Non Compete Clause for Franchise

[Sisu]

I owned a mobile franchise business which I sold over a year ago. I signed a non compete agreement when I purchase the business which says I agree not to operate in this business for 5 years after I leave. I am now living on the other side of Australia in another State. It has been 18 months and I want to start a similar business at my new address. Would this clause be enforceable? One of their franchisees works in the new area where I live.

Thanks.

 

[Rob Legat - SBPL]

Possibly. Even though you have moved, the franchise operates in the area you are in. And while 5 years may be determined to be too long a period, 18 months may not (if the non-compete clause is properly structured, it could be read down to a shorter period than 5 years).

Many franchisors go to great lengths to protect their systems, especially if one of their franchisees is in their ear about a competitor taking their business.

 

[Matthew Karakoulakis]

Hi Sisu,

Business owners often include Restraint of Trade (non-compete) clauses in agreements and they do so to protect the goodwill of their business, their business interests etc. However, the restraint of trade (non-compete) provisions have to be reasonable for them to be valid and enforceable.

The Courts, in determining whether a restraint clause is reasonable, look at whether the clause protects a genuine interest of the business and whether the limitations with respect to time period and geographical area are no greater than necessary to protect interests of the business. In Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267, the court held that a 12 month restraint period was sufficient and was probably the maximum that could be applied. The Company sought to rely on a 15 month restraint of trade clause.

In short, the restraints have to be reasonable for them to be valid and enforceable. Non-compete clause for a period of 5 years, in my view, would be held unenforceable by the court.

 

[Sisu]

Thank you both for your input. I guess I have to decide whether to take the risk and start the business or wait a few more years.