Restraint Clauses in Franchise Agreements
Franchise agreements often include restraint clauses or non-compete clauses aimed at restricting the franchisee and related parties during a prescribed restraint period and within a prescribed restraint area.
The restraint may be worded something like: The Franchisee, its directors and shareholders shall not during the Restraint Period and within the Restraint Area, be involved in another business or company (either directly or indirectly as an owner, partner, director, officer, consultant, representative, agent, licensee, or investor) where that other business could be regarded as a market competitor or identical with or similar to the Franchised Business"
The restraint period could include the term/period of the Franchise Agreement and a certain number of months or years after termination.
The restraint area might be a certain kilometre radius from the site of the Franchise Business.
Despite such express restraints the general position is as follows:
provisions in franchise agreements which impose restrictions on a person's freedom to engage in trade or employment are illegal and treated as unenforceable (unless they are demonstrated to be reasonable in respect of the interests of the parties);
the onus is on the party relying on the restraint to prove the restraint is reasonable;
what is reasonable will depend on the circumstances.
Reasonableness of Restraint
When assessing reasonableness:
the courts will first consider whether there is a 'legitimate interest' or interests that require protection and;
if so, the courts then assess whether or not the restraint does not more than is necessary to protect that interest.
If the restraint goes beyond what is necessary then it will not be considered reasonable.
So, keep in mind that irrespective of what is actually stated in a franchise agreement - the key issue is whether the stated restraint is reasonable.
Under most franchise agreements the franchisor may seek an injunction where there has been a breach of the restraint obligations by the franchisee under the franchise agreement.
Injunctions are orders made by the courts either restraining or requiring performance of a specific act in order to give effect to the legal rights of the applicant. An injunction that prevents a course of action is said to be prohibitive in nature, and this is the traditional essence of injunctive relief - it commands cessation of a wrongful act.
Generally, for a franchisor to succeed with an injunction application the franchisor (“applicant”) would:
need to show that the franchisee has breached their restraint obligations; and
have to establish that damages (monetary compensation) are an inadequate remedy.
For further information or assistance with your Franchise Agreement, contact Greyson Legal | Franchise Lawyers.