When entering into a franchise agreement, it’s common to focus on the big-ticket items—the brand, the fees, the support offered. But one clause that often deserves far more attention than it gets is the restraint of trade clause. Almost all franchise agreements contain some form of restraint, and both franchisors and franchisees should take the time to understand what these clauses mean, how they operate, and whether they are likely to be enforceable.
General Position
In Australia, the starting point is that restraints of trade are prima facie void. That means they are presumed unenforceable unless the party seeking to rely on the restraint—typically the franchisor—can show it is reasonably necessary to protect a legitimate business interest. These interests may include things like the protection of goodwill, confidential information, or the franchise system itself.
Restraint clauses often have two key components:
- Non-compete clauses: These prevent the franchisee from starting or working in a competing business for a certain period and within a certain area.
- Non-solicitation clauses: These restrict the franchisee from approaching former customers or clients of the franchised business.
So, What is Reasonable?
Whether a restraint is enforceable depends on what a court considers reasonable at the time the agreement was entered into. This is a highly fact-specific inquiry and involves consideration of a number of factors:
- The industry in question and how competitive it is
- The degree of specialisation or training involved
- The consideration given for the restraint (e.g. brand use, training, access to systems)
It’s also worth noting that the legal position varies between states. For example, New South Wales has legislation (the Restraints of Trade Act 1976) which allows courts to “read down” a restraint clause—that is, to enforce it to the extent it is reasonable, even if some parts are too broad. This makes enforceability more likely in NSW compared to states without such legislation.
Applying these principles, non-solicitation clauses are generally more likely to be enforceable than non-compete clauses, as they are more directly tied to the protection of an identifiable business interest: the ongoing custom of existing clients.
Cascading Provisions
Most well-drafted restraint clauses will contain cascading provisions. These are essentially a series of alternative restraint periods and geographic areas, designed to give the court a menu of options from which to choose the most reasonable one.
For example, a clause might say the franchisee is restrained for:
- 12, 18, or 24 months, and
- within 5km, 10km, or 25km of the franchised business, and
- across one or more types of competing activities
Think of it like a buffet: if the court finds a 24-month restraint across 25km too much, it might still enforce a 12-month restraint within 5km.
Common Traps and Mistakes
Restraint clauses are not one-size-fits-all, and drafting them poorly can lead to issues for both parties. Common mistakes include:
- Restraints that are so broad in scope, duration or geography that they are unlikely ever to be seen as reasonable
- Restraints that apply only to the franchisee entity, and not to the individuals behind the business (e.g. directors or guarantors)
- Clauses that don’t use cascading provisions and instead include a single, overly onerous restraint—say, three years Australia-wide
These issues can render a restraint unenforceable in its entirety, leaving the franchisor exposed.
Other Considerations
Restraint of trade disputes often go hand-in-hand with allegations of breach of confidentiality or misuse of confidential information. It’s important to understand that confidentiality obligations are usually dealt with under separate clauses in the agreement and are not subject to the same legal test as restraints.
In practice, this means even if a restraint clause is found unenforceable, a franchisor may still have recourse under the confidentiality provisions if sensitive information has been misused.
Final Thoughts
Whether you are a franchisor looking to protect your business or a franchisee trying to understand your post-termination obligations, it pays to get clear advice on restraint clauses before you sign. These provisions can have a lasting impact on your ability to operate in your chosen industry after the agreement ends, so don’t leave them as an afterthought.
As always, good drafting and clear expectations are the best protection for both parties.