Franchises

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Is your franchise territory safe?

Exclusive franchise territory – is it protected?

Two cases have reinforced obligations on franchisors to protect the exclusive territory of a franchisee.

Case 1:

The Supreme Court of NSW found that a franchisor breached a franchisee exclusive territory by allowing an entity relating to the franchisor to engage in online sales and subscriptions of movies and DVDs in a franchisee’s territory.  The franchisor argued that he was not in breach of the exclusive territory provisions in the Franchise Agreement as it had not physically entered into the Franchisee’s territory and had not established a “bricks and mortar” store to directly compete against the franchisee.

The court ruled that the exclusive provisions were intended to protect either party from conducting a competing a business in the hire and sale or hire of video products.  The court also stated it would be no different had the franchisor commenced operating a business of the sale or hire of video products by mail order, at a market stall or out of the back of a truck in the exclusive territory.

The court also held that as well as a breach of the terms of the Franchise Agreement, the franchisor was in breach of an implied term to act in good faith toward the franchisee by failing:

  • to remain loyal to the franchisee and comply with standards of conduct;
  • to act reasonably in relation to the promise of exclusivity in the territories; and
  • to not compete against the franchisee in respect of a rental or retail business.

Case 2:

A franchisee which conducted a building maintenance business under a Franchise Agreement, complained that a neighbouring franchisee was poaching jobs in its franchised territory.

The court found that the franchisor had allowed another franchisee to perform work within the franchisee’s exclusive territory.

Similar to Case 1, the franchisor argued there was no breach of the exclusive territory provisions, as the neighbouring franchisee had not established a showroom to sell the products in the franchisee’s exclusive territory, nor did the neighbouring franchisee directly advertise in the exclusive territory.

The court decided that under this Franchise Agreement, the exclusive territory included the activities of selling and installing the franchisor’s product and did not only rely upon whether a showroom was established in the franchisee’s territory.

Again similar to Case 1, the court held the Franchise Agreement contained an implied term of good faith and fair dealing towards the franchisee.  The franchisor was ordered to pay for profits the franchisee had missed by losing the sales and profits to the neighbouring franchisee, even though the franchisor had not received a benefit from those profits.

Message

  1. Franchisors need to review agreements to ensure that they can compete online with franchisees when they have granted exclusive franchise territories.
  2. Franchisors may need to put in processes to identify where customers come from to ensure they do not sell to customers from within an exclusive territory.
  3. Exclusive territory clauses need to be carefully drafted if a franchisor wishes to retain the right to sell online to customers within an exclusive territory.
  4. There is an obligation upon a franchisor to take steps to prevent a neighbouring franchisee from operating within another franchisee’s exclusive territory.

Links:

https://www.smallwoods.com.au/

https://www.accc.gov.au/business/industry-codes/franchising-code-of-conduct

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