Insights / August 17th, 2023

Good Faith Obligation – Compliance After Termination

So far in this series, we have considered what the good faith obligation means under the Franchising Code of Conduct (Code), and practical ways to help parties comply at the pre-contract stage, and during the term of the franchise agreement.

In this final instalment of the series, we will now look at how to ensure compliance with the obligation for matters or disputes relating to the agreement which arise after termination.  

Managing franchise disputes

Part 4 of the Code provides the framework for parties to manage franchising disputes in a cost-effective and efficient way.  Alternatively, parties can elect to follow the internal complaint-handling procedure set out in the franchise agreement.

Whichever procedure the parties choose to follow, a party can demonstrate good faith by making genuine efforts to try and resolve the dispute through acting in a reconciliatory manner, which includes: (a) Attending and participating in meetings at reasonable times; (b) Making their intentions upfront as to what they are trying to achieve; (c) Not engaging in any conduct which may damage the reputation of the franchise system; (d) Complying with confidentiality obligations during and after the process.

Some other practical ways for parties to show good faith are to:

  • Be flexible and timely in organising meetings or mediation, and prepare properly before attending;

  • Ensure that all communications are polite and respectful;

  • Listen to the other party’s views and try and find a common ground; and

  • Demonstrate a willingness to try and negotiate a resolution.

It is important to realise that taking this approach will not only assist parties to demonstrate good faith, but it will also increase their prospects of firstly, reaching a resolution and secondly, doing so on the most favourable terms.

Ending of the franchise agreement

The Code makes clear that the absence of an option to renew or extend a franchise agreement will not mean that the franchisor has not acted in good faith.

However, where it is the franchisee who wishes to end the agreement, the Code provides that they may, at any time and regardless of any other terms, give the franchisor a written proposal with terms and reasons for termination.

There are specific requirements regarding timing and stating reasons with the franchisor’s response, and also that the parties must act in good faith at all times throughout the proposal process, including dealing with any dispute which may arise.  Once again parties should follow the above tips to help show that they are acting in good faith throughout these dealings, and should avoid engaging in any conduct which is dishonest, malicious or unreasonable. 

Restraints of trade

It is not uncommon for franchise agreements to include restraints of trade which will apply to the franchisee after termination.  It is important for franchisors to be aware that the Code imposes limits on the operation of these clauses in circumstances where the franchisee seeks to extend the franchise agreement, and the franchisor does not agree, and certain other conditions apply.  The good faith obligation will also apply to these dealings and the enforcement of any restraint. 

If you need advice or assistance for any franchising matters please contact our franchising or disputes 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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