When a Franchise Agreement Restraint Clause has no effect
By Marian Ngo, Lawyer, MST Lawyers
Franchise Agreements generally contain restraint of trade clauses which prevent franchisees and guarantors from competing with the franchisor, during the term of the franchise agreement and for a particular time after the franchise agreement comes to an end, within a particular geographical area. However, clause 23 of the new Franchising Code of Conduct (“Code”) renders a restraint of trade clause unenforceable at the end of a franchise agreement if certain conditions have been met. MST has put together a simple flow chart which provides a general overview of when a restraint clause may be deemed ineffective due to clause 23 of the Code. To view this flow chart please click HERE.
It is important to note that even though a restraint of trade clause has not been rendered ineffective by virtue of clause 23 of the Code; such clauses are only valid and enforceable where the restraint is reasonable. Reasonableness is determined by considering the interests of the parties. The restraint must not go further than protecting the franchisor’s legitimate interests and must not be injurious to the public.
Further, there may be dispute between the parties as to whether the conditions of clause 23 of the Code have been met, for example, whether or not the franchisee is in breach of the franchise agreement. Franchisors and franchisees should seek independent legal advice regarding the practical effect of the restraint provisions in the franchise agreement and the application of clause 23 of the Code.