Understanding ‘Restraint of Trade’ Clauses In Franchise Agreements

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Table of Contents

• Why are ‘restraint of trade’ clauses important?
• When do they apply?
• What happens if you breach this clause?
• How are these clauses enforced?
• How do you draft these clauses?
• Conclusion

In almost every case, a franchise agreement will feature a ‘restraint of trade’ clause aimed at stopping the franchisee from entering into competition during or after the agreed term. In other words, a franchisee may be prevented (for an agreed period of time) from launching a business that could compete with the franchise. It also means that, at the end of the agreement, the franchisee cannot simply set up a new shop in that location and start removing the signage and other identifying marks of the franchise.

Why are ‘restraint of trade’ clauses important?

It goes without saying that much research and investment goes into building up the goodwill of a franchise. These clauses are used to safeguard the commercial value of the franchise’s reputation and industry knowledge. It also allows the franchisor to find and inaugurate another franchisee following the previous franchisee’s departure.

The restraint covers the entire term so that, during the agreement, the franchisee cannot simply start competing with the franchise by copying their well-established model and using their exclusive trademarks. On top of this, and understandably so, the franchisor wants the franchisee to invest all of their efforts into building the image and system of the franchise model.

When do they apply?

Restraint of trade clauses are usually effective for a set time period and will only be enforceable over a designated region. More often than not, they will restrict a franchisees ability to poach existing customers or staff of the franchise network. If you decide, after the term of the agreement has expired, that you’d like to operate a competing business, you can only do so outside the restricted region. At the expiry of the restraint clause, you will be entitled to operate any competing business in the previously restricted area, as long as the competing business does not, at any stage, seek to use the trademarks or trade secrets that you were exposed to during the term of the franchise agreement.

What happens if you breach this clause?

Upon breaching a restraint of trade clause, the franchisor is entitled to take you to court to prevent you from continuing to breach the agreement. You may have to pay damages for any financial loss the franchisor may have suffered. At this point, you should get the advice of a franchise solicitor as to your rights and options. In breaching a restraint clause, you may also be made to pay the legal costs of the franchisor, which can be substantial.

How are these clauses enforced?

Ordinarily, these clauses are enforceable through the courts. A franchisor would seek an injunction (a court order stopping you from continuing to breach the restraint clause) and this would prevent you from continuing trading in this manner. It’s very important you don’t ignore an injunction order, as this can have very grave consequences, including gaol!

How do you draft these clauses?

Most franchise solicitors will use the phrase ‘prima facie void’ when they draft these restraint clauses. This just ensures that the clause is only enforceable to the extent that is necessary to safeguard the interests of the franchisor. This means courts will look at the clause and decide whether it will have any effect to protect the legitimate business interests on the franchisor.

Conclusion

In summary, many of these restraint of trade clauses will be enforceable. If you’re unsure whether you’re in breach of a restraint clause, then you should contact LegalVision on 1300 544 755 and speak to a franchise solicitor to make sure you are not liable.