Franchising · 13 July 2018

My franchise agreement has been terminated – can I start a rival business?

Franchise
To be enforceable, restrictive covenants must fulfil three criteria

If your franchise agreement is terminated for a breach of contract, is there anything to stop you launching a rival business? Grid Law founder David Walker explains to one ex-franchisee the restrictions that may be in place.

Question

“I wonder if you can advise – I have just had my franchise agreement terminated citing breach of franchise agreement. I do not agree that I have breached it, but do not have the legal fees to fight it.

“Part of the agreement was a restrictive covenant on both me and my spouse who was not a signatory to the franchise agreement and the franchise agreement is only in my name. Would this be enforceable under UK Law?”

Answer

Thank you for your question.

Without a some more details, I can’t give any definitive advice here so I’m going to make some assumptions and give some general advice.

The first assumption is that the restrictive covenant is included in the agreement to prevent you from setting up a competing business after the franchise agreement has been terminated. However, it could just be a restriction to prevent you from using any confusingly similar branding or the franchisor’s business system in your own business.

As explained in a previous article (When are non-compete clauses enforceable), to be enforceable, restrictive covenants must fulfil three criteria.

  1. There must be a legitimate business interest to protect
  2. The restrictions must be no wider than is necessary to protect that legitimate interest
  3. They must not be contrary to public policy (i.e., would the customers of the business be unduly affected if the restrictions were enforced?)

In your case, the franchisor is likely to have invested time, effort and money into building their business so this will be a legitimate interest that they are entitled to protect.

What’s reasonable to protect that interest is looked at on a case by case basis, depending on the type of business.

So, for example, there may be restrictions on you setting up a competing business for a defined period of time, or perhaps you cannot open a similar business within a defined location or radius of the franchise business.

Whilst reasonable restrictions are likely to be enforceable against you, the franchisee, I think it’s very unlikely that they would be enforceable against your spouse who didn’t agree to them.

However, I’m assuming that you’re asking this question as your spouse would like to start a competing business.

You still need to be careful here. If your spouse was involved in your franchise business and had knowledge of how the system worked, using it in a competing business could possibly be an infringement of the franchisor’s intellectual property rights or their trade secrets.

Also, the restrictive covenant may be worded in such a way that you can have nothing to do with a competing business. This means that you couldn’t work in your spouse’s business or have any connection to it.

I hope this helps and if you can provide me with some more details, I will happily take another look at this for you.

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ice cream

 

Can a non-compete clause protect the exclusivity of our product?

David Walker responds to one reader considering buying out a small café business, but has concerns over how its sellers could compromise the exclusivity of its flagship product

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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