Insights / June 22nd, 2023

Good Faith Obligation – Staying Compliant at the Contract Stage

In our last insights, we considered some practical tips to help franchisors ensure compliance with the obligation to act in good faith under the Franchising Code of Conduct (Code) during pre-contract stage. 

In this next instalment, we now look at some practical tips to help franchisors remain compliant with the obligation during the term of the franchise agreement.

Keeping the faith during the contract term

We previously gave some examples of conduct that the ACCC would likely consider an infringement of the good faith obligation where a franchise agreement is in place. What each of these examples indicated generally is that a party’s motivation to act would appear to be 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).

To avoid breaching the good faith obligation therefore, it is important that parties ensure that their conduct is such that would be considered consistent with the spirit and objective of the franchise relationship. Some of the practical ways that franchisors can do this during the term of the franchise agreement include:

  1. Implement and maintain business practices that aim for franchisees to be treated equally when it comes to benefits and obligations across the franchise network;

  2. Where possible, try to involve franchisees in major decisions which affect their franchise, either individually or through a consultative process with the network;

  3. Have in place robust dispute resolution processes which aim to address franchisee concerns in a fair and commercially acceptable way;

  4. Where disputes arise or are likely to arise, respond in a timely manner and do not engage in any conduct which could be seen as an intimidatory tactic in order to discourage complaints or punish franchisees for raising them;

  5. Never use confidential information about the franchisee for an extraneous purpose;

  6. Avoid any type of conduct which could be seen to be malicious, or an unreasonable exercise of the franchisor’s power;

  7. Ensure that representatives of the franchisor understand the obligation and what it means to comply practically in their dealings with franchisees; and

  8. Finally, if disputes do arise with franchisees, it is always a good idea to keep detailed records of all communications, including conversations.

Remember that the good faith obligation centres on preventing conduct that is dishonest, arbitrary or unreasonable. It does not however restrict a party from acting in order to promote or protect its legitimate commercial interests. For example, in one case a franchisor established two other franchises in an area close to an existing franchisee who had no territorial exclusivity but was in dispute with the franchisor. The court determined that the existing franchisee had failed to establish that the franchisor had exercised its powers for an extraneous purpose, namely, to punish or to force them to leave the network.

In our next and final insights, we will share some practical tips to help franchisors ensure compliance with the obligation to act in good faith in any dealings after the termination of the franchise agreement.

If you require any assistance, please contact Karina McDougall.

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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