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Restraints Under the New Regime

Posted on 2 October 2014

It is anticipated that the changes to the Franchising Code of Conduct will include a monumental change to the enforcement of restraints of trade by franchisors.

It looks like the Code will provide that if a franchise agreement allows for a renewal term and the franchisee seeks to renew the franchise on substantially the same terms as the current franchise agreement and:

1. the franchisee was not in breach of the franchise agreement;

2. the franchisee had not infringed the intellectual property of the the franchisor;

3. the franchisor does not renew the franchise agreement; and

4. the franchisee claimed compensation but the compensation was nominal and did not compensate the franchisee or the franchise agreement did not allow the franchisee to claim compensation

THEN: the franchisor will not be able to enforce a restraint of trade clause in the franchise agreement.

That means, in these circumstances, the franchisee may be able to open in competition to the franchise network, franchisees and the franchisor.

Franchisors will need to have a look at their renewal of franchise provisions and franchisees may consider how this will impact upon them and their franchised business.

Tags: News

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