What do you get when you are granted an exclusive territory

This case is a franchising case, but it explores the legal consequences of granting an exclusive territory and so should be of interest to IP practitioners too.

Some facts

Spanline carries on a business of providing home additions and extensions such as awnings and patios. It operates nationally through a network of franchisees and sub-franchisees.

In 2001, Spanline appointed RPR as its exclusive franchisee for the South Coast of NSW. RPR was based in Nowra, but its territory also included the Illawarra region and the Southern Highlands. The Southern Highlands were about an hour’s drive from Nowra, but much closer to the Illawarra region.

In 2004, RPR granted Marmax a sub-franchise for the Illawarra region. That was in anticipation of events which finally took place in 2005. In 2005, RPR sold its business in the Illawarra region to Marmax and Spanline granted a new, exclusive franchise over the Illawarra region to Marmax.

In 2007, Marmax began selling to customers in the Southern Highlands. The first time RPR complained to Spanline, Spanline did nothing. It said it could find nothing amiss although, if it had conducted even a cursory search of its database, it would have found that Marmax was indeed selling in RPR’s territory.

Spanline met with Marmax in July 2009 and orally approved Marmax continuing to service customers from the Southern Highlands. Spanline considered this was in its commercial interests as RPR refused to open an office in the Southern Highlands and Spanline was concerned business from potential customers in the Southern Highlands would be lost because they would not travel to Nowra.

After yet further complaints from RPR, Spanline sent Marmax a letter in September 2009 telling it not to sell in RPR’s territory. But Marmax’ subsequent telephone call left Marmax with the understanding that it could continue in line with the July 2009 oral permission.

An attempt to negotiate a co-existence arrangement over the Southern Highlands failed as RPR would not agree to the proposed reduction in its exclusivity and Spanline authorised Marmax to continue.

The result

The trial judge had awarded RPR damages from both Spanline and Marmax: Spanline for breach of the exclusivity arrangements in the franchise agreement; Marmax for breach of the terms of the sale of business agreement.

The Full Court allowed Marmax’s appeal. The Full Court also partially allowed Spanline’s appeal, finding it liable to pay damages only for sales by Marmax in RPR’s territory after Spanline gave Marmax oral permission to continue selling in the Southern Highlands.

What kind of exclusivity was the exclusive territory

Spanline first argued that the grant of the exclusive right “to conduct the Franchised Business in the [Franchised] Territory” was just a promise to be the only franchisee located in the territory and not directed to the location of customers. The Full Court agreed with the trial judge that the exclusivity extended to the customers. The definition of Franchised Business extended to installation of the products. Also, the nature of the business was supplying and installing products in retail customers’ homes.

What did the promise of exclusivity mean

The trial judge had found Spanline in breach of its obligations to RPR implied by the grant of exclusivity both by failing to undertake even the most rudimentary investigation of RPR’s initial complaints as well as by failing to stop Marmax from selling into RPR’s territory, both before and after Spanline gave Marmax oral permission to sell to customers in the Southern Highlands and authorising Marmax to sell in RPR’s exclusive territory.

The promise of exclusivity imported with it implied terms of good faith and fair dealing and an implied term to co-operate: to do all things necessary to ensue each party got the benefit of its bargain. In doing so, the trial judge had relied on Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310 and similar cases.

The Full Court did not disagree that those terms should be implied. Instead, it disagreed about their content. In essence, the Full Court held that the grant of an exclusive territory required Spanline only to refrain from taking positive steps to derogate from the grant of exclusivity or to authorise someone else to invade the territory. The Full Court said:

[139] …. In our view, the content of 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. To require Spanline to do more, such as to take positive steps to investigate possible incursions by Marmax upon the rights of RPR, would exceed the requirement of necessity. It could not be said that the absence of a requirement to investigate such conduct would render the RPR Franchise agreement nugatory, worthless or seriously undermined.

