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Franchise Agreement Termination Triggers Trade War

The acrimonious termination of commercial contracts can lead to outbreaks of fierce competition and mutual bad-mouthing which affect customers and enter the public domain. That was certainly the case following the end of a franchise agreement in the postal franking machines market.

A company which manufactured franking machines supplied them to clients in the UK via a network of franchisee distributors. When a franchisee identified a potential customer, the company would sell a machine to the franchisee which would in turn sell or lease it to the customer. The customer would sign a direct debit form and an open-ended and fixed-price maintenance agreement with the company.

Following termination of the company’s agreement with two franchisees, the latter began writing to customers, telling them that their machines required urgent renewal and urging them to sign new direct debit mandates in their favour, rather than that of the company. The franchisees were alleged to have falsely told customers that this would not affect their current contracts and would have no cost implications.

The company launched High Court proceedings alleging malicious falsehood, and obtained a broadly-drawn interim injunction against the franchisees, restraining them or their agents from, amongst other things, making false, misleading or inaccurate statements relating to the company’s business.

The franchisees challenged the order before the Court of Appeal and the company acknowledged that the order was too wide in its effect. In re-drafting the order in more restricted terms, the Court noted the freedom of expression rights of the franchisees, who argued that their statements to customers were justified.