Exclusivity: Understanding territory

Exclusivity is a concept of great interest to franchisors and franchisees alike but often disputes arise because the parties involved do not agree on what they thought the other intended. Sadly, the franchise agreement does not always provide a clear answer

Where the agreement states: 'The Franchisor grants the Franchisee the right to operate the Business in the Territory using the Trade Marks and System', a prospective franchisee can be forgiven for presuming that this equates to the grant of an exclusive franchise area. However, it is vital to understand that the true extent of the franchisee's territory is defined not only by what the agreement allows it to do, but also by the restrictions that the franchisor agrees to observe in the defined contract territory.

The franchisee must ensure that the agreement restricts the franchisor from operating on its own account in the defined territory and from granting any third party with a licence to operate using the Trade Marks and the System. To be truly exclusive, the franchisee requires an unqualified right to operate in an area and to know that the franchisor cannot grant rights to a third party or operate directly in that area.

Increasingly, agreements contain clauses confirming that the franchisor will accept such restrictions provided the franchisee performs as required in the territory. Without this proviso, the franchisor may regret being bound by an exclusive grant of territory where the franchisee fails to meet trading expectations. For this reason, there is a trend to grant exclusivity subject to conditions, usually requiring that the franchisee meets expectations as measured by a business plan or key performance indicators.

The rise of the importance of websites and the right to respond to enquiries generated by the franchisor's website has led to concern by franchisees about how the website operates alongside a traditional territory defined on the ground rather than the worldwide web. The franchise agreement may give the franchisor the ability to decide which franchisee receives the enquiry and sometimes permit the franchisor to supply the customer directly without reference to the franchisee, even if the customer resides in the franchisee's contract territory. The prospective franchisee must be aware of clauses along the lines of 'Nothing in this Agreement shall prevent the Franchisor from establishing a website for the purposes of procuring customers (which customers shall be the Franchisor's customers) whether or not such customers are situated within the Territory'. If the franchise agreement contains a provision such as this the degree of exclusivity enjoyed by a franchisee will be reduced.

Exclusivity is often much sought after by prospective franchisees, and while it is sensible for franchisees to focus their marketing efforts in a defined geographical area, in some businesses a non-exclusive trading area may be more beneficial to a franchisee as he will not be constrained to operate within the franchise territory only.

Prospective franchisees should ensure that they have a clear understanding of their rights and of the restrictions that the franchisor will be bound before they sign the agreement. The prospective franchisee should not rely on the verbal statements made by the franchisor or set out in the franchisor's marketing literature concerning territory. Before signing the agreement, the prospective franchisee must ensure that the franchise agreement correctly reflects what the prospective franchisee is expecting as far as exclusivity is concerned.

If there is any doubt, for example in relation to how enquiries from websites will be dealt with or the conditions on which exclusivity can be reduced or removed, advice should be obtained from an experienced franchise lawyer before a prospective franchisee signs the franchise agreement.

Text: Jane Masih