Franchisor’s internet trading breaches restraint clause

  • Author : Robert Hay QC - 19-08-2014

Franchise agreements often restrict the franchisor from selling the franchised product in the territory in which the franchisee operates. Franchisors that engage in internet selling might be acting in breach of such clauses.

This issue was highlighted in a recent appeal in New South Wales from the decision of a Magistrate to award damages against a franchisor. See: Video Ezy International Pty Ltd v Sedema Pty Ltd [2014] NSWSC 143.

In Video the franchisee operated a franchise business renting and selling DVDs. A company related to the franchisor operated a website from which customers could order DVDs. The franchise agreement precluded the franchisor from carrying on a “trade or business involving the rental and/or sale of video products or any other business of a similar nature within the territory of the franchise” (restraint clause).

The franchisor contended that the online business did not breach the restraint clause because it did not refer to the rental and sale of DVDs “into” the territory of the franchisor: a business could undertake transactions in a place without it being correct to say that the business is “within” that place. The court rejected the franchisor’s contention on the basis that it was “artificial” and did not give the phrase “within the territory” its natural and ordinary meaning. The court dismissed the franchisor’s appeal.

 

The franchisor and the related company operating the website were treated as one entity and found liable for breaching the restraint clause and an implied duty to act in good faith and for unconscionable conduct under the Australian Consumer Law.

About the Author

Robert Hay QC

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