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Friday, September 18, 2015

Turf war: Upholding exclusive territory rights in a licence

By Nadia Guadagno, Senior Associate

Exclusivity is one of the most valuable rights which can be granted under a licence agreement. If that right is impinged upon, then the value of the licence is eroded. Licensees will legitimately expect licensors to honour the grant of an exclusive licence, but how far is the licensor required to go to protect that right?

The Full Federal Court recently considered this issue in Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd [2015] FCAFC 127 concerning a longstanding territory war between a franchisor and two franchisee neighbours.


What happened?


Spanline Weatherstrong Building Systems Pty Ltd (Spanline), a franchisor of the business of sale and installation of home additions, such as verandas and carports, entered into separate franchise agreements with RPR Maintenance Pty Ltd (RPR) and Marmax Investments Pty Ltd (Marmax) under which it granted each of them an exclusive right to conduct the franchised business in adjacent territories.

Marmax started completing jobs for customers who lived in RPR's territory. Unbeknownst to RPR, Spanline had given permission to Marmax to service customers who had contacted Marmax and resided within RPR's territory. RPR made numerous complaints to Spanline. In response Spanline looked into its jobs database and, despite seeing Marmax had done jobs in RPR's territory, concluded that nothing looked suspicious. In response to further complaints it gave Marmax a warning. However, Marmax continued to do jobs in RPR's territory in accordance with its permission and Spanline did not follow up any other complaints. Spanline contended it was not required to do anything further as this was essentially a dispute between two franchisees.

RPR was successful at trial against both Spanline and Marmax. Both those parties appealed*.


Right of exclusivity – does it give rise to a corresponding obligation on the licensor?


Citing an earlier Victorian Court of Appeal decision in Montedeen Pty Ltd v Bamco Villa Pty Ltd [1999] VSCA 59, the Full Court said that 'the avowedly exclusive nature of the right conferred on the franchisee…means that the franchisor is under a correlative obligation not to infringe that right whether by directly trenching upon it or by authorising another franchisee to do so.' As Spanline had granted an exclusive franchise, there was a correlative promise on the part of Spanline not to establish its own Spanline business or authorise other franchisees to engage in the franchise business within the franchised territory. This 'correlative obligation' formed an implied term of the franchise agreement which was breached by Spanline by granting the permission to Marmax.

The effect of the breach and Marmax's subsequent conduct was to deprive RPR of the benefit of its exclusive franchise. As such RPR was awarded damages on the basis that there was a strong likelihood RPR would have secured the jobs performed by Marmax but with a discount to take into account the possibility it may not have secured all of those jobs.


Is the franchisor obliged to take positive steps to maintain exclusivity?


RPR argued and the primary judge accepted that Spanline's obligation extended beyond merely refraining from positive conduct (ie not establishing or licensing another to establish the franchised business in RPR's territory) – it also had an obligation to take positive steps to ensure that RPR's exclusivity was maintained. The primary judge based his reasons on the following implied contractual terms:
  • a duty to cooperate and do all things necessary to enable the other party to have the benefit of the contract; and
  • a duty to act in good faith and deal fairly with the other party.
The primary judge found that Spanline breached those obligations by not taking reasonable and available steps to protect RPR's exclusivity, including by failing to investigate RPR's complaints and by failing to demand that Marmax disclose all the work it had done in RPR's territory. RPR also contended that Spanline should have enforced Spanline's contractual rights against Marmax for the benefit of RPR.
 

Duty to cooperate and do all things necessary to enable the other party to have the benefit of the contract

 
The Full Court reminded us that before we can imply terms, we need to ask whether they are necessary to make the contract workable and whether without the implied terms the enjoyment of the rights conferred by the contract would be rendered nugatory, worthless or seriously undermined.
 
To what extent is cooperation required to make workable the obligation to grant an exclusive franchise and the correlative prohibition on Spanline? The Full Court answered that the obligation to cooperate and 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. However, it would exceed the requirement of necessity to require Spanline to do more, such as to take positive steps to investigate possible incursions by Marmax upon the rights of RPR. The absence of a requirement to investigate such conduct would not render the franchise agreement nugatory, worthless or seriously undermined.  For the same reasons, the Full Court did 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.
 

Good faith and fair dealing

 
A duty to act in good faith requires a party not to act capriciously, prevent the performance of the contract, nullify the contract's benefits or for an ulterior purpose. However, this implied term will not restrict a party from acting to promote its own legitimate interests and does not require a party to prefer the interests of the other party or to subordinate its self-interest.
 
The Full Court held that in this case the duty of good faith did not require anything more of Spanline than a duty to cooperate and it did not require Spanline to take additional positive steps to ensure RPR's territory remained exclusive.
 
As this case concerned conduct pre-1 January 2015, the obligation to act in good faith under the new Franchising Code was not raised. However, the principles discussed in this case should apply equally to the obligation under the new Franchising Code and can provide guidance for franchising parties in relation thereto.
 

What can we learn from this?

 
A grant of an exclusive right under a licence gives rise to an implied obligation on the part of the licensor not to infringe that right itself or by authorising a third party to do so. However, it will not necessarily oblige the licensor to take positive steps to protect that exclusive right. What steps (if any) the licensor will be required to take pursuant to the contract or any implied terms of good faith or cooperation, will depend on what rights and benefits are conferred by the contract and what is necessary to ensure the licensee obtains those benefits.
 
This case also highlights the importance for licensees to ensure that their licence supports the exclusive right granted under the licence by obliging the licensor to take action against infringers, including other licensees which are acting beyond the scope of their licence.


* At trial the court found that Marmax had also breached separate agreements between it and RPR. This was overturned on appeal. This article focuses on the franchise agreement between Spanline and RPR.

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