The importance of establishing a water-tight exclusive franchise territory in your franchisee agreement.

In a recent decision in the NSW Supreme Court (Video Ezy International Pty Ltd v Sedema Pty Ltd [2014] NSWSC 143) , the Supreme Court reviewed the importance of exclusivity clauses in franchise agreements and confirms an obligation of good faith, placed on the franchisor, is implied in a franchise agreement.  Franchisors are required to justify any unconscionable conduct and franchisors will need to ensure that any bad conduct does not affect current franchise agreements with franchisees.

In this case, the franchisee purchased a Video Ezy business with the condition of a 10 year exclusive franchise territory. The franchisee alleged that the franchisor had breached the exclusivity agreement by allowing EzyDVD and Blockbuster, related companies of Video Ezy, to operate within their territory through on-line sales.  The court found in favour of the franchisee.

The franchisee argued that the competing nature of the franchisor and the franchisee within an exclusive territory, was in breach of acting in good faith under the Franchising Code. This case confirms that good faith under the Franchising Code is to be implied into a franchise agreement and that in this case it was due particularly to the franchisor’s related entities competing in the franchised territories.

The court also found that the franchisor had acted unconscionably.  It was concluded that the franchisor’s conduct was inconsistent with a ‘proper relationship between franchisor and franchisee, and demonstrated a lack of good faith’.  The test of unconscionability was relaxed, sending a message to all franchisors.

The decision regarding unconscionable conduct is highly relevant to the franchising sector where it is now suggested that it may be easier to prove that conduct was not at a suitable standard of reasonableness based on the franchise relationship and agreements between the franchisor and franchisee.

For more information about exclusive franchise territories and other important considerations, visit or Franchise Agreements page.

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