Australia: Case Update: Howards Storage World V Haviv Holdings

Originally Published 1^st July 2009

Howards Storage World is a franchised business operating as a specialty retailer of household storage items. On 18 July 2002, the franchisor, Howards Storage World Pty Ltd (HSW) entered into a franchise agreement with the franchisee, Haviv Holdings (Haviv), to operate the franchised business in a store within the Burwood Westfield Shopping Centre (Burwood Store). The franchise agreement granted Haviv an exclusive franchise territory for a radius of five kilometres around the Burwood Store. The Burwood Store opened on 31 August 2002.

On 17 August 2004, HSW entered into a franchise agreement with a new franchisee to operate the franchised business in a store within the Rhodes Shopping Centre (Rhodes Store). The Rhodes Store was (approximately) 4.8 kilometres from the Burwood Store (and therefore located inside the five kilometre radius of the exclusive franchise territory as granted to Haviv in 2002). The Rhodes Store opened on November 2004.

Haviv commenced proceedings on 29 March 2007 for breach of contract and vacated the Burwood Store on 17 August 2007. On 18 January 2008, HSW terminated the franchise agreement. Haviv denied HSW's right to terminate and on 6 March 2008, Haviv terminated the franchise agreement.

Franchisee's claims

Haviv brought the following claims against HSW:

• In breach of the franchise agreement, HSW granted a franchise to another HSW store within Haviv's exclusive territory comprising a five kilometre radius of the Burwood Store

• Haviv suffered loss and damages as a consequence of this breach

• Haviv claimed that but for the breach, HSW would have granted Haviv the franchise for the Rhodes Store and Haviv would have operated that store instead of the Burwood Store. Haviv suffered a loss equal to the present value of the net profits it would have earned from the operation of the Rhodes Store from its opening date in November 2004

• Haviv alleged a number of claims that related to misrepresentations made by HSW.

The right to an exclusive territory

The right to operate a business in an exclusive territory is a valuable right for a franchisee. A breach to a grant of exclusive territory is likely to result in a decrease in sales revenue and subsequently, a decrease in net profitability of the franchisee. Such a decrease occurred in this case immediately following the commencement of the Rhodes Store within Haviv's exclusive territory.

The entire Rhodes territory was located within Haviv's exclusive franchise territory. There was no other location in Rhodes where an HSW store could have been located. While the case discussed the appropriate way to calculate the applicable loss caused by this breach in great detail, the loss is clear and apparent when considering the following simple comparisons:

• the profitability of the Burwood Store and the Rhodes Store (the scenario created by the breach) trading together

• the profitability of the Burwood Store with no Rhodes Store trading.

Findings

On 18 March 2009, Jagot J of the Federal Court (NSW) found:

• HSW was in clear breach of the contractual exclusive territory granted to Haviv in the franchise agreement upon granting the franchise for, and permitting the operation of, the Rhodes Store

• Haviv suffered loss and damages caused by the above breach in the form of decreased sales revenue and consequently, decreased net profits

• HSW had no obligation to grant Haviv another franchise within the territory and therefore, no loss equal to the present value of the net profits it would have earned from the operation of the Rhodes Store are recoverable. An exclusive territory does not imply that a franchisee is entitled to operate an additional franchised store within its own exclusive territory.

The Court rejected the allegations that there were misrepresentations made to the franchisee.

A franchise agreement must clearly define the territory to be granted to the franchisee and the mechanisms that may be utilised to alter those clear definitions. When drafting or amending franchise documents it is important to consider the growth of your system and ensure that the franchise agreement gives the franchisor adequate flexibility to expand their network. Please contact Middletons if you have any queries regarding the exclusive territories of your franchisees or your franchised business operation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.