Franchise territorial disputes: legal risks and practical approaches

Role of franchisor’s policies and system practices  

Territorial disputes are not only about what the franchise agreement says. They often turn on how the franchisor manages and communicates its policies – and how those policies are perceived by franchisees competing on the ground. In some systems, the absence of clear policies for managing territorial conflicts becomes a source of complaints in itself. 

A common flashpoint is when a franchisor authorizes a new unit, whether franchised or corporate-owned, too close to an existing location. Even if the agreement permits it because there is no exclusivity, franchisees often view it as undermining their business and breaching the spirit of good faith or unwritten understandings within the system. 

Disputes also arise when one franchisee encroaches on the territory of another and the franchisor fails to intervene. In systems where there are no contractual territorial protections, franchisees may operate on the expectation that they will not cannibalize each other’s core areas. Whether that expectation is realistic depends heavily on the type of business and how the system has been managed. 

How a franchisor responds to complaints is critical. Franchisors that investigate and resolve encroachment issues promptly and consistently stand a better chance of preventing escalation. Those that appear inconsistent – favouring some franchisees, ignoring complaints, or changing their approach midstream – invite distrust and, ultimately, litigation. 

Assessing complaints and commercial reasonableness 

When territorial disputes escalate, a franchisee will often ask a court or arbitrator to scrutinize the franchisor’s conduct through the lens of contractual obligations and the duty of fair dealing. The analysis usually turns on whether the franchisor acted consistently, reasonably, and in good faith. 

Some of the key considerations include: 

• Consistency within the system: Is the disputed situation consistent with how the system normally operates? For example, if every franchisee in the system competes with others on food delivery apps, a franchisee who complains about encroachment through Uber Eats may have difficulty proving unfair treatment. But if one franchisee is suddenly exposed to direct overlap when that has not been the norm, the situation might start looking different. 

• Franchisor’s enforcement practices: Has the franchisor traditionally stepped in to prevent one franchisee from encroaching on another’s area? If the franchisor has looked the other way in some cases but enforced territorial protections in others, a court or arbitrator might question whether the franchisor has been even-handed. 

• Franchisee’s own performance and obligations: Is the complaining franchisee meeting its obligations? For instance, if the franchisee has recurring operational issues, customer complaints, or is failing to meet sales benchmarks, a franchisor might argue that the franchisee’s losses stem from its own deficiencies rather than from competition. In those circumstances, a franchisor’s decision to support another operator in the area might potentially be seen as commercially reasonable. 

• Underlying motives and treatment of franchisees: Is the franchisor attempting to sideline a weaker operator in favour of a multi-unit or more established franchisee? If so, this could raise questions about whether the franchisor is acting in good faith or merely pursuing its own interests at the expense of fairness. Conversely, if the complaining franchisee is demanding protection that no other franchisee receives, the claim may lack merit. 

In practice, territorial disputes are often about more than boundaries on a map. They test whether the franchisor’s conduct reflects consistent policies, commercially reasonable judgment, as well as transparency in good faith performance of obligations. 

Remedies for territorial disputes 

If liability is found against a franchisor, damages can be significant both monetarily and in potential harm to a franchisor’s reputation.  

• Accounting for profits: In one case, a franchisor opened a competing location inside a franchisee’s exclusive territory. The court awarded damages based on the profits of the competing location, including the royalties and fees the franchisor collected. The franchisee had to show both that it suffered losses and that the franchisor benefited from the breach.  This case is discussed in our article Quebec court finds franchisor breached exclusive territory rights and awards damages. 

• General and bad faith damages: Beyond economic loss, franchisors risk exposure to general damages for breach of contract and additional damages for breach of the duty of good faith. These can far exceed the value of lost profits in a single territory, and they can damage the franchisor’s reputation across the system. 

Dispute resolution 

Franchise agreements often require that territorial disputes be resolved through binding arbitration. These clauses can become complicated when third parties are involved – for example, other franchisees whose rights or operations are directly at issue. In those cases, enforcing an arbitration clause may be more difficult. 

Even where arbitration is not mandatory, or its enforceability is uncertain, it should remain a serious option. Territorial disputes in particular often lend themselves to arbitration for several reasons: 

• Timeliness: Arbitration can proceed more quickly than litigation, allowing both franchisor and franchisee to return their focus to running the business rather than fighting a prolonged case in court. 

• Confidentiality: Keeping these disputes out of the public record protects the brand’s reputation, shields sensitive business information, and avoids the negative publicity that can damage both the franchisor and franchisee in their local markets. 

• Preserving relationships: A fair and transparent arbitral process can resolve the dispute without the entrenched hostility that often comes with court proceedings, giving the parties a better chance of continuing their business relationship. 

Arbitration is not always the procedure of choice for some parties, but in territorial disputes its relative speed, privacy, and finality often make it the more commercially reasonable path. It is a procedure that parties should evaluate carefully at the outset of these types of disputes. 

The hard part – best practices for preventing territorial disputes 

The most effective way to address territorial disputes is to prevent them before they arise. This is also the most difficult part. In practice, territorial issues are complex and require clear policies, consistent application, and ongoing attention. It is not enough to draft a clause once and assume it will remain effective. System growth, market shifts, and franchisee expectations all put pressure on these arrangements. 

It is not enough to draft a clause once and assume it will hold up over time. System growth, market changes, and franchisee expectations all put pressure on these arrangements.   

The key criteria are: 

• Clear and reasonable agreements: Territorial provisions must be drafted with clarity and with commercial reasonableness in mind. Ambiguous terms invite conflict. Boundaries should be specific, commercially realistic, and aligned with the system’s growth strategy. Overly broad, vague or unrealistic restrictions risk being struck down. 

• Consistency in policies: Once territorial policies are established, franchisors must apply them evenly across the system. Uneven enforcement, unjustified special treatment for certain operators, or shifting policies create distrust and can form the basis for claims of contractual breach or bad faith. 

• Ongoing communication: Open communication between franchisors and franchisees about territorial issues is essential. Early discussions about expansion plans, system-wide changes, or potential overlaps can prevent disputes from escalating. 

• Proactive dispute resolution: Regular reviews of territorial arrangements and early engagement with franchisees can resolve concerns before they harden into legal disputes. Where adjustments are needed, explaining the rationale and applying the same principles across the system can minimize conflict. 

Franchisors that approach territorial rights with clarity, consistency, and transparency are in a stronger position to minimize disputes and protect both their brand and their franchisee relationships.

Law Works can help

At Law Works, we work with lawyers on franchise matters and commercial disputes, including:

• Assisting with drafting franchise agreements and disclosure documents 
• Advising and acting in franchise disputes on behalf of franchisors  

For additional insights, see our resources on performance standards and resolving franchise disputes.  

If your client is facing a territory or other franchise dispute, we are available to review the matter and discuss practical options for resolution, whether as counsel or in another capacity.  

Ben Hanuka is also available to serve as mediator or arbitrator on the joint appointment of the parties. 

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The information contained in this article is provided for informational purposes only and does not constitute legal advice. Readers should not act on this information without seeking professional legal advice from a lawyer experienced in this area. The content in this article may not reflect the most current legal developments, and the application of law can vary in different provinces and territories. As such, the information in this article is not guaranteed to be complete, correct, or up to date. The author and the publisher of this article disclaim all liability for any actions taken or not taken based on any or all of the contents of this site.