Franchisor liable to franchisee for allowing incursions into territory

08 May 2016

Spanline Weatherstrong Building Systems Pty Ltd, a franchisor engaged in designing, manufacturing and selling home extensions (eg patios, roof awnings, covered verandas, and carports) gave permission to one of its franchisees (Marmax Investments Pty Ltd) to conduct business within the territory of another franchisee (RPR Maintenance Pty Ltd).

The Full Federal Court1 held that, to the extent that exclusive franchises were granted by Spanline (as was the case for each of RPR and Marmax), there was ‘a correlative promise on the part of Spanline not to authorise other franchisees to engage in the franchise business within the territory of the franchise.’ By giving Marmax this permission, Spanline was in breach of its franchise agreement with RPR.

Marmax was not liable to RPR

The matter was further complicated by the fact that RPR had first sub-franchised part of its territory to Marmax (at no cost and with Spanline’s consent) and later transferred part of its territory to Marmax (for a price and without Spanline’s consent) before Marmax entered into a franchising agreement of its own with Spanline.

The Court found that Marmax did not breach any obligations to RPR under either the sub-franchise agreement or the transfer agreement. The Court made this finding on the basis that, by entering into the transfer agreement in 2004, RPR impliedly agreed to give up its right to conduct a Spanline franchise in the Illawarra area (including its right to grant a sub-franchise to Marmax) if and when Spanline and Marmax entered into a direct franchise agreement. Spanline and Marmax did exactly this in February 2005, at which point any contractual relationship between RPR and Marmax ceased. It followed that Marmax did not breach any agreement by performing work inside RPR’s franchise territory from February 2005 onwards.

The scope of Spanline’s implied duty to RPR

While the Court found that Spanline had breached its franchise agreement with RPR by allowing Marmax to sell in RPR’s territory, the Court found that Spanline did not owe RPR a duty to take positive steps to ensure that RPR’s territory remained exclusive, such as investigating RPR’s complaints about Marmax’s conduct, or enforcing its rights against Marmax for the benefit of RPR. Whilst the Court acknowledged that Spanline was under an implied duty to enable RPR to have the benefit of the contract, it found that this duty did not extend to the point where Spanline was required to take such positive steps.

The importance of site selection and territory planning as part of due diligence

This case illustrates just how important it is to undertake comprehensive due diligence before entering into a franchise agreement. There are certain matters that must be disclosed by the franchisor to the prospective franchisee in the disclosure document at least 14 days before the franchisee enters into a franchise agreement or pays a deposit, including the following:

  1. whether the franchise is for an exclusive or non-exclusive territory, or limited to a particular site;
  2. whether other franchisees may own or operate a business that is substantially the same as the franchised business; and
  3. whether the franchisor may change the territory or site of the franchise and if so, the circumstances in which such a change may occur.

While the disclosure document is designed to help the franchisee make a reasonably informed decision about the franchise, it should not be seen as a comprehensive account of all relevant matters, and prospective franchisees should always seek independent professional advice. Time spent in reconnaissance is seldom wasted.

Timeline of events: Marmax v RPR
2001 RPR and Spanline enter into a franchise agreement: Under the agreement, RPR is granted the exclusive right to conduct the Spanline business within a defined territory, called the ‘South Coast area’
2003 RPR sub-franchises to Marmax: RPR obtains Spanline’s consent to “sell” part of its franchised territory to Marmax (at no cost). Spanline, RPR and Marmax are all parties to this sub-franchise agreement. Marmax is given an exclusive right to conduct the Spanline business within a defined area, called the ‘Illawarra area’.
2004 RPR transfers the Illawarra area business to Marmax: RPR and Marmax execute a Transfer of Business and Loan Agreement by which RPR and Marmax affirm their previous sub-franchise agreement, and RPR again sells the Spanline-Illawarra business to Marmax, this time for a price of $296,367.41. This agreement contains a Vendor’s Non-interference clause which restricts RPR’s activity in Marmax’s Illawarra area, but does not contain any corresponding provision restricting Marmax from interfering in RPR’s South Coast area.
2005 Marmax and Spanline enter into a franchise agreement themselves: Marmax and Spanline enter into a franchise agreement to conduct the Spanline business in the Illawarra area. Like the RPR-Spanline franchise agreement from 2001, this agreement grants Marmax exclusive rights to conduct the Spanline business in the Illawarra area.
2007 Marmax’s incursion: Marmax begins doing jobs for customers who live in RPR’s South Coast area. Marmax made sales of $55,515 in RPR’s area over a 12 month period.
2009 RPR complains to Spanline: RPR complains in writing to Spanline that Marmax is invading its exclusive South Coast area. Marmax argues that Spanline had given it “conditional permission” to do so; Spanline did in fact give Marmax permission to take jobs in RPR’s territory so long as the customer first indicated they were unwilling to travel another hour to RPR’s showroom at Nowra.
2011 The parties attempt to resolve the matter: Representatives of RPR, Spanline, and Marmax convene to try to settle the dispute. A settlement agreement is drawn up which sets out how each franchisee must handle contacts, leads, referrals and phone calls from customers living within the other franchisee’s territory. Marmax signs the settlement agreement, but RPR refuses: it says it has exclusive territory rights under its franchise agreement with Spanline, and these should be adhered to.
2012 RPR files court proceedings: RPR issues a ‘breach notice’ to Spanline and a letter of demand to Marmax. RPR then commences proceedings against Marmax in the Federal Court. At first instance, a single judge finds broadly in RPR’s favour. Spanline and Marmax appealed that decision to the Full Federal Court on 32 different grounds.

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

Download a PDF infographic of the timeline of events

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