There are essentially two types of non-compete covenants – those that apply during the term of the franchise agreement and those that apply following the termination/expiry of the franchise. In relation to the former, franchisors are entitled to require franchisees to devote their whole time and attention to their franchise business and not to be involved in any other business, whether competing or otherwise. The reason for this is that franchisors want franchisees to “bust a gut” to make their franchise business successful and not to have their attention diverted on other businesses.
In relation to non-compete obligations that apply following termination or expiry, unlike the situation that prevails in employment contracts, franchisors are entitled to prevent franchisees from being involved in a similar or competing business following the end of the franchise agreement. These covenants will only be enforced in so far as they are reasonable which normally means that franchisees can be prevented from competing within their territory and for a period of approximately 12 months. The reason for these non-compete covenants is that no franchisor would be prepared to allow franchisees to use their trade name and know how to develop the franchisee’s business if the franchisee could then “take the signs down” and become a competitor on expiry or termination of the franchise agreement.
Written by: John Pratt
Partner, Hamilton Pratt