Franchise Business and Network
- The allegation in sub-paragraphs (ii) and (iii) is that Carewatch had ceased (my emphasis) to support or develop its franchise business and network since at least 2008. In the light of the documentary and oral evidence, I am satisfied that these allegations are completely untenable. In the first place, no breach is pleaded or proved of any of the detailed obligations on Carewatch contained in clause 7 of the Norwich agreement. Secondly, there is abundant evidence, which it would be tedious and unnecessary to recite in detail, which shows continuing support by Carewatch of its franchise business and network, e.g. by the provision of regularly updated policies and procedures, the appointment of the two franchise business development managers, the holding of business review meetings with franchisees, the operation of a central website, the provision of a Carewatch extranet and franchise forums, the holding of an annual franchise conference, and the provision of training.
- As to development, it is simply not true that Carewatch has stopped franchising. This is shown, for example, by the willingness of Carewatch to offer Focus a new Norwich franchise, even though the contractual entitlement to renewal had lapsed. Furthermore, Mr Pegler gave evidence, which I accept, that although the Carewatch franchise network is now relatively mature, Carewatch is still interested in expanding its franchise market, and was planning to sell four more franchises in 2013. This had formed part of Carewatch's business plan in 2013, and was included in Carewatch's budget for 2014. When asked in cross-examination why, unlike two of its competitors, Carewatch did not advertise franchise opportunities on its website, Mr Pegler explained that the competitors did not yet have a mature network and wished to expand nationally, whereas Carewatch already had near-national coverage and it would be inefficient to place general advertisements on the website when there are only specific parts of the UK where Carewatch wishes to recruit. In any event, development of the network need not entail the recruitment of fresh franchisees in new territories, particularly if the network already covers most of the country. I agree with the submission for Carewatch that a network may develop in maturity and experience, even if it does not develop materially in size.
(c) Conversion of Franchises to Branches
- The figures show that over the last few years the number of Carewatch branches has substantially increased, while the number of franchises has declined. I feel little doubt that this has been the result of a strategic shift in policy, but I am equally clear that Carewatch still intends to retain a substantial network of franchisees, and (where appropriate) to add to it. Mr Pegler explained that the expansion of Carewatch's own business has sometimes caused temporary friction with franchisees, particularly when Carewatch has acquired a small number of multi-site care businesses with a presence in the territories of existing Carewatch franchisees. He said, and I accept, that it is not the intention or policy of Carewatch to compete with its franchisees, and where franchisees have raised concerns about competition from branches, Carewatch has acted quickly in an effort to resolve them. In addition, Carewatch has sometimes had to step in to protect clients and staff, for example in Swansea, Newark, Greenwich and Nottingham, when franchisees have gone out of business following intervention by a local authority.
(d) Provision of Support and Know-How since 2006
- This allegation, contained in paragraph 32 (v), is again not made out on the facts. Most of the evidence relevant to sub-paragraphs (ii) and (iii) is also relevant here. It was helpfully collated by Ms Wakefield in her closing submissions, albeit in the context of the competition law issues. The fact that much of the support and know-how may have been of little use to experienced franchisees like the Graces does not mean that it was not being provided, or that its quality was unacceptably low. Similarly, the fact that the Graces have chosen in recent years not to attend the annual franchisees' conferences organised by Carewatch cannot be taken as evidence that the conferences were of inferior quality, and still less that they involved any breach of contract by Carewatch.
(e) Carewatch as the only possible Purchaser of a Franchisee's Business
- This allegation too is unsustainable. The defendants never even tried to find an external purchaser for any of their franchises, so they are on weak ground when trying to establish that it would in practice have been impossible to find one. Mr Pegler confirmed in re-examination that, if approached by a suitable candidate wishing to take over a vacant territory as franchisee, Carewatch would "of course" not turn them away. I see no reason to suppose that Carewatch's attitude would be any different if asked to consent to the sale of a franchisee's business in accordance with clause 19 of the agreement, particularly as such consent could not be unreasonably withheld. It is true that Carewatch would then have a right of pre-emption which it might choose to exercise; but that is a very different matter from saying that Carewatch is the only possible purchaser of the franchisee's business. Indeed, the right of pre-emption only arises when a suitable external purchaser has been identified and terms have been agreed for the sale.
- For all these reasons, it appears to me that the allegations of repudiatory breach against Carewatch are as hopeless on the facts as they are threadbare in point of law. It follows that the defendants had no justification for their purported termination of the agreements. It further follows that the agreements were validly terminated upon acceptance by Carewatch of the defendants' own repudiatory breach of contract in sending the termination letter of 31 January 2014.
