Acting in good faith under the Franchising Code of Conduct
The Franchising Code of Conduct (Code) requires all parties who enter, or intend to enter a franchise agreement to act in good faith. Whilst most parties are aware of this obligation, the details regarding the duty to act in good faith remain unclear. Read on to discover what acting in good faith looks like, who it applies to and what penalties arise from failing to uphold this duty.
What is good faith?
The Code currently offers no clear definition of ‘good faith’. However, it is inferred that the duty to act in good faith is consistent with the expectations set at common law. Together, the Code and common law outline basic standards of good faith, in which a court must consider when determining if the obligation has been fulfilled. Courts will consider whether the parties:
- Acted honestly and not arbitrarily
- Behaved co-operatively to achieve the purpose of the agreement
- Had regard for the interests of both parties
- Acted for legitimate commercial interests or for an ulterior purpose.
How can I show that I have acted in good faith?
To demonstrate that you have acted in good faith, you should:
- Be able to demonstrate that your decisions have been motivated by legitimate commercial interests
- Keep detailed records concerning:
- Internal decision making
- Correspondence (and/or negotiations) between yourself and the other parties
- Respond appropriately and act in a timely manner.
In addition to the above, franchisors should also demonstrate that their actions are of good faith by:
- Avoiding unnecessary withholding of consent to renewals or transfers specified with the franchise agreement
- Ensuring that the default notice clearly addresses the nature of the breach and possible solutions to rectify the situation in situations where a breach has occurred
- Instigating mediation sessions with the franchisee before terminating the agreement in the event the breach cannot be remedied.
Failing to act in good faith is a mistake you can’t afford to make. Contraventions of this obligation are serious and attract penalties under the Code. If you’re concerned that your franchisee or franchisor may not be acting in good faith, contact our franchising expert for advice:
Racha Abboud, Senior Associate
Phone: +61 2 9895 9283
Assistant Author - Emily Lucas, Legal Cadet