English High Court rules that damages are not an adequate remedy for breach of franchise agreement

On 20th August 2021, in Senior Care at Home Ltd (t/as Right at Home UK) v Adult Home Care Ltd, a franchisor was granted an interim injunction seeking delivery up and restraint of trade orders against a franchisee in a claim for alleged breaches of the franchise agreement.

In granting the application, the court held that damages would not be an adequate remedy for contractual breach in the context of a franchise model as to do so would be seen as a "green light" to the other franchisees to break their contracts. 

Facts 

Senior Care at Home Ltd ("Senior Care") is the franchisor of the "Right at Home" brand that provides domiciliary care in the UK.

In May 2017, it entered into a 10-year franchise agreement with the first defendant ("Adult Home Care"), which entitled it to trade under the "Right at Home" name in certain postcodes within the Swansea area of South Wales.  The agreement granted Senior Care extensive termination rights for material breach by Adult Home Care, as well as imposing restrictive covenants on Adult Home Care. 

The second defendant ("D2") was the sole director and shareholder of Adult Home Care and the responsible individual for the purposes of social care regulation in Wales.

In the Spring of 2021, concerns were raised by the local council regarding the performance of Adult Home Care and the behaviour of D2 following a number of whistleblowing allegations by staff, including some relating to medication compliance issues.

As a result of the local council's concerns, Senior Care began its own investigation into Adult Home Care.  In spite of D2s assertion that the issues raised in the allegations ought to be put in context of the problems in the care industry generally and the effects of the Coronavirus pandemic, Senior Care concluded that the allegations against Adult Home Care and D2 were well founded, and terminated the franchise agreement on 5^th July 2021.

In its application for delivery up and restraint of trade orders, Senior Care asserted that the matter was a straightforward case of breach by Adult Health Home of its obligations under the franchise agreement.  It also claimed that the local authority had no confidence in the defendants, which was important as half of the client base in the Swansea area came from local authority contracts. It argued that franchise agreements involved particular features of contract law which provided them with more protection than in general commercial contract.  It also asserted that, since a franchise operated as a branch of the franchisor's business, which was held on trust, the courts should be careful to uphold the franchisor's rights where they had been breached.

In response, Adult Home Care argued that interim relief would be inappropriate given the dispute of fact between the parties. It asserted that the restrictive covenants were not binding, as Senior Care was in repudiatory breach of the franchise agreement (which it had accepted), and that there were issues relating to the construction of the restrictive covenants themselves.  In particular it argued that:

• damages would be an adequate remedy particularly bearing in mind the sector involved;
• the balance of convenience favoured the continuation of care for the service users; and
• the local authority by that stage had a considerable degree of confidence in the provision of care that it provided.

Judgment

The court granted Senior Care's application for delivery up and restraint of trade orders.

Serious issue to be tried

The court found that there were a number of serious issues to be tried, including as to whether:

• Adult Home Care was in breach of the franchise agreement;
• Senior Care was in repudiatory breach of the agreement by terminating it; and
• Adult Home Care and D2 were bound by the restrictive covenants.

 The court also found that there were serious issues to be tried on the construction of some of the other clauses in the franchise agreement.

Adequacy of damages

The court held that damages would not be an adequate remedy for the franchise model.

The court found that the point of a franchise was to enable the business to be conducted in the franchisor's name and, therefore, it was important for that interest, and the franchisor's name and modus operandi, to be protected.

It also determined that it was important for a franchisor to be seen to be able to police its brand and franchise effectively and that finding damages to be an adequate remedy would be seen as a green light to the other franchisees to break their contracts.

With regard to the current application, the court held that the alleged breaches by the defendants went to the heart of the franchise operating model and purpose of the franchise, and for that reason alone damages would not be an adequate remedy. It also found that, in any event, there might be issues over the defendants' ability to meet any damages awarded.

Balance of convenience

The court found that the balance of convenience was firmly with Senior Care in light of the seriousness of the issues to be tried, the strength of the evidence against the defendants and the role of Senior Care in providing reputable care under its franchises for those in need of domiciliary care.   The court also noted that the local authority, which appeared as an interested party in the application, was ready to take any steps necessary to ensure continuity of care for the affected service users.

Comment

The court's ruling and, in particular, its unambiguous findings in relation to the adequacy of damages and balance of convenience will reassure franchisors seeking to protect the reputation of their brand and franchise network against franchisees who fail to maintain the standards they have invested considerable time, money and effort in establishing.

This ruling is the second time in just over a year that a court has found in favour of a franchisor and rejected damages in favour of injunctive relief in relation to alleged breach of contract by a franchisee.   In July 2020, in the case of Winkworth Franchising Limited v Calum Alexander Mason & Stilum Properties Limited, the franchisor of a well-known estate agency was granted an application for an interim injunction preventing a franchisee from operating a competing business in breach of post-term restrictive covenants in two franchising agreements.  In this case, the court held that damages would not be an adequate remedy on the grounds that neither the trading losses nor the damage to its reputation and goodwill which Winkworth would suffer in the absence of the interim injunction could easily be quantified.  In addition, as in the recent Senior Care case, the court was not satisfied that the defendants had the means to meet any damages awarded.