Is the non-compete clause in your franchise contract enforceable?

Most franchise agreements in the UK use a standard form contract. We’ve commented previously on how these contracts tend to feel unwieldy as they run too many pages and are generally very one sided in favour of the franchisor. There’s a lot to cover not just the contractual relationship between franchisor and franchisee, but also IP, competition law, compliance, advertising, training… the list goes on. 

The result is that, without specialist legal knowledge to adapt them, the standard clauses provided may not be fit for purpose and lead to issues later down the line.

This was highlighted in a recent case where the court held a franchisor’s standard non-compete clause as not enforceable.  In this instance a 12-month post-termination restrictive covenant that prevented a franchisee from operating a similar business within five miles of the franchise territory could not be justified meaning it was not enforceable.

This is an important point for both franchisors and franchisees. Before a franchise agreement is agreed the parties should consider the following in relation to any non-compete restrictive covenants:

• How well established is the franchise in the franchisee’s territory and the immediately surrounding area? What goodwill could the franchisor stand to lose?
• Consider the bargaining power of the franchisee and whether the interests of franchisor and franchisee are aligned. What situation would each be in if the business fails, who has the most to lose?
• What know-how has the franchisor passed to the franchisee? Could they have learnt this elsewhere or is this knowledge that will give them a competitive edge in the same market?
• Every case will be looked at on its own facts and there are not general rules about the length of restrictions.

What is and is not an enforceable restriction must be considered in the context of the agreement to which they relate.

Restrictive covenants are designed to protect the legitimate business interests of the party seeking to enforce them but should go no further than that.

For more information try our handy guide to restrictive covenants in commercial contracts or speak to our friendly solicitors for advice specific to your situation.