What is a Restraint of Trade Clause?

A Restraint of Trade clause is often included in a Franchise Agreement so that the Franchisor can stop the Franchisee from entering into competition during or after the term of a Franchise Agreement (‘Agreement’). This prevents the Franchisee from starting a business that competes with the Franchise.

In general, franchise agreements are very specific in relation to how a party can terminate an agreement and when this can occur. For example, upon termination, an Agreement may require a Franchisee to hand over the intellectual property and various business-related materials of the Franchise.  These items can include client lists and other confidential information, along with intellectual property and information as to the business system. Along with these obligations, an Agreement will also normally provide that the franchisee is restrained from acting in a way that is damaging or detrimental towards the franchisor’s reputation and the franchise brand and restrain the Franchisee from working in and/or owning a similar business for a specified period of time.

When restraint of trade clauses go too far

Sometimes the restraint of trade clause in a franchise agreement is very strict and can restrain a former franchisee from engaging in competition with any franchisees in the entire franchise system or working within a specified industry or within a specified geographic area.

Imagine you have skills in baking and you have just exited a nation-wide franchise that specifically focuses on baking. This would make work opportunities very limited. If the franchisee breaches this restraint of trade, it can result in legal action against the franchisee by the franchisor.  However, not all franchisors will choose to enforce the restraint of trade clause.

Legal advice is crucial

The lesson to take from this is that it pays to consult a franchise lawyer before entering into a franchise agreement with restrictive clauses, noting that such agreements are commonly for 5 to 10 years.

There are many issues that warrant close and careful consideration, particularly those that impact you after the franchise relationship has come to an end.  Your franchise lawyer can advise you about these clauses and help you consider an effective and protective exit strategy.

Conclusion

In summary, it is important to scrutinise every provision of the franchise agreement closely, especially those that have the potential of impacting franchisees after the end of the franchise relationship. Once the agreement is signed and the franchise has commenced, it can be impossible to amend the agreement.

Get in contact with one of our experienced franchise lawyers today. We can provide you with a full review of the franchise agreement and the disclosure document and advise on any clauses that should be negotiated with the franchisor.  A small outlay now can give you peace of mind in years to come.

Lachlan McKnight

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