The right afforded to a franchisee to trade exclusively in a particular geographical region is critical to the success of the franchise in that area. However, exclusivity in a franchise agreement can also refer to a particular customer base and the exclusive right to service that clientele.
If another franchisee opens next door in your franchise territory, the extent to which your right to exclusive trading is spelled out in the agreement will dictate the courses of action that are available in thwarting this obvious competitor. While healthy competition is essential to a functioning market, the repercussion of competing with another franchisee of the same company in the same area can be catastrophic if not addressed. The worst-case scenario is that both franchises fail, which, to an extent, comes down to bad management on the part of the franchisor.
Even if the franchise agreement does not allow for rights to a particular territory, you should take action in the following ways:
- Read the entire franchise agreement (preferably with a franchise solicitor);
- Irrespective of an exclusivity right, ask other franchisees how the franchisor dealt with this issue in the past;
- Get a franchise solicitor’s advice on how to proceed;
- Bring the issue to the attention of the franchisor; and
- If you can, negotiate the inclusion of a ‘first right of refusal’ clause (allows you to object to another franchisee entering your territory).
Are there limits to your territorial exclusivity rights?
It is very common for a franchisor to impose restrictions on the extent of the territorial exclusivity rights. These can include:
- The franchisor’s right to take commercial advantage of any franchised territory;
- The franchisor’s right to sell any of the products or services online;
- The limitation to the franchisee’s right to an exclusive territory based on meeting certain key performance indicators; or
- That the franchisor retains the right to amend the conditions of the exclusivity clause.
Just as a franchisor might want to include all of these restrictions in the franchise agreement, a franchisee might want to include a ‘first right of refusal’ clause, allowing them challenge any potential new entrants into their so-called exclusive territory.
How do franchisees ensure their exclusive territory rights are enforceable?
A franchisor will be in breach of the franchise agreement if they allow another franchisee to encroach on the exclusive territory of another franchisee.
If you’re worried about the viability of your franchise due to the franchisor’s failure to adhere to the agreement, you should tell the franchisor immediately. The next step, assuming the franchisor was not willing to negotiate, is to have the matter resolved via mediation. This process of mediation is accounted for in the Code.
What if you don’t have any exclusive rights?
The franchisors that include exclusivity provisions into their franchise agreements are normally the more established companies. If you’re a franchisee without an exclusivity clause, you might be able imply the clause by relying on the common law principle of good faith.
What is the common law principle of good faith?
This principle of good faith requires the cooperation of both parties to adhere to the agreement in an honest and fair manner and to act reasonably and in accordance with the Code.
While the good faith principle is not expressly included in the Code, the Code does state that ‘nothing in the Code limits any obligation imposed by the common law applicable in a State or Territory, on the parties to a franchise agreement to act in good faith’.
Although the Code does, to some extent, consider the good faith principle in determining whether there has been an actionable breach of a franchise agreement, it is advisable that you have a franchise solicitor negotiate the express inclusion of the exclusivity clause into the agreement from the outset.
If you’re in need of legal assistance to have your agreement negotiated, contact LegalVision on 1300 544 755 and speak with one of our franchise solicitors today.