Insights / April 18th, 2023

Franchisees and Franchisors Beware: Navigating Good Faith Obligation in Franchising

Under the Franchising Code of Conduct (Code), parties to a franchise agreement (both existing and prospective) must comply with an obligation to act in good faith. 

However because the Code doesn’t include a precise definition of what constitutes good faith, it can often be difficult for parties to understand exactly what the obligation means.

What does it mean to “act in good faith”

In considering the answer to this question, the court in one case described good faith conduct broadly as “acting reasonably, and not capriciously or for some extraneous purpose.” 

However, to understand what this means practically, it is useful to look at the type of conduct which the court has determined to not constitute acting in good faith. 

Some examples during pre-contract dealings include, where a franchisor:

1.      Failed to honestly disclose information about the history of a franchise site;

2.      Made misrepresentations about a franchise (such as the duration of previous trading, the rent payable and the purchase price);

3.      Pressured a franchisee to pay a deposit before providing documentation for the franchise purchase;

4.      Required a deposit and represented that it was refundable, then subsequently refused to refund that payment; and

5.      Directed that a deposit could be used to immediately fund the cost of signage and equipment without any real need for such urgency, then failed to co-operate with the franchisee to recover those monies.

The ACCC also provides guidance on conduct which may be considered to infringe the good faith obligation where a franchise agreement is in place.  This includes where:

1.    A franchisor treats a franchisee differently to others because the franchisee has raised concerns about the system;

2.    A franchisor raises numerous minor and immaterial breaches with a franchisee in an aggressive and intimidatory manner designed to extract concessions or cessation of complaints;

3.    Franchisees use the franchisor’s confidential information to compete with it; and

4.    Franchisees use social media to post negative comments about their franchisor or their dispute with their franchisor.

These examples show that often the conduct of the offending party is generally based on ill-intentions and/or is designed to produce an outcome (such as to punish the other party or force them to exit the franchise) which is inconsistent with the spirit and objective of the franchise relationship.

However the Code expressly states that the obligation to act in good faith does not prevent parties from acting in their legitimate commercial interests.  What this means is that the obligation does not require parties to sacrifice their own commercial interests, so long as their conduct is reasonable, and not based on ill-intentions or for an ulterior purpose.

We hope this insights provides some insight into the obligation to act in good faith.  In our next insights we will share some practical tips to help franchisors ensure compliance with the obligation to act in good faith in their dealings with existing and prospective franchisees.

For further information, please get in touch with our Franchising team.

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.

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