Insights / April 16th, 2020

COVID-19: The importance of honesty, fairness and good faith during the crisis

The COVID-19 crisis is presenting unprecedented challenges to businesses across Australia and the world. The business relationship between Franchisors and Franchisees is regulated by the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (“the Code”) and the obligation to act in good faith is a central concept of the Code.

Act in Good Faith

In times of crisis such as we are presently experiencing the obligation for Franchisors to act in good faith is of critical importance when dealing with Franchisees who may be facing a range of challenges, particularly when the Franchisor itself may be facing the same challenges.

The obligation to act in good faith does not prohibit the franchisor from protecting its legitimate commercial interests. Therefore, as a Franchisor how do you ensure you are acting in good faith and protecting your legitimate commercial interests as you navigate the exceptional circumstances we are facing? Many Franchisors and Franchisees will be faced with difficult decisions to ensure long term viability and maintaining the business relationship is of critical importance.

Questions to Consider

Here are some useful questions you should consider when dealing and negotiating with Franchisees during the current crisis:

  • Are you being honest with the other party? We recommend discussing with Franchisees the challenges you may be currently facing and working together to find a solution.
  • Are you considering the other party’s interests and taking into account the impact of the crisis?
  • Are you making timely decisions in responding to the current circumstances?
  • Are you consulting with your Franchisees regarding any proposed changes you may be required to make to protect your business?
  • Are you seeking to impose conditions which are not currently necessary to protect your business?
  • Are you acting for some ulterior purpose, for example are you looking to use the crisis to further a purpose that has not arisen out of the current crisis?
  • Lastly, it is likely that disputes will arise with your Franchisees due to the various pressures everyone is currently facing. When dealing with disputes ensure you attempt to resolve in accordance with the process outlined in the Code.

Ultimately, if you act in a manner that is honest and fair you can be assured you are acting in accordance with the obligation to act in good faith when dealing with your Franchisees which will be of benefit to both parties and contribute to your ability to successfully deal with the COVID-19 crisis.

Support Options

Franchisors should be aware that by continuing to charge franchise fees, whilst Franchisees are forced to close temporarily or are suffering a significant loss, may be considered a breach of the duty of good faith. By supporting the Franchisee through the COVID-19 crisis, Franchisors will be acting in accordance with the good faith obligation whilst protecting its legitimate commercial interest as it will contribute towards the long term viability of the Franchising business. Examples of support a Franchisor may consider providing its franchisee network includes deferring, waiving or reducing fees.

If you have any questions or think you may need some franchise legal advice about how best to navigate the COVID-19 crisis, please do not hesitate to contact a member of our Franchising team by clicking on the following link – Contact Us

This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.