Franchising in Hong Kong: How to Draft Reasonable Non-Compete Clauses

Businesses preparing to offer franchises often worry that franchisees will learn their operating methods and then set up on their own. They may therefore include a blanket ban on competition in the agreement. Yet an overly broad restriction may be unenforceable and could deter suitable partners. Building a franchise community based on mutual trust should start with asking what needs protecting, rather than simply prohibiting franchisees from running businesses in the future.

1. Distinguish legitimate interests from ordinary competition

Hong Kong has no franchise-specific legislation, nor a dedicated mandatory franchise disclosure, filing or statutory code of conduct regime. Franchise relationships are governed primarily by common law contract principles and applicable general legislation, such as the Misrepresentation Ordinance. Arrangements that restrict competition must also be considered under the Competition Ordinance. Mainland China’s Regulations on the Administration of Commercial Franchises should not be treated as the rules governing local franchises in Hong Kong.

Non-compete clauses engage the common law doctrine of restraint of trade. A clause is not necessarily valid simply because both parties have signed it. The party seeking enforcement generally needs to show that the restriction protects a legitimate business interest, is reasonable in scope and is consistent with the public interest. Enforceability depends on the particular facts and wording; it cannot be assessed solely by referring to another brand’s template.

Franchisors should first list the interests they need to protect, such as undisclosed production techniques, commercially valuable confidential information or customer connections developed through the franchise relationship. Simply wanting to keep competitors out of the market will not usually justify a restriction. Nor should a franchisee’s existing skills or publicly available knowledge automatically be treated as the franchisor’s proprietary assets.

2. Define four dimensions of the restriction

Avoid simply stating that ‘the franchisee must not operate any similar business’. Instead, prepare a clause-planning table setting out each proposed restriction and its rationale, then ask a lawyer to draft the wording:

• Business scope: Describe the products or services that genuinely compete with the franchise. Avoid sweeping unrelated retail, catering or consultancy work into the restriction.
• Geographical scope: Refer to the outlet’s actual service area, customer base and geographical reach of its goodwill, rather than imposing an indiscriminate ban on trading everywhere. An online business does not automatically justify a worldwide restriction.
• Duration: Explain how long the interest needs protection, taking account, for example, of how quickly information loses its commercial sensitivity. Hong Kong has no statutory ‘safe’ period that applies to all franchise agreements.
• Activities covered: Distinguish between operating a business, participating in its management, providing consultancy services and passive investment. Holding a small number of shares in a listed company is not the same as directly running a competing outlet.

Each restriction should answer the same question: would a narrower version still adequately protect the franchisor? If so, consider adopting that narrower version.

3. Separate restrictions during the relationship from those after termination

During the franchise relationship, a franchisor may need to prevent franchisees from simultaneously operating directly competing brands, creating conflicts over resources or interests. After termination, franchisees need reasonable scope to earn a living and conduct business. Restrictions for these two stages should be drafted separately, rather than simply carrying over the same duration, territory and descriptions of prohibited activities.

Before signing, ask prospective franchisees to disclose their existing businesses, directorships and relevant investments, and record in writing any activities they may continue. If the franchisor already knows that a prospective franchisee operates another business but does not clearly address the exception, disputes about the restriction’s scope can easily arise later. The disclosure process should collect only the information needed to assess conflicts of interest.

It is also important to establish who is actually bound. A franchise company signing an agreement does not automatically subject its shareholders, directors or their family members to the same restrictions. If particular individuals need to give undertakings, a lawyer should assess the necessity, legal basis and signing arrangements. Broad expressions such as ‘all connected persons’ are no substitute for that analysis.

Confidentiality obligations, restrictions on soliciting specified customers and requirements to stop using the brand serve different purposes. First consider whether more targeted measures would be sufficient. However, do not assume that calling a provision a ‘non-solicitation clause’ makes it enforceable: the restriction it imposes must still be reasonable.

4. Review before signing and preserve evidence when enforcing

Non-compete restrictions should be clearly presented in the franchise agreement, giving prospective franchisees time to obtain independent legal advice. They should not be hidden in an operations manual or introduced unexpectedly after the outlet opens. Franchise recruitment staff should also avoid giving verbal assurances that ‘this clause will not be enforced’ while retaining contractual wording to the contrary.

Ask a Hong Kong lawyer to review both enforceability under common law and competition law risks. Maintaining brand consistency does not make every restriction reasonable. Non-compete clauses should not be used to disguise resale price-fixing or improper market-sharing arrangements.

If a breach is suspected, first preserve relevant advertising, publicly available trading information and lawfully obtained correspondence. Check whether the activities in question genuinely fall within the clause, then assess whether to issue a notice, negotiate or take legal action. Do not assume that a court will grant an injunction simply because the agreement says one may be sought. Nor should you expect a court to rewrite an overly broad clause for the franchisor.

Practical takeaway: Start with a one-page table of ‘Interests to Protect and Reasons for Restrictions’, linking the business activities, territory, duration and parties covered to actual needs. Being able to explain clearly why each restriction is necessary provides a sound basis for a lawyer to draft and review the clauses.