Lessons to avoid competing online in your franchisee’s exclusive territory
By Rebecca Bedford and Kate Watts
The NSW Supreme Court decision in Video Ezy International Pty Ltd v Sedema Pty Ltd  NSWSC 143 demonstrates that courts are prepared to take a tough line on franchisors and to reject technical legal arguments about the construction of agreements relating to the franchise relationship. The court looked at what it considered to be the ‘natural and ordinary’ meaning of an exclusivity provision as part of its finding that a reasonable person would have understood the provision to extend to protect the franchisee from any online businesses operated by the franchisor or its associates.
The case also suggests that the courts may be willing to apply a lower bar to the test of what constitutes unconscionable conduct, and to apply accessorial liability to directors. As a result, franchisors need to ensure that they can provide reasonable justifications for their conduct and that such conduct does not undermine the commercial bargain made with franchisees.
This case also demonstrates a willingness of the courts to take a broad view of the meaning and application of ‘good faith’ obligations implied into franchise agreements. This is topical considering the Wein Review’s recommendation last year that the Franchising Code of Conduct be amended to include an express obligation on the parties to act in good faith. The issue of online sales into franchise territories is also a matter raised in the Wein Review, with a recommendation that franchisors be compelled to include in disclosure documents details of the rights of franchisors and franchisees to conduct and benefit from online sales…
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Despite their prevalence, there has been some uncertainty in relation to the income tax treatment of earnout arrangements.