The Restrictive Covenants: Validity at Common Law
- Carewatch wishes to enforce against the defendants the restrictive covenants contained in clause 22.2 of the Norwich agreement, and the identical or materially similar covenants contained in the other two agreements current at the date of termination of the franchises. It is common ground that, as covenants in restraint of trade, they are prima facie contrary to public policy and unenforceable, but they may be enforced if Carewatch can show that they were designed to protect its legitimate business interests and that they extend no further than is reasonably necessary to achieve that purpose. As Lord Macnaughten said in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company [1894] AC 535 at 565:
"It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public. That, I think, is the fair result of all the authorities."
- What will be treated as reasonable depends very much on the nature of the agreement. It is well established that the courts are far more ready to uphold a covenant in restraint of trade in an agreement for the sale of a business than they are in a contract of employment. It has also been consistently held in recent years that a franchise agreement is closer to a vendor and purchaser agreement than a contract of employment: see Dyno-Rod plc v Reeve and Another [1999] FSR 148 at 152-154 per Neuberger J (as he then was), citing earlier observations of Whitford J in Prontaprint v Landon Litho Ltd [1987] FSR 315 at 324 and His Honour Judge Roger Cooke in Kall Kwik Printing (UK) Ltd v Rush [1996] FSR 114 at 119. Neuberger J saw attraction in the analogy drawn by Judge Cooke with a lease of goodwill in the Kall Kwik case, where he had said:
"One way perhaps of looking at a franchise agreement is that this is a form of lease of goodwill for a term of years, with an obligation on the tenant, as it were, to retransfer the subject matter of the lease at the end of the lease in whatever state it is. So to that extent there is an obligation to transfer goodwill in a particular form, which is much more akin, I think, to the goodwill cases than to the servant cases."
- Apart from the provision of goodwill to the franchisee, other legitimate interests which a franchisor may reasonably protect are likely to include its confidential information and know-how, the loyalty of clients of the franchise brand, and the loyalty of employees by whom the franchise system is operated. With reference to goodwill, Dyson LJ (with whom Thomas and Richards LJJ agreed) said this in ChipsAway International Ltd v Kerr [2009] EWCA Civ 320 at [22]:
"… during the term of a franchise, goodwill is built up in the franchise territory with the use of a franchisor's name and branding. Such goodwill is a potentially valuable asset in the hands of the franchisee so long as he continues to trade in the franchise territory, and in the hands of a franchisor at the termination of a franchise agreement. A franchisor's interest in that goodwill is vulnerable to competition from a former franchisee who has knowledge of the area and experience of dealing with particular groups of customers. The commercial purpose of a post-termination covenant against competition is to prevent the franchisee for a period of time from continuing and competing in his former territory in the same line of business so as to enable the franchisor to exploit the goodwill that he has built up during the term, most obviously by recruiting another franchisee for the same area."
- With this introduction, I now turn to the four covenants contained in clauses 22.2.1 to 22.2.4 (the full text of which is set out in paragraph 79 above).
- The first covenant (clause 22.2.1) prevents Focus and the Graces from engaging in, being employed by, or being concerned or interested directly or indirectly in, "any business which competes with the Business or the Franchisee's Business or in any business similar to the Business in the Territory". It will be noted that there are two types of prohibited business: (a) any business which competes with the Business or the Franchisee's Business, and (b) any business similar to the Business. I read the final words "in the Territory" as applying to both of types of prohibited business, and not just to the second.
- There is no dispute that the period of twelve months, and the limitation to the Territory, are in themselves reasonable restrictions in a covenant of this nature. The limitation to a business which "competes" with either the Business or the Franchisee's Business is also in my view reasonable and appropriate: the defendants should not be prevented from carrying on or being involved in a non-competing business, even within the Territory. The areas of controversy, as I understand it, are:
(a) whether the business of Purely Care does in fact compete with either the Business or the Franchisee's Business;
(b) whether the scope of the covenant is extended unreasonably by the construction which I have placed on "the Business"; and
(c) whether the inclusion of "any business similar to the Business" goes further than is reasonably necessary to protect the legitimate interests of Carewatch.
- The first point is essentially a question of fact, but it is convenient to consider it here. I am left in no doubt on the evidence that the business of Purely Care, even assuming it to be confined to the provision of live-in care, does indeed compete both with the business carried on by Carewatch and with the business which was carried on by Focus at the date of termination. I am satisfied that the provision of live-in domiciliary care forms part of the spectrum of services provided by Carewatch; and even if that were not the case, the business of Purely Care would still be a competing one, because it would compete (at the very least) with the provision of 24 hour home care by Carewatch. As to competition with the Franchisee's Business, the concept of competition with a business which is now defunct is admittedly a little strange, but in my view the parties must be taken to have intended a comparison with the business as it existed at the date of termination to the extent that it was carried on by the franchisee under the Carewatch name and in accordance with the agreement. So understood, there is a clear functional correspondence between the prohibited business and the business built up by the franchisee under the agreement. I have already explained why I consider the franchised business to have included the provision of live-in care, and the evidence shows that Focus provided such care under the Carewatch name from at least 2004 onwards. The "competition" test is therefore again satisfied.
