Any franchisor who has tried to enforce a restraint of trade
clause against a former franchisee will have received legal advice
that restraints are unenforceable unless they can be shown to be
reasonably necessary to protect the franchisor's legitimate
business interests. Usually, the examination of reasonableness
focuses on the time duration of the restraint, the geographic area
of the restraint and the activities that are being restrained.
However, a recent court decision serves as a timely reminder
that time, area and activities are not the only considerations when
assessing reasonableness. In EzyDVD Pty Ltd v Lahrs Investments
Qld Pty Ltd, a decision of the Queensland Supreme Court,
EzyDVD (the franchisor) sought to enforce a restraint in a
franchise agreement. Immediately after the defendant's EzyDVD
franchise had terminated, one of the directors of the defendant had
started up a new company that ran a competitive business from the
The wording of the restraint clause was the problem. The
restraint in the franchise agreement provided that because
the franchisee had access to the franchisor's intellectual
property, it was agreed to be reasonable to restrain the franchisee
and the guarantors (described in the restraint as Control Persons)
from operating a competing business within 5km of the franchise
premises for 6 months after the franchise agreement terminated. The
franchise agreement also provided a comprehensive "delivery
up" regime whereby the franchisor's intellectual property
had to be delivered up or destroyed at the end of the franchise
agreement. It was accepted that the franchisee complied with its
"delivery up" obligation, but the franchisor complained
that the guarantor would retain some of the intellectual property
in his memory and may use that information, even subconsciously, in
the new business. For this reason it was argued that it was
necessary to impose the restraint.
The Court rejected this argument and said that the
"delivery up" regime was sufficient to protect the
franchisor's intellectual property. Whatever intellectual
property was retained in the mind of the guarantor was unlikely to
be exploited in the new business. The Court said that it was
unreasonable to impose the restraint when there was another way
(the "delivery up" regime) to protect the franchisor.
For franchisors, while the primary focus of the Court's
decision provides little comfort, there were two other interesting
points that arose out of this decision. Firstly, without making a
concluded finding to this effect, the Court appeared to accept that
even though the guarantor signed the franchise agreement as
guarantor only, he would still be bound by the restraint (the
guarantor not having signed a separate covenant agreeing to a
restraint of trade). Secondly, the fact that the franchisee had to
obtain independent legal advice before entering into the franchise
agreement was a significant matter in determining whether it was
reasonable to enforce the time and distance elements of the
The decision in EzyDVD emphasises the need to properly
consider the terms of any restraint that you want to impose on your
franchisees. A carefully worded restraint may still be enforceable,
but the courts will always critically examine the entire
contractual relationship before enforcing a restraint.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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