Most franchise agreements contain terms to the effect that the franchisee is entitled to an “exclusive territory” where the franchisor will not compete for business or allow another franchisee to operate in that area.
Several recent court decisions have reviewed the obligation of franchisors to ensure the franchisee’s territory is not encroached upon by the actions of the franchisor itself or other franchisees.
A case involving a video hire store concerned whether the franchisor’s online sales breached the exclusive territory of the franchisee. The franchisor argued that as it had not opened a “bricks and mortar” store in the franchisee’s territory, it had not breached its obligation of non-competition. The Court held that there is no distinction between online and shopfront trading, and found that not only had the franchisor breached the exclusive territory, but had also failed to act in good faith.
A separate case was brought by a building contractor company against its franchisor, after making various complaints to head office over a 2 year period that it believed a neighbouring franchisee was poaching jobs in its territory. The franchisor had told the franchisee that it did not tolerate such behavior by other franchisees, and would take the necessary action to prevent the breach continuing. When nothing happened, the franchisee was forced to take the matter to court.
The Court discovered that the franchisor had in fact entered into an agreement with the neighbouring franchisee, allowing it to take on certain jobs in the area. Similar to the earlier case, the franchisor argued that there was no breach of the exclusive territory as the neighbouring franchisee had not opened a showroom in the territory. The Court held that the franchisee’s exclusive territory had been breached by the selling activities of the neighbouring franchisee, and the franchisor had breached its obligations in permitting this to occur. The franchisor was ordered to pay damages for lost profit and sales to the franchisee.
These recent decisions bode well for franchisees that are suffering as a result of franchisors’ lack of concern for their territorial rights – franchisors should now be aware that they may be liable for lost profits if they do not preserve their franchisee’s exclusive territories.
If you are a franchisee and believe that your exclusive territory has been breached, contact the team at Everingham Solomons where Helping You is Our Business.
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