- I can deal with the second point briefly. I have construed "the Business" as meaning the business carried on under the Carewatch name as it exists from time to time, and not only as it existed at the date of entry into the agreement. Such a construction does not extend the scope of the covenant unreasonably, because the business is still confined to that carried on under the Carewatch name. Furthermore, it is still limited to the business of providing care and support services and training services. It must also be remembered that the duration of the covenant is only twelve months, so major changes in Carewatch's business are unlikely to take place during its currency.
- I am also satisfied, in relation to the third point, that the extension to "any business similar to the Business" is reasonable. The requirement of "similarity", and the limitation to the Territory, keep it within reasonable bounds. A business which is similar is also almost bound to compete with the Business, so there is force in Mr Evans-Tovey's suggestion that the parties may have intended the requirement of similarity to be a convenient proxy for the measurement of competition. Finally, it is worth noting that in at least two franchise cases similar extensions have been upheld, although it is fair to say without separate argument directed to the point. In Prontaprint, the defendant agreed not to "engage in or be concerned or interested directly or indirectly in the provision of the Service or anything similar thereto", and on an application for an interim injunction Whitford J held that the validity of the covenant was likely to be upheld at trial. In Convenience Co Ltd v Roberts [2001] FSR 35, the relevant covenant extended to "any business similar to or competitive or in conflict with the business". The covenant was struck down by John Mitting QC, sitting as a deputy High Court Judge, but only because its territorial scope was unreasonably wide: see [15].
- The second covenant (clause 22.2.2) is similar to the first, save that (a) it runs for only nine months, and (b) the prohibited competing or similar business must be 'within the territory of another franchisee of the Franchisor and in which a customer of the Franchisee shall have its address or place of business." It is important to note that these last requirements are cumulative, not alternative: the defendants are only prevented from engagement in a competing or similar business in the territory of another franchisee if a customer of Focus has its address or place of business in that territory. According to Carewatch, the only other territory in respect of which that condition is likely to be satisfied is Swaffham.
- In my judgment, this covenant too is reasonable, particularly having regard to its limited territorial scope. A franchisor has a legitimate interest in preventing competition by a former franchisee against its other franchisees, and it also has a legitimate interest in retaining customer loyalty built up by the former franchisee. This clause reflects and protects those interests in a way that seems to me entirely reasonable.
- The third covenant (clause 22.2.3) prevents the defendants for a period of twelve months from soliciting or touting for business "from customers who were customers of [Focus] at any time in the 12 months period prior to termination". This covenant has the straightforward purpose of preserving the loyalty of customers for whom Focus provided care services while trading under the Carewatch name. The period of one year is clearly reasonable. One would not expect a covenant of this type to have a territorial limit because, as counsel for Carewatch aptly put it in their written submissions, loyalty is not area-specific. The covenant is instead kept within reasonable bounds by its relatively short duration and its limitation to those who were customers of Focus within the twelve months before termination.
- Whereas the third covenant is concerned with the solicitation of former customers of Focus, the fourth covenant (clause 22.2.4) is concerned with the solicitation or "poaching" of employees. It has two limbs. The first limb prevents solicitation etc of any employee of Carewatch or any of Carewatch's franchisees. The second limb prevents solicitation etc of any person who was an employee of the Franchisee's Business in the six months before termination of the agreement.
- The defendants do not dispute that the first limb of the covenant is enforceable, and it is enough to say that I agree. The second limb is challenged, however, at least to the extent that it might require Focus (so it is said) to dismiss its own employees. The principal concern, as I understand it, is that the covenant might prevent Focus from continuing to employ, for the purposes of the Purely Care business, those whom it had employed in the franchised Carewatch business prior to termination. In my judgment, however, there is nothing unreasonable in principle about a provision which prevents Focus from employing any former employee of the franchised Carewatch business for a period of twelve months after termination. That business has by definition come to an end, and Carewatch has a legitimate interest in ensuring that the defendants cannot make use of the accumulated knowledge and expertise of the employees of that business for a limited period. If it turns out that this prohibition gives rise to operational difficulties for Focus, because the same staff have been used for both the Carewatch and the Purely Care businesses, that is a problem which it seems to me the defendants have brought upon their own heads by their mingling of the two businesses. It is not something which goes to the reasonableness of the covenant, which must be judged as at the date when the agreement was entered into and in the light of the surrounding circumstances then known to both parties. The agreement clearly envisaged, by its express provisions, that Focus would carry on no business apart from the franchised business, save with the prior written consent of Carewatch, and that the Graces would devote their full time, attention and effort to that business, subject to the same proviso. In that context, the parties cannot objectively be taken to have foreseen the mingling of the franchised business with an unauthorised competing business, and the second limb of the covenant in clause 22.2.4 is therefore unobjectionable.