[140] For the same reasons, we also do not accept RPR’s contention that Spanline was under an obligation to take steps to enforce its contractual rights against Marmax for the benefit of RPR.

At [150], the Full Court held that the implied duty to act in good faith did not require anything more than the implied duty to co-operate.

What did this mean? First, Spanline had no obligation to do anything to protect RPR or to try to stop Marmax invading RPR’s territory. (Any of us who might have thought that setting up a network of exclusive territories might have implied such an obligation would apparently be wrong.)

As already noted, therefore, Spanline was only liable to RPR for damages on sales[1] made by Marmax in RPR’s territory after Spanline gave Marmax permission to carry on. Spanline was not liable for sales while it was just “sitting on its hands”.

If you were acting for a franchisee, or an exclusive licensee, of a territory which did not extend to the whole of Australia, you would want to consider bargaining for a term requiring the franchisor (or licensor) to do “something”.

In this connection, the Full Court expressed an additional concern about implying a term that Spanline take reasonable steps to ensure RPR’s territory remained exclusive. It was likely to be uncertain in scope:

[141] …. The mere fact that the term operates by reference to a criterion of reasonableness is not the problem: it is that the contract does not supply any means for determining what is reasonable in the circumstances. It was argued that Spanline’s obligation to RPR could extend to termination of the contractual relationship between Spanline and Marmax. How the interests of Spanline and Marmax would be taken into account in determining whether such a step would be “reasonable” was not explored.

Something rather explicit would seem to be required

Why didn’t Marmax have to pay damages

RPR argued that Marmax was also in breach of both the original sub-franchise agreement and the sale of business agreement.

The Full Court held that the initial sub-franchise agreement between RPR and Marmax had been terminated once RPR and Marmax entered into the sale of business agreement and Spanline granted exclusivity over the Illawarra region to Marmax (with RPR’s knowledge and consent).

The Full Court accepted that a restraint on Marmax selling in RPR’s (retained) territory would not have been an unreasonable restraint of trade. However, the restraints imposed in the sale of business agreement did not extend to Marmax’ activities.

The sale of business agreement did include a restraint clause which seems fairly typical:

Except as permitted by clause 3.10, Marmax must not, and must ensure that each of its affiliates does not, during each restraint period in the South Coast Franchise Area:

(a) promote, participate in, finance, operate or engage in (whether on its own account or in partnership or by joint-venture); or

(b) be concerned or interested (directly or indirectly, or through any interposed body corporate, trust, principal, agent, shareholder, beneficiary, or as an independent contract, consultant or in any other capacity) in,

any of the Restrained Businesses.

For this purpose, “Restrained Business” was defined to mean:

a business, or operation:

(i) similar to the Spanline franchise businesses such as the Business; or

(ii) competitive with the Spanline franchise businesses such as the Business; or

(iii) supplying similar products and services to the Spanline franchise businesses such as the Business.

As best I can make out, this clause did not provide any protection to RPR because Marmax was conducting a Spanline franchise business, not a competing or similar business. There was also a “non-interference” clause:

On and from the Completion Date, [RPR] must not, and must ensure that each of its affiliates does not, during each restraint period:

a) Solicit, canvas or secure the custom of a person who is at the Completion Date, or was within 1 year before the Adjustment Date, a customer of the Business or [RPR] in connection with the Business;

b) Represent itself as being in any way connected with, interested in or associated with the Business (except as its proprietor before the Completion Date) or any business conduct by Marmax; or

c) Solicit, employ or engage the services of any transferring employee or any other person who becomes an employee of Marmax in connection with the Business.

The remarkable feature about the non-interference clause is that it was one way. There was no reciprocal obligation on Marmax not to interfere with RPR’s continuing business.

As a result, Marmax was not in breach of any contractual obligations it owed to RPR and the award of damages for making sales in RPR’s territories could not be sustained.

Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd [2015] FCAFC 127 (Middleton, Foster and Gleeson JJ)

  1. Strictly speaking, damages for the loss of the opportunity to make those sales.  ?
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