Exclusivity is most frequently defined according to geographic area or territory (the franchisee has an exclusive right to service a defined geographic area), however it can also be defined according to clientele (the exclusive right to service a particular set of customers).

If your franchisor allows another franchisee to operate close to your business, whether or not you have an exclusivity arrangement will determine what action you can take to combat the effect of this competition on your business. The commercial dangers of competition should not be underestimated as the consequences to a franchisee of not adequately protecting the exclusive rights of the business can be dire.

Whether the franchise is exclusive or non-exclusive, a franchisee should take the following steps:

• read the franchise agreement carefully;
• as part of due diligence prior to entering into a franchise agreement, speak with other franchisees about how the franchisor treats the issue of exclusivity in practice regardless of any exclusivity clause);
• obtain independent legal advice;
• address any concerns with the franchisor; and
• if possible, negotiate special conditions in the agreement, for example, first right of refusal in relation to any new franchise in the territory.

Restrictions on exclusivity

Even where a franchise is exclusive, franchisors will commonly place particular restrictions on exclusivity in the franchise agreement. Common restrictions on exclusivity can be that the franchisor retains the right to sell directly into the franchised territory to key customers; that the franchisor retains the right to conduct business online selling products or services of the franchise; that the franchiseeÕs exclusivity rights are conditional upon meeting certain prescribed performance criteria; or that the franchisor has the right to renegotiate the territory boundaries.

Whilst these restrictions are often quite prohibitive for a franchisee, a franchisee may seek to include a term in the franchise agreement giving them first right of refusal in relation to any proposed new franchise in the territory.

What can franchisees do to enforce exclusivity rights?

Generally a franchisor will be in breach of its franchise agreement if they fail to adhere to the exclusivity arrangements granted to a franchisee or fail to enforce a franchiseeÕs exclusive rights against other franchisees.

In Haviv Holdings v Howards Storage World (2009), Howards Storage World (HSW) granted Haviv a franchise to operate a HSW retail outlet in an exclusive territory described as being Ôa 5km radiusÕ around the Burwood retail outlet. However, HSW subsequently granted another party the right to operate a HSW retail outlet 4.8 kilometres from the Burwood retail outlet. The Federal Court found that HSW breached the exclusivity clause and would be liable for damages suffered by Haviv until the expiry of the last option for the renewal period — in 2022.

If franchisees have any concerns about exclusivity, they should address them first with the franchisor. If the concerns cannot be resolved at this stage the franchisee should seek to resolve the dispute by mediation in accordance with the Code. Amendments to the Code in June 2010 provide improved protection to the legitimacy of the mediation process.

What rights do non-exclusive franchisees have?

It is common for franchisors, particularly large ones, not to grant exclusivity to their franchisees. So what can you do if another franchisee opens up close by? Franchisees without an exclusivity clause to protect their rights may be able to argue that they have an implied protection against encroachment based on the common law implied term of good faith.

Broadly speaking, the concept of good faith confers obligations on the parties to co-operate in order to achieve the objects of the agreement, to act honestly; and to comply with the standards of conduct which are considered reasonable.

The case of Futuris Industrial Products Pty Ltd v Arrow Industries Pty Ltd provides an example of Australian courts recognising a duty of good faith in the context of encroachment on a franchise territory. The Federal Court found that an exclusive right to sell brake pads existed based upon the conduct of the parties and correspondence between them which indicated that both parties saw the relationship as being exclusive.

The concept of good faith was one of the issues for discussion prior to the amendments to the Code in June 2010. It was proposed by some that the Code should expressly recognise the common law obligation of good faith between franchisors and franchisees.

Ultimately the amendments to the Code fell short of express recognition of an implied duty of good faith. The Code was amended to the effect that Ônothing 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 faithÕ.

Whilst the duty of good faith is developing and may provide protection for a non-exclusive franchisee, exclusivity is too important an issue to be left to the uncertainty of litigation and, if possible, should be resolved through express wording in the franchise agreement. Where a franchise agreement provides for exclusivity, it is necessary to understand the exact terms of the exclusivity, in particular, any restrictions on franchisees contained in the agreement.

Kristie Piniuta is a senior associate at Hall & Wilcox Lawyers.