- In a further note submitted to me after circulation of this judgment in draft, Ms Stevens-Hoare argued that my reasoning in the previous paragraph failed to do justice to the potential width of clause 22.2.4. She submitted that the clause would prevent Focus or the Graces from continuing to employ any of the existing employees at the date of termination, even if such employment were outside the former franchise territories, or if it were an employment within those territories which was neither similar to nor in competition with the franchised Carewatch business. A blanket prohibition of such a nature was plainly unreasonable, she said, because it went significantly beyond any legitimate business interest which Carewatch might have. Further, if that aspect of the covenant were unreasonable, the covenant as a whole would be unenforceable because its scope could not be brought within reasonable bounds by application of a "blue pencil" test (as to which see clause 22.4).
- These contentions were not specifically pleaded in paragraph 26 of the amended defence, and Ms Stevens-Hoare barely touched upon them in her written and oral submissions at trial. I will nevertheless deal with them, and explain why in my view they should be rejected.
- In the first place, so far as Focus itself is concerned, I consider that the covenant is reasonable in its entirety for essentially the same reasons as I have already given in paragraph 139 above. Focus is the former franchisee, and its very name indicates that its main business is the provision of care. It has also carried on the competing and unauthorised business of Purely Care. In view of the express terms of the agreement, I do not think the parties can reasonably have contemplated, when it was entered into, that Focus might be used within the period of twelve months after termination to carry on a wholly unrelated business employing the same staff as had previously been used for the franchised business. Such a possibility is so remote that it cannot be relied upon to stultify the clear commercial objective of the covenant, which is to protect the goodwill of Carewatch and the loyalty of its customers. Nor is there any indication in the evidence that the Graces do in fact intend to use Focus to carry on any such unrelated business and employ existing members of staff in it. The possibility is advanced as a purely theoretical one, in the hope that it might be enough to invalidate the clause as a whole, including the parts of it which serve a clear commercial purpose and are on any view reasonable.
- In my judgment it would be wrong in principle to allow a theoretical possibility of this nature, which the parties could not reasonably have foreseen when the covenant was given by the defendants and expressly acknowledged by Focus to be reasonable (see clause 22.3), to invalidate it. In a rather similar way, as Mr Evans-Tovey points out in his helpful submissions in reply, covenants which restrain the solicitation of former customers are commonly upheld, even though the solicitation is not expressly limited to customers for the provision of the same or similar products or services.
- So far as the Graces personally are concerned, they are bound by the agreement in their individual capacities as the Principal, that is to say the persons who control Focus and through whom (as directors) Focus normally acts. In the context of clause 22.2 as a whole, I would not construe clause 22.2.4 as extending to any steps which the Graces might take, either as individuals or through any new corporate vehicle, to carry on a wholly unrelated business which could not compete in any way with Carewatch. Ms Stevens-Hoare gave the examples of business as a café, garden centre or bookshop. Thus I would not regard it as a breach of the covenant if Tony and Elaine (or either of them) were to set up such a business and employ in it a former employee of Focus, whether in his or her former role (eg as a book-keeper or cleaner) or in a new role. I reach this conclusion as a matter of construction of clause 22.2.4, read in its context. I would only add that, even if my construction is wrong, and such employment would technically involve a breach of clause 22.2.4, I cannot imagine that Carewatch would refuse to give its permission if asked, and still less that it would be so unwise as to seek to enforce it by way of an injunction.
- For these reasons, I conclude that each of the four covenants contained in clause 22.2 is fully valid and enforceable at common law.
The Competition Law Issues
- As refined in argument, the question of competition law which I have to decide is whether the four restrictive covenants set out in clause 22 of each of the agreements, assuming them (as I have held) to be otherwise valid, are nevertheless void because they infringe the Chapter I prohibition in section 2(1) of the Competition Act 1998 ("the Competition Act"). The argument does not directly affect the step-in provisions in clauses 22.6 to 22.9. It is also common ground (and I agree) that, if the covenants in clause 22.2 are void, they can be severed from the rest of the agreement and therefore do not invalidate the agreement as a whole.
- Section 2 of the Competition Act mirrors and gives effect in the United Kingdom to Article 101 TFEU (previously Article 81 EC). So far as relevant, section 2 provides that:
"(1) Subject to section 3, agreements between undertakings, decisions by associations of undertakings or concerted practices which –
(a) may affect trade within the United Kingdom, and
(b) have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom,
are prohibited unless they are exempt in accordance with the provisions of this Part.
(2) Subsection (1) applies, in particular, to agreements, decisions or practices which-
(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development or investment;
(c) share markets or sources of supply;
…
(3) Subsection (1) applies only if the agreement, decision or practice is, or is intended to be, implemented in the United Kingdom.
(4) Any agreement or decision which is prohibited by subsection (1) is void.
…
(7) In this section "the United Kingdom" means, in relation to an agreement which operates or is intended to operate only in a part of the United Kingdom, that part.
(8) The prohibition imposed by subsection (1) is referred to in this Act as "the Chapter I prohibition"."
