Two recent New Zealand High Court decisions have shed light on the enforcement of Restraint of Trade clauses under franchise agreements.

Restraint of Trade clauses are designed to protect the franchisor from the franchisee taking the intellectual property and opening up in competition with the franchisor at the end of their agreement. The decisions have gone both ways, one in favour of the franchisor, and the other in favour of the franchisee.

In Mad Butcher Holdings Ltd v Standard 730 Ltd [2019] NZHC 589, Mad Butcher Holdings (MBH) sought an injunction to stop Standard 730 Ltd (Standard) from carrying on trading as an independent butcher after the natural expiry of the franchise agreement. When assessing the request for injunctive relief a court looks at whether there is a serious question to be tried, where the balance of convenience lies, and where the overall justice of the case lies.

  • A serious question to be tried was established on the basis that MBH has a strongly arguable case that it had enforceable contractual provisions, which at the time restrained Standard from operating a retail butchery shop in the premises.
  • The balance of convenience was influenced by the uncertainty of Standards ability to pay damages, and that an injunction could be conditional on MBH’s principal providing security in a form acceptable to the Registrar.
  • In assessing overall justice it was determined that Standard had been put on notice by MBH not to continue trading as an independent butcher, and that his Standards staff would not have had employment if he has not continued as an independent butcher.

The High Court found in favour of MBH and granted the injunction to stop Standard trading as an independent butcher.

On the other hand, in Mainland Digital Marketing Ltd v Willetts [2019] NZHC 2542, Mainland Digital Marketing (MDM) the franchisee was attempting to enforce a restraint of trade to stop two of its ex franchisors from taking up employment with one of the companies contracted to the franchise.

In their new role, they were determined to be market competitors because the services provided were identical to those provided by the franchise. However, a determining factor in the case was there was no prohibition on becoming an employee in the restraint of trade, whereas a previous shareholder of MDM was subject to a restraint of trade that clearly prohibited him from becoming an employee of a market competitor. The omission was sufficient to preclude the restraint of trade from applying.

Another determination in the case was that when determining whether it was the same type of business it was sufficient to establish that some of the individual components of the business for were being carried on, and not necessary to establish all the elements of the business in the restraints of trade were undertaken in the new business dealing.

Restraints of trade can be fickle and the utmost care should be taken to ensure that they are enforceable and have their desired effect.