Introduction
You invested hundreds of thousands of dollars to open a franchise location. You built a customer base, hired staff, and established your business in the community. Then you learn that the franchisor plans to open another franchise — or a corporate-owned location — just a few kilometres away. Can they do that?
The short answer is: it depends on what your franchise agreement says and how the franchisor exercises its rights. Ontario franchise law does not automatically grant franchisees exclusive territories. However, the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the "AWA") imposes a duty of fair dealing that can constrain how a franchisor manages its network, including decisions about new locations. Understanding your rights requires a careful examination of your franchise agreement, the AWA, and the circumstances of the proposed new location.
Franchise Territory Rights Are Not Automatic
One of the most common misconceptions among franchisees is that buying a franchise automatically comes with an exclusive territory. It does not. In Ontario, territory rights are contractual — they depend entirely on what the franchise agreement provides. Some franchise agreements grant exclusive territories. Others provide protected territories with certain limitations. Many provide no territorial protection at all.
This is why reviewing the franchise disclosure document and franchise agreement before signing is so critical. If the franchise agreement does not include a territorial exclusivity provision, the franchisor generally has the contractual right to open additional locations, grant new franchises, or operate competing channels anywhere — including next door to your franchise.
Understanding the Different Types of Territory Provisions
Exclusive Territory
An exclusive territory provision gives the franchisee the sole right to operate within a defined geographic area. The franchisor agrees not to establish another franchise, company-owned location, or other distribution channel within that territory during the term of the agreement. Exclusive territories provide the strongest protection, but even these provisions must be read carefully. The definition of the territory (by radius, postal code, municipal boundary, or otherwise), the duration of the exclusivity, and any carve-outs or exceptions all affect the scope of protection.
Protected Territory
A protected territory is a step below full exclusivity. It typically means the franchisor will not open another franchise of the same brand within a defined area, but may reserve the right to operate through other channels — such as online sales, catering, delivery from outside the territory, or different brands owned by the franchisor. Protected territories provide meaningful but limited protection. The key is to understand exactly what the franchisor is prohibited from doing and what it has reserved the right to do.
No Territorial Protection
Some franchise agreements provide no territorial protection at all. In these cases, the franchisor has full discretion to open additional locations, grant new franchises, or compete through any channel, without restriction. Franchisees operating under agreements with no territorial protection are particularly vulnerable to encroachment.
What Is Encroachment?
Encroachment occurs when a franchisor opens or authorizes a new location, channel, or operation that draws customers away from an existing franchisee. This can take several forms:
• Opening a new franchise location within or near the existing franchisee’s trade area.
• Opening a company-owned location that competes directly with the franchisee.
• Granting distribution rights to a different brand or sub-brand that sells substantially similar products in the same area.
• Expanding online or delivery channels that serve customers within the franchisee’s geographic area.
• Allowing a non-traditional location (such as a kiosk, food truck, or institutional outlet) that competes for the same customers.
Encroachment is one of the most common and contentious issues in franchise law. It pits the franchisor’s interest in system growth against the franchisee’s interest in protecting their customer base and return on investment.
The AWA and Fair Dealing in the Context of Encroachment
Even where the franchise agreement does not provide explicit territorial protection, the duty of fair dealing under section 3 of the AWA may constrain the franchisor’s conduct. Section 3 requires both parties to act in good faith and in accordance with reasonable commercial standards in the performance and enforcement of the franchise agreement.
The intersection of encroachment and the duty of fair dealing has been the subject of significant judicial consideration in Ontario. In the context of cases such as Country Style Food Services Inc. v. Mesic, the courts have examined whether a franchisor’s decisions to place new locations in proximity to existing franchisees can amount to a breach of the duty of fair dealing, particularly where the franchisor knew or ought to have known that the new location would materially harm the existing franchisee’s business.
The analysis is fact-specific. Relevant factors include whether the franchisor made representations about territory during the sales process that were not reflected in the written agreement, whether the new location was placed with a deliberate intent to harm the existing franchisee, and whether the franchisor’s conduct was consistent with reasonable commercial standards in the franchise industry.