- By virtue of section 60, the Competition Act is to be interpreted so far as possible consistently with the treatment of corresponding questions arising in EU law in relation to competition within the EU. The court must also "have regard to any relevant decision or statement of the Commission": subsection (3).
- The defendants' case is that the clause 22 restrictive covenants are caught by section 2(1) because they have as their "object… the prevention, restriction or distortion of competition within the United Kingdom". No reliance is placed on the alternative criterion of restriction by effect. It follows, on the basis of settled European law, that if the relevant anti-competitive object is established, there is no need to carry out any factual and economic assessment of the kind required to establish a restriction by effect. Nor is it necessary to examine whether a restriction by object involves an appreciable restriction of competition. As the Court of Justice of the European Union ("the ECJ") held in Case C-226/11, Expedia Inc, at paragraph 37 of the judgment of the Court:
"37. It must therefore be held that an agreement that may affect trade between Member States and that has an anti-competitive object constitutes, by its nature and independently of any concrete effect that it may have, an appreciable restriction on competition."
- It seems to me clear that the restrictive covenants prima facie fall within the scope of section 2(1) on the basis that they may affect trade within (at least) the territories of the agreements, and they have as their object the prevention or restriction of competition within those areas. That, after all, is the whole point of a covenant in restraint of trade. Following termination of the agreements, there would be scope for actual or potential competition between Carewatch (either through its branches, or through replacement franchisees) and Focus in the relevant territories, and the object of the covenants is to protect Carewatch's goodwill by preventing or limiting such competition for a period of twelve months. At first blush, therefore, the Chapter I prohibition would appear to apply.
- Carewatch's primary answer to this is to argue that the restrictive covenants nevertheless fall outside the ambit of Article 101 (and thus outside the Chapter I prohibition) by virtue of the decision of the ECJ in Case 161/84 Pronuptia de Paris GmbH v Pronuptia de Paris Ermgard Schillgalis [1986] ECR I-353, [1986] 1 CMLR 414 ("Pronuptia"). I will call this the Pronuptia defence. If the Pronuptia defence fails, Carewatch's second line of defence is that the covenants are exempt pursuant to section 10 of the Competition Act and the Vertical Agreements Block Exemption. If that defence also fails, Carewatch says that the covenants are anyway exempt under section 9 of the Competition Act.
- I will begin by considering the Pronuptia defence, because if made good it provides a complete answer to this part of the case.
The Pronuptia Defence
- Pronuptia, which was decided in 1986, is the leading judgment of the ECJ on the application of Article 101 to franchise agreements. The Court pointed out (in paragraph 13 of its judgment) that there are many different varieties of franchise agreements. It distinguished in particular between service franchises, under which the franchisee offers a service under the business name and in accordance with the instructions of the franchisor; production franchises, under which the franchisee manufactures products according to the instructions of the franchisor and sells them under his trade mark; and distribution franchises, under which the franchisee simply sells certain products under the franchisor's name. Pronuptia was a case of the third type, and the Court said that its judgment was confined to distribution franchises. The principles which the Court went on to state have, however, been applied more widely to other types of franchise, including service franchises (which is the relevant category in the present case).
- After observing that the compatibility of franchise agreements with what is now Article 101(1) cannot be assessed in the abstract, but depends on the provisions contained in the relevant agreements, the Court said that it wished to make its reply to the questions referred by the German Bundesgerichtshof "as useful as possible" and went on to set out the guiding principles. I will quote the first three paragraphs of this guidance:
"15. In a system of distribution franchises of that kind an undertaking which has established itself as a distributor on a given market and thus developed certain business methods grants independent traders, for a fee, the right to establish themselves in other markets using its business name and the business methods which have made it successful. Rather than a method of distribution, it is a way for an undertaking to derive financial benefit from its expertise without investing its own capital. Moreover, the system gives traders who do not have the necessary experience access to methods which they could not have learnt without considerable effort and allows them to benefit from the reputation of the franchisor's business name. Franchise agreements for the distribution of goods differ in that regard from dealerships or contracts which incorporate approved retailers into a selective distribution system, which do not involve the use of a single business name, the application of uniform business methods or the payment of royalties in return for the benefits granted. Such a system, which allows the franchisor to profit from his success, does not in itself interfere with competition. In order for the system to work, two conditions must be met.
16. First, the franchisor must be able to communicate his know-how to the franchisees and provide them with the necessary assistance in order to enable them to apply his methods, without running the risk that that know-how and assistance might benefit competitors, even indirectly. It follows that provisions which are essential in order to avoid that risk do not constitute restrictions on competition for the purposes of Article 85(1). That is also true of a clause prohibiting the franchisee, during the period of validity of the contract and for a reasonable period after its expiry, from opening a shop of the same or a similar nature in an area where he may compete with a member of the network. The same may be said of the franchisee's obligation not to transfer his shop to another party without the prior approval of the franchisor; that provision is intended to prevent competitors from indirectly benefiting from the know-how and assistance provided.
