Francotypp–Postalia Limited v Whitehead [2011] EWHC 367(Ch)
This case involved a dispute between franchisor and franchisee relating to the "Restricted Area" in post termination covenants. It was defined in the non-compete covenant as not only the Territory (i.e. the franchisee's previous territory) but also the territories of the franchisor's other franchisees and distributors. The franchisor acknowledged that the definition of Restricted Area was too wide to be enforceable, so it proposed to validate it by applying the blue pencil test to take out all reference to areas other than the Territory.
The High Court (Peter Smith J) reviewed the case law and approved the 3 condition test set out in previous cases for a contract to remain effective after severance of the provision:
- the unenforceable provision must be capable of being removed without the necessity of adding to or modifying the wording that remained,
- the remaining terms must continue to be supported by adequate consideration and
- removal of the unenforceable provision must not so change the character of the contract that it became "not the sort of contract the parties had entered into at all".
The requirement of consideration was satisfied. Furthermore, the blue pencil test could be applied to the non-compete covenant on its own. But he refused to sever the offending area in the definition to save the non-compete covenant. The problem was that, although Restricted Area was defined in the non-compete covenant, the term was used in non-solicitation and other restrictive covenants. The scope of other covenants would be modified by any change to the definition, which meant that the first condition (no modification) was not satisfied – even though they were enforceable without the change in the definition. The Judge indicated that severance would also infringe the third test, i.e. the contract would be radically different if the changes were made.
The Judge indicated that if the definition had been set out in each clause, the problem would not have arisen. There was a standard severance clause, but he said merely that it did no more than repeat the common law blue pencil test.
This case demonstrates the importance of ensuring that any provisions which might be found to be unenforceable should be separated as far as possible from other provisions and, in particular, should not drafted so as to be interdependent.
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