Restraint Of Trade Clauses

Posted by Byron Cannon on January 11, 2012

Franchise AgreementsI was recently asked by a client to obtain a Barrister’s opinion in relating to specific restraint of trade clause in a commercial agreement that he had signed.  I often get asked by clients about the enforceability of restraint of trade clauses and whether or not they are void.

Is a Restraint of Trade Void?

It has long been established at common law that a term of a contract that is an unreasonable restraint of trade is, in the first instance, contrary to public policy and void (Peters (WA) Ltd v Peters Ville Ltd (2001) 181 ALR 337).

Some general principles in relation to “reasonability” are as follows:

  1. “Reasonable” means reasonable both in relation to each party and in relation to the public interest;
  2. The onus is on the party attempting to enforce the restraint provision to prove that the restraint is reasonable as between the parties (Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 317)
     
  3. The subject of the restraint bears the onus of proving that the restraint is in the public interest (Amoco Australia at 308, 317);
     
  4. It is not common however for restraints that are found to be valid as between the parties, to be against public interest;
  5. A restraint is reasonable in relation to the party seeking enforcement of the clause if it is necessary for the “adequate protection of that party”; it is reasonable in relation to the party sought to be restrain if it preserves the fullest liberty of action consistent with that protection (Brightman v Lamson Paragon Ltd (1914) 18 CLR 331 at 337 per Issacsj);
  6. The restraint therefore must be not wider than is necessary (Buckley v Tutty (1971) 125 CLR 353 at 476);
  7. Some agreements have an express term stating that the restraint is reasonable.  This is not conclusive evidence that a restraint is in itself reasonable (Queensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260 at 268).

Is a Restraint in a Franchise Agreement Valid?

In order for a restraint to be reasonable, the party seeking to enforce the clause must establish an identifiable interest that they need to protect.  In the case of a franchise arrangement, such  recognised interest includes the interest of a franchisor in protecting patronage built up through the operation of the franchise, as well as the preservation of confidentiality of information provided to a franchisee, which could be used by the franchisee to compete with the franchisor.  (KA&C Smith Pty Ltd v Ward (1998) 45 NSWLR 702 at 722).

Is a Restraint on an Employee Valid?

The Courts have, generally speaking, drawn a distinction between restraint on employees on the one hand, and restraints of a commercial nature on the other (Geraghty v Minter (1979) 142 CLR 177 at 185).  The general principle permeating these cases is that a person has rights to work in a trade or profession without unjust restriction.  Restraints on employees competing with employers are normally valid only if required to prevent misuse of information or solicitation of customers (Artcraft Pty Ltd v Chandler [2003] QSC 102).

It is very important that each restraint of trade is considered individually, given the variations in the drafting of these clauses.  Specific and detailed legal advice is needed in both the drafting and interpretation of these sometimes difficult clauses.

Please do not hesitate to contact me if you require assistance in relation to restraint of trade provisions in a contract.

Buying A Franchised Business

Posted by Byron Cannon on December 15, 2011

Franchise AgreementFranchised businesses differ from other businesses in a number of ways.  They essentially offer the ability to run your business utilizing the franchisor’s “system” in a way that allows you to gain benefit from the name, marks, brand, image, and general “know-how” of a much bigger and more expansive organization.

Whilst operating a franchised business provides you with a great number of benefits, there are nonetheless a number of pitfalls that prospective franchisees need to look out for when entering into their franchise agreements.

Franchising in Australia is governed by the Franchising Code of Conduct which operates to regulate the conduct of both franchisors and franchisees.  As an offshoot of the Australian Competition and Consumer Regulations, it also provides for sanctions against non-complying entities.

At its most fundamental level, the Code dictates that before you enter into a franchise agreement, the Franchisor must provide you with a copy of the following documents:

  1. A copy of the Code;
  2. A copy of the franchisor’s “Disclosure Document”; and
  3. A copy of the Franchise Agreement in the form in which is to be executed by you, at least 14 days before you enter into the Franchise Agreement or make a non-refundable payment to the franchisor.

Disclosure Document

The Disclosure Document  is designed to provide you with as much  information as possible so you can make an informed decision when considering entering into a Franchise Agreement with the franchisor.  Although it is important that you consider all of the information contained within this document, I generally advise my clients to pay particular consideration to the following:

  1. The experience of the Franchisor, including its management and directors;
  2. Whether the Franchisor has been involved in previous litigation or other Court proceedings;
  3. Details of other current franchisees and their locations;
  4. The number of franchisees that have exited the system;
  5. Details of costs and expenses that may be passed on by the Franchisor to you; and
  6. The Franchisor’s financial reports and accounts.

Franchise Agreement

Your franchise agreement is just like any other contract and as such it is imperative that you read it and fully understand it before signing it.  Considerations that you should pay particular attention to in this document include:

  1. Whether or not your site and/or territory are exclusive to you and whether or not the Franchisor can grant additional franchises within your area or even operate their own business in competition with you.
  2. The extent of the fees, levies, and/or other expenses that you are required to pay under the franchise system.
  3. The exact nature of the rights that you are granted under the franchise system and the restrictions on your use of the franchisor’s brand.
  4. Whether or not the lease of your business premises is to be held in your name or in the name of the franchisor.
  5. Whether or not you are required to undertake a fit-out or refurbishment of the business premises during the franchise term.
  6. The extent of the training/assistance that will be provided to you by the franchisor at the beginning of, and throughout, the franchise term.
  7. The process that is involved should you wish to sell your franchised business at some stage in the future.

Whilst franchised businesses can be easier to operate than other businesses in many circumstances, they are accompanied by very specific restrictions in the way in which you are able to operate your business to ensure that the Franchisor’s interests are protected.  For this reason it is essential that anyone considering entering into a franchise agreement seeks legal advice before doing so.