17. Secondly, the franchisor must be able to take the measures necessary for maintaining the identity and reputation of the network bearing his business name or symbol. It follows that provisions which establish the means of control necessary for that purpose do not constitute restrictions on competition for the purposes of Article 85(1)."
- These two conditions were then reflected in the Court's answer to the first question, in paragraph 27:
"(2) Provisions which are strictly necessary in order to ensure that the know-how and assistance provided by the franchisor do not benefit competitors, do not constitute restrictions of competition for the purposes of Article 85(1).
(3) Provisions which establish the control strictly necessary for maintaining the identity and reputation of the network identified by the common name or symbol do not constitute restrictions of competition for the purposes of Article 85(1)."
- Pronuptia is therefore authority for the proposition that, at least in the context of a distribution franchise, provisions which are strictly necessary in order to protect the know-how and assistance provided by the franchisor, and to maintain the identity and reputation of the network, are not to be regarded as interfering with competition. It is clear from paragraph 16 that such provisions may include post-termination non-compete clauses of reasonable duration. By contrast, as the Court went on to explain, provisions which share markets between the franchisor and franchisees, or which prevent them from engaging in price competition, do constitute restrictions of competition for the purposes of what is now Article 101(1).
- In a subsequent Decision of the European Commission dated 14 November 1988 in the case of ServiceMaster [Decision IV/32.358 (88/604/EEC) OJ 1988 L332/38], the Commission granted exemption for a standard form franchise agreement concerning the supply of housekeeping, cleaning and maintenance services to both commercial and domestic customers submitted to it by an English company. The franchise was therefore a service franchise, as in the present case. On this aspect of the matter, the Commission said (paragraph 6 of the Decision):
" The Commission considers that, despite the existence of specific matters, service franchises show strong similarities to distribution franchises and can therefore basically be treated in the same way as the distribution agreements already exempted by the Commission. This basic premise relies on the fact that the EEC competition rules apply without distinction to both products and services. This does not prevent the Commission from taking into account in individual cases certain specific characteristics relating to the provision of services.
In particular, know-how is often more important in the [supply of services] than in the supply of goods because each service requires the execution of particular work and creates a close personal relationship between the provider of the service and the receiver of the service. Therefore, the protection of the franchisor's know-how and reputation can be even more essential for service franchises than for distribution franchises where mainly the goods advertise the business by carrying the trademark of the producer or distributor. Also certain services, as for instance the ServiceMaster services, are executed at the customer's premises, while goods are usually sold at the premises of the retailer. Services of this type further reinforce the link between the provider of the services and the customer."
- Counsel for Carewatch submit, and I agree, that this passage is highly relevant to the present case, because the provision of domiciliary care is a paradigm example of a service which involves a close personal relationship with the franchisee. It is therefore more important than ever for the franchisor to be able to protect his know-how and reputation once the franchise relationship has come to an end. The particular provisions which the Commission decided fell outside the scope of Article 101 included post-termination non-compete and non-solicitation clauses for a period of one year, the latter extending to customers of the franchisee in the two years before termination. The Commission said in paragraph 11:
"This post-term non-competition and non-solicitation obligation is acceptable both as regards its duration and its geographical extent. This obligation is necessary to prevent the ex-franchisee from using the know-how and clientele he has acquired for his own benefit or for the benefit of ServiceMaster's competitors. It is further necessary to allow ServiceMaster a limited time period to establish a new outlet in the ex-franchisee's territory."
- More recently, the application of Pronuptia to post-termination restrictive covenants in a franchise agreement has been considered by Briggs J in Pirtek (UK) Limited v Joinplace Limited and others [2010] EWHC 1641 (Ch). The franchise agreement in this case was one to carry on business as Pirtek Darlington in the custom manufacture, sale and servicing of industrial hoses, fittings and components within County Durham for an initial term of ten years. The judge commented at [60] that the franchise probably straddled all three classes identified by the ECJ in Pronuptia, but he saw no reason not to apply the guidance given in that case.
- After setting out the relevant paragraphs from Pronuptia, Briggs J said at [50]:
"It is evident, in particular from paragraph 16, that a post-termination restraint on competition may, but will not necessarily, fall outside the purview of section 2, and that this question will depend on whether the post-termination restraint is essential to prevent the risk that know-how and assistance provided by the franchisor to the franchisee will, after termination, be used to aid the franchisor's competitors. The test is in many aspects similar, but not identical, to that which the common law applies to the validity of a post-termination restraint on competition. It is in both cases a necessity test, but whereas the common law considers what is necessary to protect the franchisor's goodwill, Community law addresses that which is essential to protect the franchisor against his know-how and assistance being used by his competitors."
