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