Deductions - derogation from grant - franchise agreements - injunctions - repudiation - restrictive covenants
(1) Jeffrey Stone (2) Lynn Ashwell (T/A Tyre 20) v Fleet Mobile Tyres Ltd: CA (Civ Div) (Lords Justice Keene, Wall, Wilson): 31 August 2006


The appellants (T) appealed against an injunction restraining them from soliciting or touting for business, for a period of one year, any person who had been a customer of the respondent (F). T also appealed against the dismissal of its counterclaim for damages against F.



F provided tyre-fitting services and conducted most of its business by entering into franchise agreements with persons who then operated a mobile tyre-fitting service. F also operated a Web site that set out the prices for supplying and fitting various types of tyres, branded eTyres.



Customers would place orders through F, who would then contact the relevant franchisee. F made deductions from the Web site price before passing the work on to the franchisee. F had entered into two franchise agreements with T, which were in similar terms.



T were instructed to promote the eTyres brand by changing the livery of their vehicles. T complained to F about the deduction of money from the eTyres price, in excess of the agreed 6%, and demanded repayment. T also demanded that F should permit T to continue to trade and promote F's non-eTyres work, which was allegedly more profitable for them.



F denied any breaches of the agreements and, on discovering that T were making plans to trade in competition with it, F terminated the agreements. T continued to trade in a way that would have breached the restrictive covenant under the agreements if the covenant were effective.



The judge held that the deductions were not unlawful because each offer of an eTyres job to a franchisee was an ad hoc offer of work that did not count as gross sales because they were not regulated by the terms of the agreement, and that F had not been in breach of its duty not to derogate from the grant of a franchise. F submitted that the price paid by the customer was not part of the franchisee's business; what was part of it was the lesser price at which the franchisee had agreed to do the work, and the grant of the right to operate the franchise business under the trade names was subject to terms that gave it the right to require T to change the livery of their vehicles in order to promote the eTyres brand.



T submitted that F had wrongly repudiated the agreement and therefore they were discharged from the obligation under the restrictive covenant clause.



Held, the franchisee was not a sub-contractor where eTyres work was concerned. Such work was part of the franchised business, and the franchisee was not selling to F, but to the customer, albeit by way of F's Web site. Consequently, the franchisee's gross sales included the eTyres sales to those customers at the prices paid by those customers.



F was entitled to its 6% on those amounts under the agreement, which would normally be done by way of deduction received by it from those customers. However, it was not entitled to deduct any greater amount and had to account to the franchisee for the remainder of those payments by the customers. By deducting sums for eTyres work greater than it was entitled to under the agreement, F was in breach of the agreement.



Accordingly, the agreements with T were wrongfully repudiated by F. T were discharged from their obligation under the restrictive covenant clause and were entitled to the sums wrongfully retained by F and to an account thereof.



F's instructions would have prevented T from effectively promoting the non-eTyres aspect of the business they had purchased. The vehicle livery would have been dominated by the eTyres name and telephone numbers, as would the business cards. The name to be advertised would only be eTyres. Yet eTyres was a part of the business where the prices to the customer were set by F, not by T, as contemplated by the agreement.



The non-eTyres work was clearly intended to be a significant part of the business. The agreement, when read as a whole, could not be construed as entitling F to impose such far-reaching restrictions on T's ability to promote that part of the business where T set the sale price directly with the customer. F's instructions would have substantially impeded T's exercise of their rights under the agreements, had T accepted such instructions.



Therefore, F was acting in breach of the agreement in a manner sufficiently fundamental as to amount to a repudiation, which T were entitled to and did accept, Esso Petroleum Co Ltd v Addison (2003) EWHC 1730 (Comm) applied. In the circumstances, the injunction was discharged and the counterclaim allowed.



Appeal allowed.



Geraldine Andrews QC, Mark Engelman (instructed by Mitchiners) for the appellants; Nigel Jones QC, Graham Cunningham (instructed by Borneo Linnells) for the respondent.