Franchise alert – transfer of a franchise

A recent decision considered whether a franchisor’s refusal of a transfer of a franchise was unlawful¹.

The franchisor, Bedshed, refused consent to a transfer of a franchise by Masterclass.

Bedshed had determined that the potential transferee was unsuitable, because neither the transferee nor a person with a substantial interest in the franchise would be at all times directly supervising the franchise business, as required by the agreement.

Masterclass claimed that the requirement for direct supervision was an unlawful and unreasonable restraint of trade and, therefore, unenforceable.

The court held:

• the franchisor did not act unreasonably in withholding consent to the proposed transfer on those grounds
• the requirement for direct supervision was not a restraint of trade. The requirement did not restrain the franchisee from other activity, although that may have been the practical effect. Rather, the franchisor imposed the requirement of direct supervision because it considered that would be ‘most likely to ensure the success of the franchise business, to the benefit of both’ given the needs of that kind of business. The court held that this did not go beyond what is reasonable in order to protect the franchisor’s legitimate interests, and
• therefore, the franchisor’s refusal was lawful.

This article was written by Amalia Stone, Senior Associate of the Sydney Corporate team.

For more information please contact

Endnotes

Name : Irene Zeitler
Title : Partner
Office : Melbourne
Phone : +61 3 9288 1581
Fax : +61 3 9288 1567
Email : irene.zeitler@freehills.com

Name : Kristin Stammer
Title : Partner
Office : Sydney
Phone : +61 2 9225 5572
Fax : +61 2 9322 4000
Email : kristin.stammer@freehills.com