Acting in Good Faith – The Franchising Code

The Franchising Code of Conduct requires parties to a Franchise Agreement to act in good faith.

Interestingly the concept of good faith is not defined in the Franchising Code itself.

What is Good Faith?

When a principle such as good faith is not defined the courts will rely on what are known as common law principles and in Australia it remains largely a construct of common law.

As a general concept it is an implied term that you must:

• be reasonable and equitable
• be necessary to give business efficacy to a contract
• be so obvious it goes without saying
• be capable of clear expression, and
• not contradict the express terms.

The Australian Competition and Consumer Commission (ACCC) states that:

The obligation of good faith will extend to all aspects of the franchising relationship, including:

• pre-contractual negotiations
• performance of the contract
• dispute resolution
• the end (including termination) of an agreement.

The obligation to act in good faith may not end when your agreement comes to an end. For example, if your agreement imposes obligations that will continue after the agreement has ended, you or the franchisee may be required to carry out these obligations in good faith.

The ACCC provides examples of conduct that could be seen as not acting in good faith such as:

• a franchisor treating a franchisee differently to other franchisees because the franchisee has raised concerns about the system
• a franchisor raising numerous minor and immaterial breaches with a franchisee in an aggressive and intimidatory manner designed to extract concessions or cessation of complaints
• franchisees using confidential information provided by the franchisor to compete with the franchisor
• franchisees using social media to post negative comments about their franchisor or their dispute with their franchisor.

There are significant changes proposed by the Government from 1 July 2021 in relation to Franchising and one relates to the duty to act in good faith when a Franchisee wants to terminate and exit their agreement.

For example, franchisees have 14 days to terminate a new agreement after it’s made. They can also terminate a new agreement 14 days after receiving a proposed lease, as well as 14 days after entering into a lease, if they were not provided with accurate lease documents beforehand.

Under the changes, franchisees can propose to terminate their franchise agreement via a written notification at any time, to the franchisor. There are no limits on what reasons the franchisee may have to terminate.

Existing franchisees wanting to exit an agreement will be able to give their franchisor a written proposal for termination at any time, and the franchisor must respond within 28 days.

If the franchisor does not agree to the termination, they must include their refusal reasons. The franchisee can go through the usual dispute resolution processes provided by the Code.

However, franchisors that refuse a termination request could be seen to have breached the Code’s good faith obligations or to have engaged in unconscionable conduct.

It is clear that Franchisors and Franchisees obligations as to acting in good faith are becoming more onerous in the relationship.

The courts and no doubt the ACCC will be looking closely at the obligations going forward and it will be interesting to see how this develops.

How can FC Lawyers help?

At FC Lawyers we have over 25 years’ experience acting for both Franchisors and Franchisees. If you have any questions don’t hesitate to contact our team.