Franchisors need to protect their business from ex-franchisees, for their own sake and for the sake of their other franchisees. Restraining ex-franchisees from competing with the franchise is not straight forward. The question I often get asked is, are they ever enforceable?
The answer is yes, but you really do need a carefully crafted contract. The courts won’t enforce a restraint unless they are convinced it is reasonable. What is reasonable depends on the circumstances of your business and the particular franchise.
There is no hard and fast rule. However, you can go a long way by applying the principles from past court cases and complying with the Franchising Code of Conduct.
So, here are our 9 Top Tips for creating enforceable restraints against franchisees:
- The restraint must protect genuine and legitimate interests of the Franchisor.
- The scope, time frame and area of the restraint should be just enough to protect those interests.
- Consider making a payment to the franchisee, but absolutely make a genuine payment to the franchisee for goodwill if clause 23 of the Franchising Code of Conduct applies.
- Use cascading clauses, listing varying time frames, areas, conduct and interests you are looking to protect. This will allow a court to strike out the unreasonable parts but allow the reasonable restraints to continue.
- The restraint clause also needs to capture all of the capacities of the person/s you are trying to restrain – acting either directly or indirectly, or with others, as a company, individual, partner, director, employee, consultant etc.
- Don’t rely solely on the restraint clause if you can help it. Use strong separate clauses/agreements to protect as much of your interests as possible. For example, use a separate confidentiality clause/agreement or a Deed of Re-entry to get possession of important premises when the franchisee leaves.
- Require all Franchisees to get independent legal, financial and business advice before they sign up to the restraint.
- Actually negotiate the restraint with the Franchisee and keep records of it.
- And last but not least, the best tip really is to get solid legal advice and have a restraint clause drafted that is tailored to your circumstances.
When was the last time you had your franchise documents comprehensively reviewed and updated? Maybe it’s time to have a chat with me about how I can help set you and your business up for success and avoid costly and unnecessary disputes.
About the Author:
Steve Milicevic, owner of Milicevic Lawyers, specialises in Franchising and Commercial Law. Feel free to get in touch with him at:
P: 1300 55 88 03