Restraint of Trade Clauses Under the New Franchising Code: What Franchisors and Franchisees Need to Know
- 15 hours ago
- 4 min read
Australia’s franchising landscape continues to evolve, and one of the most significant changes introduced under the new Franchising Code of Conduct relates to restraint of trade clauses.
From 1 April 2025, additional restrictions came into effect that limit when franchisors can rely on restraint of trade provisions at the end of a franchise relationship.
These reforms are designed to provide greater protection for franchisees while ensuring franchisors only use restraint clauses where they are genuinely necessary to protect legitimate business interests.
This article is based on guidance published by the Australian Competition and Consumer Commission (ACCC).
What Is a Restraint of Trade Clause?
A restraint of trade clause is a contractual provision that restricts what a franchisee can do after leaving a franchise system.
Common examples include restrictions that:
Prevent a former franchisee from operating a competing business
Stop them from working within a particular industry sector
Prohibit them from trading within a specified geographic area
Apply for a defined period after the franchise agreement ends.
For many franchisors, these clauses are intended to protect confidential information, customer relationships, goodwill, intellectual property, and the integrity of the franchise network.
However, Australian courts have consistently held that restraint clauses must be reasonable and no broader than necessary to protect legitimate business interests.
What Changed on 1 April 2025?
The updated Franchising Code introduced new restrictions on the use of restraint of trade clauses.
The changes apply to franchise agreements that are:
Entered into on or after 1 April 2025
Renewed on or after 1 April 2025
Extended on or after 1 April 2025
Transferred on or after 1 April 2025.
Importantly, the reforms do not ban restraint of trade clauses altogether.
Instead, they restrict franchisors from including or enforcing certain restraints in specific circumstances when a franchise agreement expires.
When Can a Restraint of Trade Clause No Longer Apply?
Under the updated Code, a restraint of trade clause cannot apply where all of the following circumstances exist at the time the agreement expires:
1. The Franchisee Wanted to Continue
The franchisee sought to renew or extend the franchise agreement on substantially similar terms.
2. The Franchisee Qualified for Renewal
The franchisee met the conditions required for renewal under the agreement.
3. The Franchisee Was Not in Serious Breach
The franchisee was not in serious breach of the franchise agreement at the time of expiry.
4. The Franchisor Chose Not to Renew
The franchisor decided not to renew or extend the agreement.
5. No Fair Goodwill Payment Was Received
The franchisee did not receive fair compensation for goodwill or was otherwise unable to claim goodwill compensation.
Where these conditions exist, the restraint clause cannot be relied upon under the new rules.
Why the Changes Matter
Historically, some franchisees found themselves in a difficult position when a franchise agreement ended.
In some cases:
The franchisee wanted to continue operating
They had complied with their contractual obligations
The franchisor declined renewal
The franchisee received little or no compensation for goodwill
They were still prevented from operating in the same industry.
The reforms seek to address this perceived imbalance by preventing restraints from applying in circumstances where franchisees have effectively done everything required of them but are unable to continue in the system.
Franchisors Should Review Existing Agreements
The ACCC has encouraged franchisors to review their franchise agreements to ensure compliance with the updated Code.
This review should include:
Restraint of trade provisions
Renewal clauses
Expiry provisions
Goodwill clauses
Transfer and exit mechanisms
Operations manuals and related documents.
Franchisors should carefully identify:
When restraints will apply
When restraints will not apply
Whether the scope of restraints remains reasonable
Whether the restrictions are proportionate to the interests being protected.
Failure to review outdated documentation may create compliance risks under both the Franchising Code and the Australian Consumer Law.
Franchisees Should Understand Their Post-Term Obligations
For franchisees, restraint clauses remain one of the most important provisions to understand before signing a franchise agreement.
Before entering, renewing, or extending an agreement, franchisees should carefully consider:
How long any restraint lasts
The geographic area covered
The activities that are restricted
Whether goodwill compensation may be available
How renewal rights operate
What happens at the end of the franchise term.
A restraint clause can significantly affect future business opportunities, making early legal review essential.
Restraints Are Not Automatically Invalid
One common misconception is that restraint of trade clauses are now prohibited.
That is not the case.
The ACCC has emphasised that restraint clauses can still be valid where they are:
Reasonable
Proportionate
Necessary to protect legitimate business interests
Carefully drafted
Supported by the circumstances of the franchise relationship.
The key issue remains whether the duration, geographic scope, and restricted activities are justified.
Key Takeaways for Franchise Networks
The new franchising reforms represent another important shift towards greater franchisee protection while maintaining reasonable safeguards for franchisors.
Franchisors should proactively review their franchise documentation and seek specialist advice to ensure compliance.
Franchisees should carefully assess restraint provisions and understand their rights regarding renewal, goodwill, and post-term restrictions before committing to any agreement.
As regulatory scrutiny of franchise agreements continues to increase, ensuring restraint clauses are properly drafted and legally enforceable has never been more important.
Source credit: This article is based on information published by the Australian Competition and Consumer Commission (ACCC) Small Business Team regarding restraint of trade clauses under the Franchising Code of Conduct.
