Are you acting in good faith as a franchisor?

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The Federal Court in a recent decision found one of Australia’s largest mechanical/automotive franchisees, Ultra Tune, was found to have breached its obligation to act in good faith to one of its Franchisees. Read the article regarding Ultra Tune here. It is the first time the Australian Competition and Consumer Commission (ACCC) has brought proceedings against a franchisor over franchise code obligations for franchisors to act in good faith in their dealings with franchisees. This raises many questions. The main one being are you as a franchisor acting in good faith?

Changes to the Franchising Code of Conduct

Since 1 January 2015 the Franchising Code of Conduct (Code) introduced the good faith obligation which relates to franchise agreements entered into on or after 1 October 1998 (subject to a few exceptions). Parties to a franchise agreement, and those who propose to enter into a franchise agreement, must act towards each other with good faith.  Penalties of up to $54,000.00 could be imposed on those parties who breach the obligation.

What is good faith?

There is no clear definition of good faith in the Code. The common law expectations of the duty to act in good faith together with the Code outline the basic standards which a court must consider to ascertain if the obligation has been fulfilled.

When considering if a party has acted in good faith a court may have regard to the following factors:

  1. Whether the party has acted honestly and not arbitrarily;
  2. Whether the party behaved cooperatively to achieve the purpose of the agreement;
  3. Acted for legitimate commercial interests or for an ulterior purpose; and
  4. Had regard for the interest of both parties.

Good faith involves the franchisor consulting with the other party about proposed changes, being honest with the other party, including among other things, full disclosure and trying to resolve disputes as they arise with current and prospective franchisees.

Conduct may lack good faith if one side acts dishonestly or fails to have regard to the legitimate interest of the other side.

Good faith comprises three notions of:

  • An obligation on the parties to cooperate in achieving the contractual objects;
  • Compliance with honest standards of conduct; and
  • Compliance with standards of conduct which are reasonable having regard to the interests of the parties.

Good faith is often equated with the concept of reasonableness.

Despite the fact that there is no set definition for good faith, parties cannot limit it or contract out of it.

How do you ensure you have fulfilled your obligations of good faith as a franchisor?

To minimise the risk of being found to be in breach of your obligation of good faith there are some basic guidelines that franchisors should adhere to.  Decisions and actions taken by franchisors when exercising rights under agreements should ensure that legitimate business objectives can be demonstrated. This includes maintaining detailed records that set out the business objective.

Franchisors and franchisees are required to act in good faith towards each other throughout the entire franchise relationship, beginning before the franchise agreement is signed and continuing after termination.

Conclusion

The risk of failing to uphold the good faith obligations of the Code is very real.

With the recent judgment of the Federal Court, good faith, whatever that may be, is currently at the forefront and under the microscope of the ACCC.  What previously was considered acceptable under past and present agreements may now leave franchisors in a vulnerable situation.  A review of current agreements and or procedures, is recommended to ensure compliance with the changing landscape of franchisor and franchisee responsibilities.

If you or your business has any concerns or questions regarding the obligation of good faith or franchising in general, please contact FC Lawyers.

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