The scenario: the franchisee has requested the franchisor to extend the terms of the franchise agreement but the franchisor has refused as it intends to continue operating the franchise on its own account. No goodwill will be paid by the franchisor to the franchisee upon termination. The franchise agreement contains a restraint of trade clause preventing the franchisee from operating similar trade. Immediately upon termination, the franchisee intends to set up a similar trade within the restraint area of the franchise business/premises.
The sting: Section 23 of the Code provides some protection to the franchisee by deeming any restraint of trade clause in a franchise agreement as having no effect, if the franchisee gives written notice of its desire to extend the franchise agreement and the franchisor elects not to do so; the franchisor does not compensate the franchisee for goodwill; the franchisee is not in breach of the franchise agreement; and the franchisee has not infringed the franchisor’s intellectual property or breached any obligation of confidentiality under the franchise agreement. If all of these requirements are met then the franchisee is able to continue trading in the same business or industry, albeit not under the same brand name as the franchisor and without breaching the franchisor’s intellectual property.
The intention of Section 23 is to provide relief in special circumstances where a franchisee, through no fault of its own, has not had its franchise extended by the franchisor.
It is important to note that the protection does not apply where the franchisor has terminated a franchise agreement for breach of the agreement by the franchisee.
Section 23 of the Code raises three primary areas of concern for franchisors:
· Is the franchise system easily replicated by an unrestrained franchisee?
· How can the contribution towards goodwill be accurately quantified?
· What mechanisms should franchisors include in their franchise agreements that are equitable in the circumstances?
The answer to these questions will largely depend on the nature of the franchisor’s business. Each franchise system is different and the decision must be considered on its own merits. It is therefore essential that franchisors seek legal and accounting advice to address these questions. The issue for franchisors is whether or not to consider including a valuation mechanism in their franchise agreements versus the potential risk posed from competition by the franchisee.
It is timely to note that Section 23 of the Code does not restrict a franchisor from enforcing a restraint of trade clause during the term of a franchise agreement. Clauses restraining a franchisee from infringing the intellectual property of the franchisor will remain enforceable during and after the expiry of the term of a franchise agreement. The code also does not require that compensation be paid.
What should franchisors do? Franchisors should conduct a review of their franchise agreements and make sure the restraint area and restraint duration is reasonable; make sure the restraint clauses survive termination of the franchise agreement; and make sure the clauses are reasonable and fair to protect the legitimate business interests of the franchisor.
Contact Rostom Manookian on 0416 716 960, or email rostom@manookiansolicitors.com to discuss how we are able to assist you with your legal requirements. We offer fixed fee services to ensure transparency and certainty to meet your requirements. We provide legal services in franchising, business, property, conveyancing, leasing, intellectual property and other commercial related contractual and transactional matters.
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