Good faith in your franchise model – what does it mean?

By Sarah Stowe | 26 Feb 2016 View comments

Acting in good faith is one of the new legal responsibilities for both franchisors and franchisees under the Franchising Code of Conduct. Good faith is a two-way street. It means being honest with the other party and considering their interests. It also extends to consulting with the other party about proposed changes and trying to resolve disputes as they arise.

A franchisor is required to act in good faith in its business dealings with current, and prospective, franchisees. And on the flip-side, they must act in good faith when dealing with the franchisor. 

This mutual obligation applies throughout the franchise relationship; covering pre-entry negotiations, performance of the contract, dispute resolution, and the end of the franchise agreement. 

But, can you still act in your commercial interests? What sort of conduct do you need to be aware of? And, what are the consequences for not holding up your end of the bargain?

Legitimate commercial interests

Good faith doesn't prevent you or your franchisor from upholding any legitimate commercial interests. 

Yes, you must have regard to the rights and interests of the other side, but this does not mean you have to act in their interests. 

As an example, good faith will require parties to act honestly and cooperatively during the negotiation of a franchise agreement, however it is unlikely to compel a franchisor to make requested additions or changes to an agreement. 

Similarly, the decision by a franchisor not to offer a franchisee an option to renew or extend their franchise agreement does not mean that the franchisor has not acted in good faith in negotiating the agreement.

What does the law say?

The Franchising Code doesn't define exactly what good faith means, however it does state that the obligation of good faith is to reflect common law. 

Under common law, good faith requires parties to an agreement to exercise their powers reasonably and not arbitrarily or for some irrelevant purpose. 

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

Australian courts have found business dealings to be not in good faith when they involve one party acting for some ulterior motive, or in a way that undermines or denies the other party the benefits of the contract.

The Franchising Code outlines certain factors that a court may consider when determining whether a franchisor or franchisee has acted in good faith. 

The court may look at whether they acted honestly and not arbitrarily and whether they cooperated to achieve the purposes of the agreement. A court may also consider other factors.

Stretching the faith

Conduct that may raise concerns under the obligation of good faith includes:

  • a franchisor treating a franchisee differently 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 way to extract concessions or stop 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.

Whether certain conduct will lack good faith will depend on the circumstances surrounding the conduct.

The consequences

Failing to act in good faith is a breach of the Franchising Code. If you believe a party hasn't acted in good faith in their dealings with you, you have a 'private right of action' under the law. This means that you can take them to court for breaching the Code.

The ACCC may also take action if it believes a business has broken the law. Failing to act in good faith could result in the ACCC seeking a penalty of up to $54,000 or issuing an infringement notice of $9000.

Decisions by the ACCC about what is the appropriate response to a breach of the law are made in accordance with our Compliance and enforcement policy, which is available online at www.accc.gov.au/cepolicy.