Franchise Agreements – The Importance of Post Termination Restrictions

What are post termination restrictions?

Usually in the form of non-compete and non-solicitation clauses, post termination restrictions seek to prevent a departing franchisee from taking clients or key employees from a franchisor, or from setting up their own business in competition with the franchisor.

Why are post termination restrictions necessary?

From a franchisor’s perspective, post termination restrictions can be crucial. For example, they are particularly important to have in place for franchisees that are likely to have special knowledge about the franchisor’s business, so that they cannot move on and utilise that information straight away. Ultimately, their purpose is to protect the interests of the franchisor and prevent former franchisees from carrying out activities that might damage the franchisor’s position and/or reputation.

Are post termination restrictions always enforceable?

Whilst post termination restrictions aim to protect the franchisor’s legitimate business interests, they should not go beyond what is reasonably necessary for that purpose. Example factors include:

1. The period of restriction – a former franchisee should not generally be restricted from carrying out an activity for an unreasonable amount of time;
2. The scope of restriction – a former franchisee should not generally be restricted from carrying out an activity over an unreasonably wide area. For example, there may be no need for a local business to have a nationwide post termination clause;
3. The activity restricted – a former franchisee should not generally be restricted from carrying out an activity that is not sufficiently similar to the business they carried on as a franchisee;
4. Restricted persons – it is important for a franchise agreement to clearly define terms such as ‘customer’, ‘client’, or ‘employee’, to any potential confusion or dispute when interpreting a non-solicitation clause.

If these clauses are not drafted correctly, there is a risk that they may not be enforceable.

What happens if a former franchisee breaches a post termination clause?

The consequences of breaching a post termination clause should be clearly set out in the franchise agreement. It is important for that agreement to set out the obligations of the parties clearly, to prevent a dispute arising. Often, breach of post termination clauses by a franchisee will allow the franchisor to be indemnified against liabilities, costs, expenses, damages and losses suffered or incurred by them as a result of the breach.  It may also be possible to apply for a court remedy to stop someone from acting in breach of post termination clauses, known as injunctive relief.

Tips for Franchisors

1. Draw attention early – a simple way to bring post termination restrictions to the attention of a franchisee is to specifically highlight them prior to the agreement being signed, for example in a covering letter.
2. Have robust franchise agreements signed and in place – this ensures that all parties understand what is expected of them and sets out a clear framework in the event that something goes wrong.
3. Have agreements reviewed – we recommend that franchise agreements are prepared and/or reviewed by a legal professional with franchising expertise, in order to protect your business. This will help to prevent disputes, such as those regarding the enforceability of post termination restrictions, from arising.

How can we help?

Our Franchising Team is experienced in dealing with issues for both franchisees and franchisors. Our lawyers have the knowledge and expertise to review your matter and advise on the most appropriate steps to take. We will always consider your individual circumstances to provide tailored advice at an affordable cost.

If you wish to discuss a matter, please contact our Franchising team on 01202 525333, via email at franchising@ellisjones.co.uk or by clicking on the “Make an Enquiry” button on our website.