Raine & Horne’s recent successful claim in the Supreme Court of New South Wales offers some reassurance and guidance to franchisors about restraint of trade clauses in their franchise agreements.
In this instance, a Raine & Horne franchisee, Adacol, signed a new franchise agreement with Ray White while still a franchisee under the Raine & Horne franchise agreement. At the same time, Adacol commenced trading and advertising as a Ray White franchisee in the same premises that it previously operated as a Raine & Horne franchisee.
Raine & Horne then terminated its franchise agreement with Adacol and sought orders enforcing certain provisions of the franchise agreement, in particular the restraint of trade clause. The restraint of trade provided that:
‘The Franchisee and the persons named in item 10 of the Schedule as is witnessed by their execution of and the delivery of this Deed agree that they will not for a period of 12 months after the termination (for whatever reason) of this Deed conduct or be in any way employed or interested in any real estate agency business which carries on business substantially within a radius of five kilometres from the Premises.’
The allegation was that Adacol was in breach of this restraint of trade as it had commenced the operation of a Ray White franchise directly from the previous premises of the Raine & Horne franchise.
McDougall J held that Raine & Horne’s restraint was valid. He said: ‘Restraints of trade may be valid where they are reasonably necessary to protect some identified legitimate interest of the party seeking to enforce the restraint, and where they did no more than is reasonably necessary to achieve that.’ 1
In this case, the Court identified three legitimate interests of Raine & Horne:
the franchisor’s direct interest in receiving franchise fees under the franchise agreement;
the franchisor’s direct interest in the franchise itself over and above the revenue that it derives from it;
the franchisor’s significant goodwill and existing business built up over many years.2
In addition to the restraint of trade issue, there are two additional points made by McDougall J which are important for franchisors to consider.
Professional advice certificates
The first is that the Court did not accept that Adacol felt some pressure to renegotiate the then current franchise arrangements. He stated that the unconvincing nature of the evidence was indicated by three forms of certificate attached to the franchise agreement, whereby Adacol acknowledged having received independent business, accounting and financial advice about the proposed franchise agreement or the franchise business. This decision confirms the importance of franchisors requiring their franchisees to seek independent professional advice in respect of the proposed franchise agreement or franchise business.
Inducing breach of contract
Secondly, this decision is a warning to franchisors who are negotiating with prospective franchisees who are currently parties to an agreement with another entity. The other agreement may impose conflicting obligations on the prospective franchisee. A franchisor must be careful not to induce a prospective franchisee to breach any terms of the current franchise agreement, or any other agreement, when they are recruiting prospective franchisees to join their franchise network.
There are some options available to a franchisor seeking to minimise the liability for inducing breach of contract, while still continuing to develop a franchise network.
This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.
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