A recent advertisement by a franchise network seeking new franchisees highlighted the fact that franchisees in this network benefited from a "real territorial exclusivity".

Traditionally, the notion of territory was at the heart of any franchise agreement.

In fact, one Quebec court judgment even stated that it was an essential provision of any franchise agreement. In fact, most franchise agreements use the concept of territory not for one purpose, but for four, those being:

  1. Exclusivity Granted to the Franchisee

    Many franchise agreements grant the franchisee an exclusivity or some other form of protection (such as a right of first refusal on the opening of new franchises) within a certain territory defined in the agreement.

    We invite you to read or reread our bulletin entitled Is the Territorial Exclusivity Clause Now Obsolete? regarding this category of provisions and the challenges it raises.

  2. Advertising, Promotion and Solicitation

    The concept of territory is also used in many franchise agreements to prevent competition between franchisees in the advertising and promotion of their respective businesses.

    For example, many franchise agreements contain clauses whereby the franchisee undertakes to limit to a certain territory any advertising and promotional activities for its business, as well as its solicitation of customers.

  3. Delivery of Goods or Services

    Thirdly, in many industries, franchise agreements contain clauses limiting to a specific territory the delivery of goods or services by a franchisee.

  4. Non-Competition Covenants

    Finally, the vast majority of franchise agreements contain non-competition covenants on the part of the franchisee and its officers, both during the term of the agreement and for a certain period of time after the end of that term.

    One of the legal requirements for the validity of such undertakings is that their scope be limited to a reasonable territory clearly defined in the agreement.

It can therefore be seen that the notion of territory plays several important roles in a franchise agreement.

However, with the phenomenal growth of online purchases, delivery platforms and social networks, the relevance of a territory in a franchisor-franchisee relationship is becoming less and less obvious and, in many cases, needs to be replaced by other mechanisms, means and tools better adapted to this new commercial reality.

These new mechanisms, means and tools may include

  • A pooling of franchisees' activities (particularly for advertising and promotional purposes) on a regional, provincial or national basis;
  • Coordination and, sometimes, centralization (often under the management of the franchisor) of technological tools used by the franchisees in the network (particularly websites, electronic advertising and social networks);
  • Mechanisms for indemnification and compensation between franchisees in the event that one franchisee makes a delivery of goods or services in the territory of another franchisee (rather than an absolute prohibition on doing so);
  • Mechanisms to promote the equitable referral between franchisees of new customers, orders and contracts;
  • Tools for the fair sharing and allocation of new customers, orders and contracts received by the franchisor or a centralized (telephone or online) order centre;
  • Means for resolving territorial disputes between franchisees.

Obviously, these new means and tools have to be well adapted to the sector of activity and to the specific needs of each franchise network.

The use of franchise experts is therefore fundamental to the design and implementation of these new means and tools.

Fasken has all the resources and expertise required to help you in this regard.

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.