- Briggs J then commented that this is "by no means merely a difference in language", and referred to the decision of the Commission in Charles Jourdan OJ 1989 L35/31, [1989] 4 CLMR 591, where the Commission had held that a post-termination covenant against competition:
"… would not be justified first as the know-how provided includes a large element of general commercial techniques, and second, as this type of franchise is primarily granted to retailers who are already experienced in selling shoes."
- As Briggs J observed at the end of [51], this shows that the Commission:
"… took seriously the need to distinguish between know-how of a general type provided to experienced retailers, and know-how specific to the franchisor's way of business, together with training provided to those without prior experience. In both cases it may be supposed that a similar legitimate need might exist to protect the franchisor's goodwill, but that formed no part of the Commission's analysis."
- Briggs J then referred to Kall-Kwik Printing (UK) v Bell [1994] FSR 674, where Harman J had considered the application of the Pronuptia defence to an allegation that a post-termination restrictive covenant fell foul of Article 81, and had concluded that the defence was bound to succeed. Briggs J said at [53], and I respectfully agree, that in the light of both Pronuptia and the Commission's decision in Charles Jourdan it is necessary to adopt "a more cautious, case-specific, analysis".
- It is of some interest to see how Briggs J then applied his approach to the facts. Pirtek (UK) had gone to great lengths to frame its standard franchise agreement in a way that appeared to maximise the extent and value of its provision of know-how and assistance to its franchisees, and the defendant Mr Vickers (the owner of Joinplace) had given an untruthful warranty that without the benefit of the Pirtek system he would have been unable to run or participate in any similar or competing business. Before becoming a franchisee, Mr Vickers had in fact, for no less than thirteen years, been an employee, first of Pirtek and then of one of its franchisees. His case was therefore that he had, in reality, learnt little either about the system or how to run a Pirtek business under his subsequent franchise agreement.
- Although Briggs J saw some force in this argument, he rejected it, holding at [56] that the question should be tested, not by reference to the language of the franchise agreement, but rather "by reference to the evidence as to the know-how and assistance which was in fact routinely provided by Pirtek (UK) to its franchisees, both generally and to Joinplace in particular." Adopting this approach, the Judge was satisfied that a post-termination restraint on competition was "amply justified". The know-how and assistance provided by Pirtek to its franchisees:
"… extended to technical assistance (both to principals and staff), business management assistance, including in particular the expensive and complicated IT system and, in the form of the Operating Manual, included a comprehensive description of the way in which to run a business which would be attractive to customers. Mr Vickers was taken through this in cross-examination, and he agreed with substantial parts of it, albeit saying that in certain respects he had no particular need for it himself."
- A further way of expressing the relevant test was neatly encapsulated by Briggs J when he said at [59]:
"Once it is established that, taken as a whole, the know-how and assistance provided by a franchisor to a franchisee and (in the present case) its principal is of an extent and type likely to turn that franchisee or principal into an effective competitor of the franchisor, it is in my judgment quite inappropriate then to conduct a minute assessment of the question whether a particular franchisee could somehow devise a similar and competing business after termination which might minimise the extent of the prior provision of know-how and assistance by way of contribution to his competitiveness."
- If, as in my view it should be, the approach of Briggs J is adopted to the evidence in the present case, I feel no real doubt about the conclusion to which I should come. The know-how and assistance provided by Carewatch to Focus and the Graces, viewed retrospectively as at the date of termination, was clearly of an extent and type likely to turn them into effective competitors of Carewatch. I will not set out the details, which I have already summarised when dealing with the defendants' allegations of repudiatory breach. The Graces started from scratch in 1999, with no prior knowledge or experience of the care business. Over the next 15 years, they used the know-how and assistance provided to them by Carewatch to build up a thriving business which by the date of termination was turning over approximately £2 million per year. Their establishment of the unauthorised Poppy Care and Purely Care business shows only too clearly their potential to be effective competitors of Carewatch. It was precisely in order to prevent conduct of that kind that the in-term and post-termination covenants against competition were included in the agreements. In my judgment, the post-termination covenants in clause 22 clearly satisfy the Pronuptia requirements, and the defence therefore succeeds.
The Other Defences
- In view of the clear conclusion to which I have come on the Pronuptia defence, I do not propose to deal with the other two defences relied on by Carewatch. Each of them involves questions of some difficulty, and I am also satisfied that proper consideration of the defence under section 9 of the Competition Act would require a much fuller examination of the relevant facts and law then has been possible in this expedited trial. If necessary, I would therefore have adopted the fall-back position of each side and directed a further hearing to resolve that issue.
The Step-in Provisions
- The general nature and purpose of the step-in provisions in clauses 22.6 to 22.9 are in my judgment reasonably clear. Upon termination of the agreement, Carewatch has the right, but is under no obligation, to enter the Premises and operate the business in place of Focus. Notice of intention to exercise this right must be given within seven days of termination. This was duly done by Field Fisher Waterhouse's letter of 4 February 2014. Thereupon, at least as a matter of contract between the parties, the benefit of the Franchisee's Business (as defined) vested in Carewatch or its nominee absolutely.
