Franchise Encroachment, Part 1

Contractural Concerns

Do franchisees have an unrestricted right for claims of encroachment regardless of the language of the contracts?

Kaufmann: If franchise-agreement territorial provisions are clear, well-drafted, explicit and adhered to by the franchisor, then technically franchisees have no claim of encroachment whatsoever against their franchisors. It's unfortunately the case, however, that some members of the judiciary-using as cover the "implied covenant of good faith and fair dealing"-substitute their notions of what is "fair" for franchisees separate and apart from what the contracts actually say. This destructive tendency of some jurists contravenes the basic principle that what was "fair" when the contract was signed is "fair" today.

Zarco: Franchisees absolutely do not have an unrestricted right. The contractual language is crucial in determining whether franchisees can assert and monitor claims against franchisors for Breach of Contract, Breach of Implied Covenant of Good Faith and Fair Dealing and so on. If a particular franchise agreement contains language that clearly and specifically states the franchisor has reserved for itself the right to place a competing unit in close proximity to an existing franchisee's location, regardless of impact, then there's a substantial legal precedent to uphold the franchisor's right to encroach. If, however, the franchise agreement fails to specifically set forth the respective rights of the parties as to the location or expansion of future stores, then the franchisee is free to allege and maintain express and implied contract claims.

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