Home > News > Post-Contractual Restraint Clauses in Franchise Agreements Update: Narellan Franchise Pty Ltd v RBME Pty Ltd (No 2)

Post-Contractual Restraint Clauses in Franchise Agreements Update: Narellan Franchise Pty Ltd v RBME Pty Ltd (No 2)

Spread the love

By Cherry Mitry, Law Clerk and Alicia Hill, Principal

Introduction

On 22 November 2022, Justice Parker of the Supreme Court of New South Wales delivered a judgement on the matter of Narellan Franchise Pty Ltd v RBME Pty Ltd (No 2).[1] This decision follows interlocutory proceedings that were heard in June, as discussed in our previous article, where Narellan Franchise Pty Ltd successfully obtained an interlocutory injunction to enforce competition restraints. The effect of these was to prohibit RBME Pty Ltd (‘RBME’) and its owners from carrying on a similar business (‘Competition Restraints’).

Background

The Narellan Pools Group (‘Narellan’) were a corporate group which operated a franchise business in which they sold and installed fibre glass swimming pools for consumers.

Among its franchisees was RBME which was owned and controlled by Mr Tim and Matthew Ranieri (‘the Ranieris’).

A franchise agreement – which contained contractual Competition Restraints – was executed between the parties to give effect to the franchisor-franchisee relationship.

Following a deterioration in relationship, the franchise agreement was not renewed beyond 31 May 2022. Nonetheless, the Ranieris continued to operate a pool installation business through another company which they own, called T&M Pools Pty Ltd (‘TMP’).

Issues

The issue to be determined was whether the Competition Restraints clauses were enforceable, such that Narellan could obtain an injunction which would have the effect of restraining the Ranieris from operating a similar pool installation business for one year beyond the expiration of the agreement.

Decision

The Court held that the Competition Restraints in the franchise agreement were unenforceable, on the basis that they were an unreasonable restraint on trade allowing RBME and the Ranieris, to carry on their other business.

Reasons for Judgement

Justice Parker commenced by assessing the market for pool installation by way of background. It was noted that the pool-building market was a competitive one, in which there are low barriers to entry, with at least 80 competitors in the Sydney jurisdiction.

His Honour then identified that the Restraint of Trade Act 1976 (NSW) had application in this case. A two-stage test concerning the restraint of trade doctrine in this Act was outlined. This would entail assessing:

  • whether, as a matter of construction, the Ranieris’ conduct breaches the covenants in the franchise agreement; and
  • whether the restraint on competition in the franchise agreement ‘goes no further than is reasonably necessary to protect’ Narellan’s interests.[2]

In the first stage of the test above, the Court construed key terms in the agreement, giving meaning to each term, in light of established contract law principles. The analysis undertaken by the Court are particular to the contract presented in this case.

In this matter, Competition Restraints were found to apply to the installation of any in-ground pool which extends beyond the fibre-glass pools market that the franchisor had operated in. The Competition Restraints were also found to apply to shareholders and directors of companies personally involved in carrying on business, which captured the Ranieris involvement in TMP.

In the second stage of the test, Justice Parker considered the reasonableness of the restraint. It was observed that any goodwill that had been built up in connection with the franchisor’s marketing and name would be valuable to a franchisee beyond the expiration of the franchise agreement. As such, a franchisor would have an Interest in this goodwill, that is to be safeguarded by a temporary restraint on competition.

However, his Honour reasoned that, in this instance, Narellan did not purchase any goodwill of the business.

Upon the expiration of the agreement, the Ranieris:

  • were required to relinquish possession of customer information belonging to Narellan;
  • could not use Narellan’s name or brand;
  • could not use customer leads; and
  • were required to return confidential information of Narellan upon the expiration of the franchise agreement.

Any goodwill that had been built up during the period of the franchise agreement was derived from the skill, labour and experience of the Ranieris and their company, and not through Narellan, who they had merely paid to operate under their name.

The effect of these findings was that Narellan as franchisor, did not establish ‘a sufficient interest to justify a restraint on competition…after the end of the franchise agreement’.[3] [199].

In the alternative, Justice Parker found that the one-year duration of the restriction on competition was not reasonably necessary to protect Narellan’s interests, as two weeks was a sufficient protection to allow for a new franchisee to be trained.

His Honour then turned to consider the contracts that had not been completed before the expiration of the franchising agreement, where the Ranieris had sought to convince customers to substitute to non-Narellan pools.

Justice Parker’s decision turned on the particular facts of this case, finding that these Competition Restraints were also unreasonable.

In the alternative, as a discretionary remedy, the Court was not prepared to grant an injunction restraining the Ranieris from competing with Narellan, as doing so would cause hardship to customers that had entered into these agreements.

Takeaways

This case exemplifies the uncertainty that may arise when franchisors seek to enforce post-contractual rights which restrain competition with the franchise business.

Franchisors must be aware that merely accepting payments for a franchisee to operate under its name will not alone be a sufficient interest to warrant protection under a Competition Restraint clause.

In this case where the franchisee uses its own effort or skill to generate business, the Court was reluctant to ascribe a legitimate interest to the franchisor which justifies protection. This effort or skill can take the form of promotional activities or marketing carried out by the franchisee resulting in courts declining to enforce the Competition Restraints clauses in a franchise agreement.

[1] Narellan Franchise Pty Ltd v RBME Pty Ltd (No 2) [2022] NSWSC 1590 (‘Narellan’).

[2] Ibid [136], citing Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343, 356 [61]–[62] (Gleeson JA, Bathurst CJ agreeing at 345 [1], Beazley P agreeing at 345 [2]).

[3] Narellan (n 1) [199].