Marking their territory: Federal Court rules on restraint clauses in franchise agreements

22 July 2014 Topics: Franchising

In the case of RPR Maintenance Pty Ltd v Marmax Investments Pty Ltd [2014] FCA 409, the Federal Court of Australia considered the application of a restraint of trade clause in a franchise agreement.

The facts

RPR Maintenance Pty Ltd (RPR) was a franchisee of Spanline Weatherstrong Building Systems Pty Ltd (Spanline), a designer, manufacturer and seller of home extensions and other additions for both home and professional builders.

The agreement between RPR and Spanline contained an undertaking by Spanline that the franchise territory (the New South Wales south coast) was exclusive to RPR, and that Spanline would prevent any other franchisor from operating within that area.

Spanline and RPR entered into a sub-franchise agreement with Marmax Investments Pty Ltd (Marmax), carving out part of its territory in favour of Marmax for a five year period. RPR and Marmax later entered into a transfer of business and loan business to Marmax.

This later agreement contained mutual restraint obligations on both RPR and Marmax preventing the parties from engaging in ‘restrained businesses’ within one another’s territory. ‘Restrained businesses’ were defined as those that were similar to, competitive with or providing similar products to the Spanline business. The restraint provisions cascaded in durations of ten, five, two and one years.

Because of the location of Marmax and RPR’s business premises, some consumers within RPR’s territory actually lived closer to the Marmax showroom.

A dispute arose between the parties in respect of:

  • Marmax allegedly selling and installing Spanline products within RPR’s territory; and
  • Spanline failing to take appropriate action to protect RPR’s exclusivity, as required under the Spanline-RPR franchise agreement.

Was the restraint of trade clause breached?

A restraint clause is void on public policy grounds unless it can be shown to be reasonable to protect the legitimate interests of the parties, with the onus resting with the party seeking to enforce the clause. In this case, RPR was seeking to enforce the restraint therefore it bore the onus of showing reasonableness.

In assessing ‘reasonableness’, a court will have regard to:

  • the scope of the trade restrained;
  • the geographical territory covered; and
  • the duration of the restraint.

The Court noted it is more inclined to consider a restraint ‘reasonable’ in a sale of business as compared to an employment contract. For example, given parties in a business-to-business transaction do not generally suffer any inequality of bargaining power.

The Court held that Marmax had breached the restraint clause by performing work in RPR’s territory, with Griffiths J explaining that:

  • The restraint reasonably referred to RPR’s legitimate business interest in preserving its own Spanline franchise.
  • It was reasonable that customers in RPR’s territory living closer to Marmax’s business could not use Marmax, because only a small portion of either company’s jobs arose out of showroom visits and so the inconvenience suffered by consumers was very minor.
  • Cascading restraint periods are not unusual in commercial arrangements, but in this particular case, no period longer than five years could be reasonable because this was the duration of the franchise agreement.

The Court held that RPR was entitled to damages for Marmax’s breach of the restraint, but left the quantification of these damages for later proceedings.

To what extent was Spanline responsible?

RPR had made a series of complaints to Spanline regarding Marmax’s intrusion into its territory, but Spanline’s investigations were ‘seriously deficient’. Spanline had access to information that RPR did not, and could have demanded that Marmax provide information on the areas in which it had been dealing.

The Court held that Spanline had failed to do all that was necessary and reasonable to protect RPR’s exclusive territory.
Spanline was not liable however, as it had not actually induced Marmax to breach its agreement with RPR.

Lessons to be learned

Although courts frequently restrict the application of restraint clauses, RPR v Marmax serves an important reminder that they can still be effective to protect the business interests of commercial parties.

Particularly in franchise and sub-franchise scenarios, it is essential that parties carefully review restraint of trade clauses to determine what rights and responsibilities they have. Even a head-franchisor, which might assume some degree of detachment from sub-franchisor disputes, could find itself embroiled in such a dispute.



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