A Fine Commercial Line – Franchising Agreements And Breach Of Contract

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Last month the Nyst Legal commercial litigation team spent nearly two weeks in the Federal Court in Melbourne, flanked by a phalanx of QC’s, arguing the toss about exactly how far businesses can and can’t go in talking up their product to the customers of their commercial competitors.

Photo by Tim Mossholder on Unsplash

Our client, a major national franchise chain, had actively marketed its wares to the franchisees of its various franchisor competitors throughout Australia, convincing many of them it offered a far superior product and service for their money. Not surprisingly, the campaign proved to be a highly successful one, with many out-of-contract franchisees defecting to our client in the hope of finding a better alternative, and still more lining up to make the switch as soon as their current franchise term expired.

Again not surprisingly, that put a lot of corporate noses out of joint, as our client’s brand became the big name on the block. Its competitors weren’t happy, but there wasn’t a whole lot they could do about it. Healthy competition is what free enterprise is all about, and businesses are free to market their product to anyone they please, including the customers of their competitors.

The complication came when one franchisee was so impressed with our client’s franchise product, they couldn’t wait to get out of their current agreement. Instead of negotiating an early termination of their agreement, or waiting for its term to expire, the franchisee simply walked out on the contract, and ‘patched across’ to our client’s brand.

That raised the potential for an action in the relatively rarely visited tort of inducing breach of contract. The allegation was our client had intentionally induced the franchisee to breach their existing franchise agreement to come over to the new franchise. Our client countered that it had no wish or intention to see anyone breach anything, although it had aggressively encouraged its competitors’ franchisees to defect, once they were free to do so.

The case is on-going in the courts, but has brought into sharp focus the fine line between what is permissible in commercial competition, and what’s not. Any business is absolutely free to market its product to competitors’ customers, including telling them they would be much better off to ‘get with the strength,’ provided they don’t step over the line and encourage those customers to breach their current contractual obligations.

The courts have described the tort of inducing breach of contract as involving “direct persuasion or procurement or inducement applied by the third party to the contract breaker, with knowledge of the contract and the intention of bringing about its breach.” Intention is a crucial feature, so it will inevitably come down to what is and isn’t said to the prospective customer. That makes it imperative that the marketing is well documented, expressed in concise terms that make it very clear what’s being offered, so there can be no misunderstanding. Because once that fine line gets blurred, you can spend a lot of time and money arguing about just exactly who said what to whom, and to what end.

Brendan Nyst

Senior Associate, Gold Coast Lawyer, Nyst Legal

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