Agency, distribution, supply and franchise agreements – Law firm

The enforceability of non-competition restrictions after the termination of an agency, distribution or franchise agreement can be an important factor in deciding what to do in many situations.

With two recent Court of Appeal judgments on the subject, do we now have clear guidance on what is and what is not reasonable with respect to the duration and extent of such restrictions?

Judgments

Credito

Credico Marketing Limited v Lambert concerned a marketing company (Credico) entering into a number of agency agreements – known as “commercial agreements” – with a series of agents who would provide marketing services to clients.

The Credico agreements contained two non-competition clauses. The first prohibited the agent (in this case, Mr. Lambert) from working for someone else during the term of the agreement. The second was a post-termination restriction not to work for someone else for a period of six months after the agreement was terminated.

Credico justified these non-competition restrictions by pointing to the confidential information provided and the time spent training agents, as well as the money spent to help agents become profitable and successful.

The Court of Appeal decided that the post-termination restriction was unenforceable. Essentially, the fact that commercial support had been provided during the term of the agreement with Mr. Lambert did not constitute a legitimate commercial interest that had to be protected after the agreement ended.

In addition, the information acquired through the specialized training was deemed not sufficiently special and the Court of Appeal compared the knowledge and skills acquired to the position of employees who would learn and develop skills while employed by a company.

Dwyer

Dwyer v Fredbar concerned a franchise agreement for specialist drainage services and in this case the Court of Appeal followed the judgment in Credico.

In particular, the Court of Appeal was concerned with the respective bargaining power between the franchisor and the franchisee and specified that the inequality of power “when it exists is not only relevant but constitutes the important factor in determining reasonableness”.

In this regard, the Court of Appeal departed from the established position that a post-termination non-competition restriction of 12 months or less that protected a legitimate business interest would be enforceable. On the other hand, previous judgments had not dealt with equality of bargaining power.

What do these judgments mean for agency and franchise agreements?

Whereas Credito focused on agency agreements and Dwyer with a franchise agreement, what is clear from the judgments of the Court of Appeal is that equality – or lack thereof – of bargaining power will be a key factor in determining, both for agents and franchisees, the reasonableness of post-termination non-competition restrictions and therefore their enforceability provided there is a legitimate business interest to be protected.

Meanwhile, for non-competition restrictions operating during the life of an agreement, the test remains whether the restriction does no more than is reasonable to protect a legitimate business interest.

However, it should be remembered that the starting point at common law is that an agent owes a duty of loyalty to his principal, which entails fiduciary duties to put the principal’s interest before his own interest and that of the principal. ‘a third. Curiously, the Court of Appeal of Credito ignored the common law position.

What do these judgments mean for distribution deals?

In distribution agreements, the common law position is that the supplier and distributor owe an implied duty of good faith to each other so long as this reflects the parties’ presumed intention and the relevant context in which the agreement has been reached.

For distributors, this implied duty may, in some respects, be considered comparable to the fiduciary duty of an agent. However, the failure of the Court of Appeal to Credito consider the common law position in determining the applicability of non-competition restrictions to a distributor?

With regard to distribution (and franchise) agreements, it is also important to bear in mind that following the entry into force on June 1, 2022 of the block exemption order for vertical agreements; if a non-competition obligation is essential to protect know-how, it may be enforceable under competition law.

Take home points

  • While the Court of Appeal for each of Credito and Dwyer decided that non-competition clauses that applied while agreements were still in effect were enforceable, it is always the principal, the franchisor and, by extension, the supplier in a distribution agreement that is responsible for ensuring that these non-competition clauses are reasonable and do no more than necessary to protect legitimate business interests.
  • In contrast, the provision of training and business support services provided during the term of an agreement will no longer warrant a non-competition clause after termination. Instead, the issue will be equality of bargaining power.
  • It is always good for the principal, supplier and franchisor to be sure that the non-competition restrictions in agency, franchise, distribution and supply agreements will apply. But the tests that will be applied to determine applicability are different depending on whether the restrictions are to apply during the term of the agreement or after it has ended.
  • As such, the non-competition restrictions in the agreements used as precedents should be checked and possibly rewritten.
  • With regard to commercial agency agreements, it is important to bear in mind the provisions of the Commercial Agents Regulations which relate to the applicability of non-competition restrictions after termination. These restrictions of non-competition will only be valid if they are in writing and relate to the geographical area or group of customers and the geographical area entrusted to the commercial agent, as well as to the nature of the goods covered by his agency under the contract.

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If you have any questions about these issues relating to your own organization, please reach out to a member of the team or speak with your usual Fox Williams contact.