‘Keep your hands off my customers’ – A look at exclusive franchise territories

March, 2016

By Brent Weston, Special Counsel 

Exclusive franchise territories

Granting an exclusive geographical territory to a franchisee is common in franchise systems as it allows each franchisee to operate in a defined area to the exclusion of other franchisees.  This in turn gives the franchisee the right to prevent competing franchisees setting up business in the exclusive territory, and also to prevent the poaching of customers located in that territory. As a large portion of a franchisee’s success depends on the business that it generates in its territory, it is not surprising that franchisees will go to great lengths to protect it.

The Federal Court recently considered territorial exclusivity in NSW1, where the contractual arrangements looked like this:

Exclusive Territory Diagram

What Marmax did 

Over the course of one year, Marmax performed work for customers who came into its showroom in Albion Park Rail (south of Wollongong). These customers actually lived in the Southern Highlands (covering Mittagong and Bowral), which  was in RPR’s territory.

What Spanline did

Spanline provided conditional consent to this activity with the effect that Marmax could service customers living in RPR’s territory, but only if they were unwilling to drive to the nearest RPR showroom in Nowra, or did not want RPR to do the work.  Marmax had no obligation to notify RPR or pay any amount to it.

What were RPR’s exclusive rights?

Spanline granted RPR an exclusive right to sell and install Spanline products to customers whose residential dwellings were located within its franchise territory.  This meant two things:

  1. There was a promise by Spanline not to authorise other franchisees to engage in RPR’s franchise business within its territory; and
  2. There was an implied contractual obligation requiring Spanline to do all things necessary to enable RPR to have the benefit of the contract.

Spanline was in breach

By operation of these two principles, Spanline could not take any steps that would infringe upon, or cause a third party (Marmax) to infringe upon, the exclusive franchise granted to RPR.  Spanline failed to comply with these obligations by giving Marmax conditional permission to undertake work in RPR’s exclusive territory.  However, Spanline was not obliged to take positive steps to investigate work undertaken by Marmax in RPR’s exclusive territory, or to enforce its contractual rights against Marmax for the benefit of RPR.

Loss and damage

When Spanline breached the contract by permitting Marmax to obtain jobs from customers in the RPR territory, RPR lost opportunities to which it was entitled. The effect of Marmax’s conduct was to deprive RPR of the benefit of its exclusive franchise, and the right to make sales to customers in its territory.  Damages were awarded on the basis that RPR would have secured 80% of the work obtained by Marmax.

Lessons

When granting exclusive territories, be aware that a court may imply an obligation to do all things necessary to enable the parties to enjoy the benefits conferred by the contract.  For franchisors, this may impose obligations greater than those written in the franchise agreement.

One way to avoid the problems raised in the Marmax case is to not grant exclusive territories. This has become more commonplace, and has had the effect of creating competitive tension between competing franchisees.  It is also a reflection of the digital age.  Many franchisees no longer need to set up a physical shopfront to attract customers.  In many systems, franchisees are very mobile and will go to the customer after being referred a job from the franchisor’s centralised call centre.  Often, the franchisee will be given a job in a specified geographical area, but not always.

Contact Mills Oakley

The Mills Oakley Corporate Advisory team can assist with exclusivity clauses and all other franchising needs.

For more information, please contact:

tim-cox

Tim Cox | Partner 
T: +61 7 3228 0442
E: tcox@millsoakley.com.au

 

 

 


1Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd [2015] FCAFC 127

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