Alternative Channels: Online Sales and Different Brands
Modern franchise disputes increasingly involve competition from alternative channels rather than traditional brick-and-mortar locations. A franchisor may begin selling products directly to consumers through an e-commerce platform that serves customers in the franchisee’s territory. Or the franchisor may acquire or develop a second brand that offers substantially similar products and places it in the franchisee’s area.
Whether these activities constitute encroachment depends on the language of the franchise agreement. If the territorial exclusivity provision applies only to franchise locations of the same brand, online sales and alternative brand channels may fall outside its scope. This is an evolving area of franchise law, and franchisees facing competition from alternative channels should seek legal advice to understand their specific rights and options.
Practical Steps If You Are Facing Encroachment
If your franchisor has announced plans to open a competing location near your franchise, or if you are already experiencing the effects of encroachment, consider the following steps:
1. Review your franchise agreement carefully. Identify any territory provisions, exclusivity clauses, or restrictions on the franchisor’s right to open additional locations. Understand exactly what protections you have — and what you do not have.
2. Document the impact. Gather evidence of how the new or proposed location is affecting your business, including sales data, customer complaints, and traffic patterns. Quantifying the impact strengthens any legal claim.
3. Communicate with the franchisor. Raise your concerns in writing. Sometimes encroachment issues can be resolved through negotiation — for example, through territorial adjustments, financial compensation, or marketing support.
4. Review your disclosure document. Check whether the franchisor made any representations about territory or system growth during the sales process. If the FDD contained statements about territorial protection that are inconsistent with the franchisor’s current conduct, this may support a claim.
5. Consult a Booni Law’s franchise team. Encroachment claims involve complex interactions between contractual rights, the duty of fair dealing, and the specific facts of your situation. An experienced franchise lawyer can assess your position and recommend the best course of action.
Frequently Asked Questions
Q: My franchise agreement says I have a "protected territory" but my franchisor is opening a location just outside it. Is that allowed?
A: If the new location is outside the boundaries of your protected territory as defined in the franchise agreement, the franchisor may technically have the contractual right to open it. However, if the new location is placed so close to your territory that it materially draws away your customers, you may have a claim under the duty of fair dealing in section 3 of the AWA. The analysis will depend on the specific facts, including the definition of your territory and the impact of the new location on your business.
Q: Can I refuse to renew my franchise agreement if the franchisor has encroached on my territory?
A: Renewal rights are governed by your franchise agreement. Whether you choose to renew may depend on the ongoing viability of your franchise in light of the encroachment. However, refusing to renew does not address the harm you have already suffered. If the franchisor’s conduct constitutes a breach of the duty of fair dealing, you may be entitled to damages regardless of whether you choose to renew. A franchise lawyer can help you evaluate your options.
Q: Does the AWA require franchisors to provide exclusive territories?
A: No. The AWA does not require franchisors to grant exclusive territories. However, the FDD must disclose any territorial restrictions — or lack thereof — so that the prospective franchisee can make an informed decision. If the FDD fails to disclose that the franchisee will have no territorial protection, this omission may constitute a disclosure deficiency.
Q: What if my franchisor verbally promised me an exclusive territory but it is not in the written agreement?
A: Verbal representations can be relevant under Ontario franchise law. If the franchisor made representations about territory that were not reflected in the franchise agreement or the FDD, this could support a misrepresentation claim. However, proving verbal representations can be challenging. This is one reason why it is essential to seek independent legal advice before signing and to ensure that all important terms are reflected in writing.
Contact Booni Law
If your franchisor has opened or plans to open a competing location near your franchise, you need to understand your rights. Booni Law advises franchisees across Ontario on territory disputes, encroachment claims, and the duty of fair dealing under the Arthur Wishart Act. We can review your franchise agreement, assess your legal position, and help you develop a strategy to protect your investment. Booni Law serves clients across Ontario, including the Greater Toronto Area, Southwestern Ontario, and communities throughout the province. Email us at admin@boonilaw.com or call +1 (226) 271-1751 to get started.
Disclaimer: This article is provided for general informational purposes only and does not constitute legal advice. Reading this article does not create a solicitor-client relationship between you and Booni Law. The information in this article may not reflect the most current legal developments and should not be relied upon as a substitute for professional legal advice tailored to your specific circumstances. If you require legal advice, please contact Booni Law.
