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Are Post-Termination Restrictions in Franchise Agreements Enforceable?

The general answer is 'yes'; whilst the Courts are generally reluctant to enforce any provision that affects an individual's ability to earn a living, the approach taken in franchising cases is often far more commercial.

Lawyers who deal regularly with 'Post-Termination Restrictive Covenants' tend to consider enforceability on a spectrum.

At the 'least enforceable' end of that spectrum are restrictions imposed on employees, and at the 'most enforceable' end are restrictions arising in commercial contracts, such as business sales and joint ventures.

The Courts recognise that the nature of franchising gives rise to the need for protection. For example, a franchisor may find it difficult to secure a new franchisee if the exiting franchisee is freely able to operate a similar business in the assigned territory - in order to make a territory resalable, the franchisor has a legitimate business interest in allowing a new franchisee to establish itself and this need is capable of protection by way of a restriction. 

Previous cases have recognised that a franchise relationship can be equivalent to a "lease of goodwill", with goodwill returning to the franchisor on termination of the franchise agreement. Thus to seek to protect that goodwill is entirely appropriate.

For these (and other) reasons the Courts have regularly determined, when assessing enforceability, that a franchise agreement occupies a more central position on the spectrum, but one slightly closer to a business sale than an employment relationship - this is good news for those looking to enforce Restrictive Covenants.

The key to drafting enforceable Restrictive Covenant's is to limit them in scope and duration so that the franchisor can demonstrate that they do no more than is reasonably necessary to protect its business interest. The test is heavily dependent on the facts of each case - so just because a court has approved a term before doesn't mean they will do so again.

Whilst the court's willingness to enforce franchise restrictions is encouraging, franchisors should be careful not to jeopardise enforceability by seeking to impose a restriction which is so wide as to make it unreasonable. Careful thought needs to be given at the outset when RCs are drafted so that they are not too wide.  It is also good practice to revisit them generally as the network, business and territories develop.

For further information please contact Liam Tolen  on 01392 333806 or l.tolen@ashfords.co.uk.

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