- Following receipt of the letter of 4 February, Focus was obliged by clause 22.7 to "take such steps as are necessary to give up possession of and/or transfer to [Carewatch] or its nominees any lease of the Premises and the assets of the Franchisee's Business". The only items expressly excluded from such transfer, unless otherwise agreed by Carewatch, are (a) the bank account of Focus and all monies belonging to Focus; (b) the right to receive the debts of Focus; and (c) all liabilities of Focus, except as otherwise agreed. The reference to "any lease of the Premises" is clearly apt to cover the lease of Norfolk Road, from which the Ipswich and Colchester franchise businesses were being run. Equally clearly, however, the wording does not catch the freehold interest in Focus House, which I have held to be the Premises for the purposes of the Norwich agreement. It follows that Focus House is not caught by the obligation in clause 22.7 unless it falls within the words "and the assets of the Franchisee's Business". I will return to this point below.
- Clause 22.8 then stipulates the consideration to be paid by Carewatch for the materials and items used in the Franchisee's Business. Items wholly owned by Focus which are included in the latest audited accounts of the Franchisee's Business are to be paid for at their net written down value, or (if lower) their market value at the date of termination: clause 22.8.2. If such items are not wholly owned by Focus, but are subject to a lease, hire, hire purchase or other form of rental or credit agreement, Carewatch has the option to take over the benefit and burden of the agreement as from the date of termination, subject to completion of the necessary assignment or novation: ibid. The price to be paid for materials used in the business which are not itemised in the latest audited accounts is specified in clause 22.8.1, in a formula which is not free from ambiguities but in broad terms equates to cost or market value if lower.
- The latest accounts of Focus are those for the year ended 28 February 2013, which were apparently approved by the board (that is, Tony and Elaine) on 26 June 2013. The tangible fixed assets include freehold land and buildings shown at cost in the sum of £462,732. According to the accounting policies shown in note 1 to the accounts, land and buildings are not depreciated. As I have already said, Focus acquired the freehold of Focus House in January 2010 for £185,100 (paragraph 34 above). The purchase was funded by a mortgage of £126,000 from HSBC, of which £77,428 is still outstanding. According to an informal indicative valuation obtained by Tony from an estate agent in March of this year, the current value of the property is likely to be around £250,000. The Graces are therefore understandably concerned that they would suffer a substantial financial loss if they were compelled to transfer Focus House to Carewatch at its cost value, as shown in the latest accounts. If the indicative value is broadly correct, their loss would be of the order of £65,000 on the assumption that Carewatch also took over the mortgage, and more than twice as much if Carewatch could somehow take the property unencumbered and leave the outstanding mortgage debt with the Graces.
- On a fair reading of the step-in provisions, I do not consider that Focus House is caught by clause 22.7 of the Norwich agreement. There is no lease of Focus House which could be transferred, and, as a matter of construction, the words "and the assets of the Franchisee's Business" are in my judgment naturally read as referring to assets other than the Premises. This construction gains support, in my view, from clause 22.8, where the references to "materials" and "items" used in the business would not naturally include the premises from which the business is conducted. It seems to me that the parties simply failed to provide for the possibility that the Premises might be freehold premises owned by the franchisee. Had they done so, it would objectively be a most improbable intention to impute to the parties that Carewatch should be entitled to purchase the property on termination for its historic cost value shown in the accounts. Nor, it seems to me, is it necessary to include a compulsory transfer of Focus House in order to give business efficacy to the step-in provisions. The defendants are still obliged to give up possession of Focus House, at least to the extent necessary to enable Carewatch to take over and run the former franchise business. For that purpose, Carewatch needs no more than a licence to occupy the property. It will probably also be necessary to obtain the consent of the mortgagee. Alternatively, it is of course open to the parties to agree a sale of Focus House, at an appropriate price.
- If, contrary to what I have held, Focus House should be treated as an asset of the business under clause 22.7, I would in any event be inclined to hold that the price payable for it under clause 22.8.2 is its market value at the date of termination. It does not have "a net written down value" in the accounts, because it is shown at cost without any depreciation.
- Ms Stevens-Hoare also had an argument based on section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, but in view of the conclusions which I have reached on the construction of the step-in provisions it is unnecessary for me to consider it.
Conclusion
- For the reasons which I have given, I consider that all the defences raised by the defendants fail. Carewatch is entitled to injunctive relief to enforce both the restrictive covenants in clause 22.2 and (subject to what I have said about Focus House) the step-in provisions in clauses 22.6 to 22.9. Carewatch is also entitled to damages against all three defendants.
- Counsel should do their best to agree a suitable form of order before this judgment is handed down. Any remaining points of detail can be dealt with on that occasion, or if necessary at a subsequent hearing to deal with consequential matters.
