Question
of the week Question of the week

Curious. Interesting. Informative.

24 June 2016

Restrain yourself

Business / Franchise Sale & Purchase, Trade Marks
Federal

Asked

Dear Mentor

Our client signed a franchise agreement in 2012. The franchise agreement is terminating at the end of 2016.

In late 2015, our client requested the franchisor to extend the terms of the franchise agreement but the franchisor refused as it intends to continue operating the franchise on its own account. No goodwill will be paid by the franchisor to our client upon termination.

The franchise agreement contains a restraint of trade clause preventing our client from operating similar trade within 4 years and within 4 kilometres of any franchise premises.

Immediately upon termination, our client intends to set up a similar trade within the 4 kilometres radius of the franchise premise.

Does clause 23 of the new franchise code of conduct apply despite the franchise agreement having been entered in 2011?

What would be an effective manner of documenting the non-application of the restraint of trade in any termination agreement?

Many thanks.

Answered

Thanks for the question.

Clause 23 of the code, which was introduced with other amendments on 1 January 2015, does not apply to agreements made before that date. Whether the restraint is enforceable will depend on the application of the normal legal principles concerning restraints - that is, whether it is reasonably necessary to protect the legitimate business interests of the franchisor. See, for example, Masterclass Enterprises Pty Ltd v Bedshed Franchisors (WA) Pty Ltd [2008] WASC 67 (13 May 2008).

If agreement is reached to the effect the restraint will not apply following termination, it is best documented in a deed - probably a deed of termination of franchise - that includes a clause such as 'the franchise agreement is varied by deleting clause X'.

Regards

Mentor