What is the effect of a restraint of trade after termination of a Franchise Agreement?
Adacol was a Raine & Horne franchisee at Brighton and Ramsgate in Sydney.
The franchise agreement provided:
“29.1 – The franchisee and the (guarantors) agree they will not for a period of 12 months after 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 5km radius of the premises.”
The franchisor terminated the Franchise Agreement on the basis that Adacol “voluntarily abandoned the franchise business or the franchise relationship” prior to the end of the term.
Adacol continued to operate from the same premises but instead as a Ray White franchisee. It was a condition of the Ray White franchise agreement that franchise fees be waived until the end of the Raine & Horne term.
Was the restraint of trade is void for public interest? Was Raine & Horne was able to show the restraint is no wider than is reasonably necessary to protect its legitimate interests?
The court found that there were some differences between restraints imposed on employees and restraints imposed on Franchisees.
It is interesting to note that Adacol could have avoided the operation of the restraint if it conducted a real estate agency business outside of the 5km radius of the restraint. This was so, even if it sold or managed properties within the 5km radius, or serviced customers who had previously been customers of the business.
The court found that a franchisor has the following interests to be protected by a restraint of trade:
1. Its direct interest in receiving franchise fees under the franchise agreement. In this case, Adacol proposed to continue to pay the franchise fees until the end of the term.
2. An interest in the franchise itself over and above the revenue it derives from it. e.g. at the end of the franchise, Raine & Horne may enter into a new franchise agreement with a third party, without competition from the former franchisee. This is different from starting up a new franchise business and facing competition from the existing franchisee trading from the original premises. Support for this interest was found in the assignment provisions of the franchise agreement, which provide for the franchisee to be restrained from competing with the purchaser.
3. Raine & Horne has significant goodwill in an existing business built up over many years, notwithstanding that goodwill had been contributed to by Adacol.
The court found that the restraint was enforceable!