Restraint of Trade (and Cascading) Clauses
Franchise agreements often contain provisions that continue to affect franchisees long after the relationship ends. Among the most important, and frequently litigated, are the restraint of trade clauses. These terms aim to protect the franchisor’s brand and business, but they can also significantly limit what a former franchisee can do next.
One feature of these clauses that’s worth special attention is the "cascading clause": a legal drafting technique that can impact enforceability.
What is a Restraint of Trade Clause?
In most franchise agreements, a restraint of trade clause:
- prohibits the franchisee from operating a competing business or working in the same industry during the term of the agreement, and for a certain period after termination of the franchise agreement.
- prevents use of the franchisor’s confidential information or trade secrets.
- restricts the solicitation of former customers, employees, or suppliers.
These clauses are only enforceable to the extent they are reasonable in terms of duration, geographic area, and scope of activity. If they are too broad, courts may set them aside.
What is Cascading Restraint Clause?
A cascading clause (sometimes called a "ladder" clause) is a legal drafting tool used to increase the likelihood that a restraint will be enforceable.
It works by listing multiple alternative restraints, usually varying by:
- Time (e.g., 24 months, 18 months, 12 months, 6 months).
- Geographic area (e.g., nationwide, state, region, or within a set radius).
- Scope of the prohibited conduct.
Each level is separated by the word "or", allowing a court to choose the most reasonable combination.
Example of a Cascading Restraint Clause
The franchisee must not operate a competing business within:
(a) 10 km of the franchised territory for 24 months, or
(b) 10 km of the franchised territory for 18 months, or
(c) 5 km of the franchised territory for 12 months, or
(d) 5 km of the franchised territory for 6 months.
If the court finds (a) too broad, it may still enforce (c) or (d), rather than strike out the entire clause.
This approach improves enforceability but does not guarantee it. The restraint must still be reasonable in the context of the business relationship.
What if a Franchisee Breaches a Restraint Clause?
If a franchisee is found to be in breach, intentionally or not, they may face:
- Injunctions (court orders to stop the competing activity).
- Claims for damages by the franchisor.
- Responsibility for legal costs.
Even if the clause is ultimately found to be unenforceable, defending a claim can be costly and disruptive.
What Should a Franchisee Do?
If you're a current or former franchisee facing a potential breach of restraint provisions:
- Seek immediate legal advice: A franchise agreement lawyer can assess whether the clause is likely to be enforceable, especially if it uses cascading terms.
- Don’t assume the clause is invalid: Cascading clauses are designed to survive partial invalidity. Just because one restraint seems too broad, it does not mean the whole clause will fail.
- Negotiate or mediate: Early resolution can reduce legal risk and cost. Many franchisors are open to practical outcomes, especially when the relationship ends amicably.
- Pause the breaching activity (if advised): Taking quick remedial steps may improve your legal position or support a negotiated outcome.
Final Thoughts
Cascading restraint clauses are now a common feature in franchise agreements. While they increase the likelihood of enforceability, they don’t eliminate uncertainty. Whether you’re signing a new agreement, or exiting an existing franchise, it’s essential to understand how these clauses could affect your business's future.
At Wadlow Solicitors, we advise franchisees and franchisors across all stages of the franchise life cycle, from agreement negotiation to post-termination disputes. See our commercial contracts or commercial litigation pages for more information.
Contact Wadlow Solicitors or call (08) 8212 2955 and schedule an appointment with Jing He.
