Franchise agreements often contain restraints of trade. The restraints typically apply for a period of time after the franchise ends, and may restrict franchisees from competing with the network or conducting a similar business within a particular geographical area.

Whilst these restraints can be legitimate and important protections for the franchise network, they can also be a major hinderance for franchisees looking to move onto their next venture.

Clause 23 of the Franchising Code of Conduct can be a way for franchisees to avoid the operation of these restraint clauses. However, it has quite a narrow application - and there numerous proactive steps that franchisees must take to obtain the benefit of the exception.

In order for the Clause to apply:

• The franchise agreement must be expiring;
• The franchisee must give written notice to the franchisor, asking for the franchise agreement to be extended, on the franchisor’s usual terms;
• The franchisor must refuse to extend the agreement;
• The franchisee must not be in ‘serious breach’ of the franchise agreement (or any related agreement) immediately before the agreement expires;
• The franchisee must not have infringed the franchisor’s intellectual property, or breached any confidentiality agreement during the term of the franchise agreement; and
• Either:
  • The franchisee claimed compensation for goodwill and the claim was rejected, or the franchisee was paid a nominal amount that was not ‘genuine’ compensation; or
  • The franchise agreement did not allow the franchisee to claim compensation for goodwill.

If all of these items are satisfied, the franchisor cannot enforce the restraint of trade clause in the franchise agreement.

There are quite a few things to consider in relation to Clause 23 of the Franchising Code of Conduct:

• This Clause only applies where an agreement is expiring. It would not apply, for example, where the franchise agreement is terminated early.
• This part of the Franchising Code was slightly changed in June 2021, including to add the words ‘serious breach’. The new wording applies to franchise agreements that are signed, extended or renewed from 1 July 2021. The old wording applies for all agreements finalised before that.
• The phrase ‘serious breach’ is not defined, and no examples are given. The meaning of these words could cause some uncertainty, as it may be difficult to determine whether a breach is ‘serious’ enough to disqualify the franchisee from being able to take advantage of the clause.
• Supplementary to a restraint of trade clause, franchise agreements often have separate clauses protecting the franchisor’s intellectual property and confidentiality, both during and after the franchise term.
  
  While the Code does not define a ‘restraint of trade clause’, it probably does not apply to these Intellectual Property and confidentiality clauses – which means they will continue in operation.
  
  This is critical for franchisees considering whether this Clause applies, as depending on the franchise agreement’s terms, things like customer databases, supplier lists, recipes etc. will probably be part of the franchisor’s confidential information and/or Intellectual Property.
• Even if Clause 23 does not apply, restraint of trade clauses are generally only valid to the extent that they are reasonable. It is up to the franchisor to demonstrate that their particular clause is reasonable in the circumstances.

With regard to matters concerning franchise restraints that have made it to court, there has been a mixed bag of results for franchisors. In some cases, the confidential information/Intellectual Property protections have been found to be enough to protect the franchisor’s interests.

Ultimately though, both the particular restraint clause and the franchisee’s circumstances must be considered in their own right.

It can be difficult for franchisees to navigate their next steps after a franchise agreement ends. Often, thoughts of carrying on business in the same industry or geographical area are quickly put to bed due to the restraint clause in the franchise agreements.

However, in the right circumstances and with some preparation, Clause 23 of the Franchising Code of Conduct can make life a little easier for franchisees.

If you have a query relating to any of the information outlined above, or would like to speak with someone in Holman Webb’s Holman Webb’s Franchising & Retail Group with regard to a matter of your own, please don’t hesitate to get in touch today.