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Judgment No. 2648 of 2017 of the Court of Milan had dealt with the issue of proper territorial distribution of franchise stores and so-called exclusive areas. Let’s examine its insights:
The case concerns the question of whether, in the absence of an explicit delimitation of territorial exclusivity in the franchise agreement, the franchisor is free to open outlets with other franchisees wherever it chooses, even if in close proximity to previous franchisees.
The dispute, in particular, concerns the owner of a single-brand franchised store for the resale of telephone products.
Since the franchisor/franchisor had entered into a contract with a new party to open another outlet adjacent to the store operated by the previous one, even on the same street, the first franchisee sought termination for breach of contract by the franchisor due to its bad faith and damages.
Article 1375 of the Italian Civil Code states that a contract must be performed in good faith. This normative provision is a fundamental principle in the field of contracts, requiring the parties to act with fairness and mutual loyalty in order to ensure the balance of performance and the proper implementation of the agreements made.
In addition, Article 3 of Legislative Decree No. 114 of March 31, 1998 regulates the form and content of the business affiliation contract. The contract must expressly indicate a number of elements, including the scope of possible territorial exclusivity both in relation to other franchisees and in relation to channels and sales units directly operated by the franchisor, as provided for in letter c. of Article 3.
As a matter of fact, the wording of the Franchise Rule states that “the contract shall also expressly state the scope of any territorial exclusivity both in relation to other franchisees and in relation to channels and sales units directly operated by the franchisor.”
Although exclusivity in relation to the area allocated to the franchisee is thus not a necessary element of the franchise agreement, it cannot be left to the franchisor’s discretion to establish a store location strategy that compromises the franchisee’s interests.
The concept of “zone of exclusivity” in the context of franchising represents an important guarantee for both the franchisee and the franchisor, since it precisely defines the geographical area in which the franchisee has the exclusive right to operate, while at the same time protecting the franchisor from any claims or disputes related to the granting of other outlets outside that zone.
The ruling does not seem to have any particular innovative impact, but it explains the argument very clearly: a lawyer who is drafting a franchise contract for the franchisor should manage exclusive areas carefully and cautiously, so as to ensure a balanced territorial distribution of outlets and prevent situations of harmful competition among franchisees.
Although Italian law does not provide for the obligation of territorial exclusivity in favor of the franchisee, it is important that the franchise contract provides for a specific geographic delimitation of the exclusive area in order to ensure that the franchisee is adequately protected in terms of its interests.
In addition, the contract should always inform the franchisee about the number of franchisees and the location of their outlets, in order to assess the existence of “competitors” in areas adjacent to those of interest and the potential of the investment.
The Canella Camaiora Law Firm is experienced in contract and franchise matters, so it offers assistance to its clients in drafting contracts and resolving disputes related to their interpretation and application, including issues related to the proper territorial distribution of outlets and the obligation to act in good faith.