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What types of restrictions are set out in the franchise agreement?
Franchise agreements contain restrictions on both the franchisor and franchisee. Usually there are more restrictions on the franchisee, because the franchisor wants to ensure compliance with the business model and consistency and efficiency across the franchise network. Some franchisors accept restrictions on operating or licensing in a franchisee’s territory. This exclusivity enables the franchisee to maximise its opportunities in its market. In return, the franchisee will normally agree to keep out of other franchise territories. There will be restrictions placed on the franchisee to enable the franchisor to control standards and consistency across the network. These will relate to premises, brand and advertising approvals and strict compliance to business methods and standards. Particularly key for the franchisor are restrictions on the franchisee post termination. These seek to prevent the franchisee from competing, misusing confidential information or poaching staff. They are designed to protect the franchisor, whose brand and system helped build the franchisee’s business. Equally, the franchisee cannot be unfairly restricted from earning a living or lawfully competing with the franchise. English law has a principle of ‘freedom of contract’, which broadly gives effect to what parties freely agree. However, particular restrictions, especially exclusivity terms and post termination restrictions, need to be considered in the light of UK and European competition law and justified.
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