This franchising update focuses on RPR Maintenance Pty Ltd v Marmax Investments Pty Ltd [2015] FCAFC 127, and the Full Federal Court’s interpretation of exclusivity clauses in franchise agreements.

The Full Court found that the franchisee, Marmax, had breached an exclusivity clause by doing a single job in another franchisee’s, RPR, territory but that Spanline, the Franchisor, was not required to take positive steps to enforce its contractual rights in the franchise agreement against one franchisee on behalf of another franchisee.

This decision highlights for franchisors and franchisees some of the issues when dealing with exclusivity clauses.  

CASE HISTORY

Marmax Investments Pty Ltd (Marmax) and RPR Maintenance Pty Ltd (RPR) were franchisees of Spanline Weatherstrong Building Systems franchise. RPR commenced proceedings against Marmax and Spanline Weatherstrong Building Systems Pty Ltd (Spanline) the franchisor, arguing that Marmax was operating within its exclusive territory and Spanline allowed this to occur in breach of its franchise agreement with RPR.

The trial court originally held that Marmax had breached its franchise agreement by doing jobs in RPR’s territory. RPR was awarded to damages from Marmax and Spanline.

Marmax and Spanline both appealed the decision. While the appeal considered over 30 grounds of appeal this update focuses on the courts finding in relation to the exclusivity clause contained in the franchise agreements.

THE IMPORTANCE OF EXCLUSIVITY? 

Exclusivity of territory is seen as an important and valuable right of a franchisee. One of the primary purposes of the grant of an exclusive franchise territory is to regularise competition between franchisees. It can also protect vulnerable franchisees.

Breach of an exclusive franchise territory might result in a decrease in sales revenue, from which a franchisee may be able to recover damages.[1] However the damages are not limited to direct loss suffered.

WHAT THE COURT DETERMINED ABOUT THE EXCLUSIVITY CLAUSE

In this case, the Full Court upheld the original decision that the exclusivity clause contained in RPR’s franchise agreement conferred an exclusive right to sell and install Spanline products to consumers whose residential products were located within its franchise territory and to constrain it from selling and installing those products to customers who lived outside its territory.

The Full Court rejected Spanline’s and Marmax’s argument that the exclusivity clause was only concerned with ‘excluding other businesses from establishing business operations in the same territory’. The Full Court said this interpretation would seriously erode the value of the right of exclusivity in a way that does not make business sense, particularly having regard to the subject matter of the franchises which involves installation of products.

After finding that there was a promise on the part of Spanline not to authorise other franchisees to engage in the franchise business within the territory of the franchise, the Full Court then considered whether the grant of an exclusive franchise territory by Spanline required Spanline to take steps to ensure that the exclusivity was maintained (in effect a duty to co-operate to give effect to the grant of exclusivity in the franchise agreement).

In Spanline’s circumstances, the Full Court found that:

  1.  the obligation to do all things necessary to give the other party the benefit of the contract required Spanline to refrain from taking ‘positive steps’ that would infringe upon, or cause a third party to infringe upon, the exclusive franchise granted to RPR.
  2. to require Spanline to do more (for example, to require Spanline to take positive steps to investigate possible incursions by Marmax upon the rights of RPR) would exceed the contractual requirement of necessity (the taking of the positive steps not being necessary for the franchise agreement to function).

As a result the Full Court also did not accept that Spanline was under an obligation to take steps to enforce its contractual rights against Marmax, another franchsiee, for the benefit of RPR.

The Full Court held that there was no implied contractual duty on Spanline to take “positive steps” to enforce the exclusivity of the franchise agreement, only a “duty to cooperate” with the franchisee, RPR.

The Full Court also considered the effect of an implied obligation of good faith in light of Spanline’s obligations. Bearing in mind the underlying obligations surrounding the grant of an exclusive franchise, the Full Court found that the implied duty of good faith, in these circumstances, did not require anything more of Spanline than a duty to cooperate to give effect to the grant of exclusivity and based on the reasoning did not require Spanline to take action against Marmax.

NOTE OF CAUTION

This decision flags a warning to franchise parties that:

  1. each party needs to be aware of the agreement that they are entering into and the extent of the obligations on each party to give effect to the bargain / contract agreed;
  2. in some cases ‘positive steps’ may be required of a franchisor to take action to give effect to the duty to co-operate to give effect to the bargain made between the franchisor and the franchisee in the franchise agreement; however,

in other cases however, such as this one, if the franchisor is providing what it contracted to do under the terms of the franchise agreement and is not authorising other franchisees to engage in business in another franchisee’s territory, then that may be sufficient to meet the franchisor’s obligations.