When was the last time you actually stopped to think about your restraint of trade clause? Be honest — it’s probably been a while. Many franchisors haven’t read theirs since the day it was first drafted. Some couldn’t even say what it covers, let alone whether it would hold up if ever tested.
The thing is, restraints of trade aren’t just another boilerplate clause. In the franchise world, they’re one of the few tools that truly protect your goodwill, brand and confidential know-how once a franchisee walks out the door. Yet we still see plenty of franchisors relying on outdated or poorly drafted restraints that wouldn’t survive a challenge.
The good news is that it’s never too late to revisit your restraint and make sure it actually does what you think it does.
The law – let’s start with the basics
Restraint of trade law in Australia is a mix of common law principles and state legislation. The starting point is simple enough: any clause that restricts a person from trading is presumed void unless it can be shown to be reasonable.
Courts ask whether the restraint goes no further than reasonably necessary to protect the legitimate interests of the franchisor — things like system goodwill, confidential information, client connections and brand stability. Beyond that, it becomes an unreasonable restriction on a person’s right to work.
In New South Wales, the Restraints of Trade Act 1976 (NSW) gives courts a little more flexibility. If a restraint is too broad, a judge can “read it down” to make it reasonable rather than striking it out completely. But in other states, there’s no such safety net — if it’s unreasonable, it’s gone.
There are two main types of restraint you’ll see in a franchise agreement. The first is a non-compete clause, which stops a former franchisee from running a competing business within a set distance and time after leaving. The second is a non-solicitation clause, which prevents them from approaching your customers or staff. Both can be enforceable — but only if drafted with precision and restraint.
Why one size doesn’t fit all
A restraint that might be reasonable in one industry can be completely unrealistic in another. Courts look closely at the commercial context. For example, in highly competitive or common industries like cafés, gyms or hair salons, it’s very difficult to justify a far-reaching restraint. There are simply too many similar businesses and too little at stake in terms of unique goodwill. By contrast, a specialised medical or professional service with distinct client relationships may justify a longer or wider restriction.
Public interest also plays a role. The law doesn’t want to unreasonably limit a person’s ability to earn a living or reduce consumer choice. A franchise network that only operates in one or two suburbs would struggle to justify a restraint covering an entire state. Courts expect the restraint area and duration to reflect the real footprint of the network — not what the franchisor might one day aspire to achieve.
Where franchisors get it wrong
At Magnolia Legal, we review franchise agreements day in, day out. Some restraints are excellent: concise, commercially sensible, and likely to hold up in court. Others… not so much. Here are the most common missteps we see.
Too many cascades
Franchisors love a cascade. It’s the idea that if the court doesn’t like a five-year, 50-kilometre restraint, it can fall back to three years and 20 kilometres, or one year and ten kilometres, and so on. On paper, it seems clever. In practice, it often reads as overreach.
Take the example of a small café. A restraint that covers the whole of Australia for five years will never be enforced — and including those sorts of extremes can actually hurt your case. It signals to the court that the franchisor didn’t turn its mind to what’s genuinely necessary.
Ambiguous terminology
Ambiguity is the quiet killer of restraint clauses. We often see wording like “a business selling similar or the same products as the franchised business.” It sounds fine until you test it.
If your Mexican QSR sold bottled water, does this clause stop the franchisee from opening a doughnut shop that also sells water? On a literal reading, it could. The law, of course, wouldn’t enforce something that absurd — but the ambiguity gives the former franchisee room to argue that the whole clause is unreasonable. Once you open that door, enforceability weakens.
A good restraint defines the activities that are genuinely competitive, not every conceivable overlap.
Trying to bind non-parties
Another common issue is overreach through association. We still see restraints written to bind not only the franchisee but also their spouse, children, relatives, or even “any person associated with them.”
Under the doctrine of privity of contract, that doesn’t fly. You can only bind the contracting parties — the franchisor, the franchisee, and any guarantor. If you’re worried about family-run competition, the better approach is to define what “involvement” means (for example, prohibiting the franchisee from holding an interest in a competing business through another person), rather than trying to bind third parties directly.
The unfair contract terms overlay
Even if your restraint passes the reasonableness test, there’s now another hurdle — the unfair contract terms (UCT) regime under the Australian Consumer Law. Since late 2023, unfair terms are not just void, they can attract civil penalties.
The ACCC has made it clear that franchisors are squarely in focus. A restraint clause can be considered unfair if it creates a significant imbalance between the parties, isn’t reasonably necessary to protect the franchisor’s legitimate interests, or would cause detriment to the franchisee if enforced.
The Back in Motion Physiotherapy case earlier this year is a good example. The ACCC alleged that the franchisor’s restraint terms were unfair because they stopped former franchisees from working as physiotherapists near their previous clinics for extended periods — even if the clinic had closed, or if the franchisee had left the network on good terms. The restraints also applied to wide geographic areas and long durations, effectively preventing former franchisees from continuing their profession.
Following the ACCC’s intervention, Back in Motion agreed to remove the terms and amend its agreements. The regulator’s message was clear: franchisors can’t rely on blanket, one-size-fits-all restrictions to protect their networks. The restraint must be proportionate to the risk being managed. In practice, this means time and area limits that reflect real commercial justification, not just a desire to deter competition.
The takeaway for franchisors is straightforward: just because your restraint might scrape through at common law doesn’t mean it will survive scrutiny under the unfair contract terms regime.
What franchisors should do now
If it’s been a while since you’ve reviewed your franchise agreement, start with your restraint clause. Ask yourself: does the duration, area and scope make sense for your business? Is it tied to real commercial risk, or is it a leftover from an old precedent? Can you explain, if asked, why those numbers were chosen? If the answer is “not really”, it’s time for a refresh.
When redrafting, keep it clean, clear and defensible. Use specific definitions. Avoid inflated radiuses and timeframes. Don’t try to cover every eventuality — just the ones that actually matter. And consider how your clause would look through the lens of the new UCT laws.
If in doubt, have someone experienced in franchising law stress-test it. A few hours of review now can save months of dispute later.
How Magnolia Legal can help
At Magnolia Legal, we help franchisors across Australia review, update and strengthen their franchise documentation — not to make it longer, but to make it stronger. If your restraint clause hasn’t had a health check in a while, now is the time to take a look. Get in touch with our team to arrange a fixed-fee review and ensure your restraint of trade provisions are clear, compliant and enforceable.