Franchising: The 7 Do’s and 7 Don’ts of Acting in Good Faith

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Table of Contents

• Do
• Don’t
• Key Takeaways

Franchisees and franchisors must act in “good faith” in their interactions with each other, and in relation to a franchise. “Good faith” is a word that is bandied around in the franchising world, but what does it really mean? And how can you be sure that you’re doing your best to fulfil such a vaguely worded obligation?

While there’s no hard-and-fast rule about what “good faith” means, we set out below practical tips for staying on the right side of the Franchising Code of Conduct (Code). Keep in mind that “good faith” applies to potential franchisees and potential franchisors who are negotiating with each other, as well as those who have already entered into a franchise agreement!

Do

1. Be honest: Using a franchisor’s confidential client information to take over their business (including by pretending to be the franchisor to the clients) is one example of a franchisee acting dishonestly.
2. Co-operate.
3. Pursue your legitimate commercial needs: A franchisor can open additional franchises within the non-exclusive territory of a franchisee. They will unlikely breach their obligation of good faith in circumstances where the franchisor perceived financial benefits of expanding in the area, and the franchisee didn’t meet the prerequisites for being offered the right to open another store.
4. Make decisions within a reasonable period: Whether you are the franchisee or the franchisor, you both stand to benefit if decisions are made efficiently, and you can turn your minds to the overarching task at hand – running a successful business.
5. Take into account the other party’s business interests.
6. Discuss proposed changes to the agreement: This is particularly important for franchisors, who are traditionally seen to hold more of the “power” in a franchising relationship. Franchisors should avoid unilaterally introducing changes.
7. Exercise your right (as a franchisor) to draft a franchise agreement that doesn’t contain a right for the franchisee to renew or extend. Clause 6 of the Code makes it clear that this won’t be considered a breach of good faith.

Don’t

1. Act in pursuit of some hidden, non-commercial, and illegitimate interest: For example, don’t impose arbitrary restrictions on your franchisee, which don’t protect an actual business need.
2. Issue breach notices and try to terminate on the basis of unfounded allegations, or without considering your legal position: Carefully consider what your Franchise Agreement says, and determine whether the other party appears to be contravening the terms of the contract.
3. Drag out your decision-making unnecessarily: It’s one thing to let the other side know that you need time to get legal advice. It’s another thing to drag your feet in the hopes that the other side will get tired of waiting and just give in to your requests.
4. Aggressively pressure the other side into agreeing to your position: For example, when negotiating a new franchise agreement.
5. Agree with everything: Just because you have to cooperate, doesn’t mean that you are forced to do everything the other party requests. The obligation to cooperate should be balanced against your legitimate commercial needs.
6. Refuse to engage in the dispute resolution process: For example, by refusing to go to meetings planned by the other side to try and work out the disagreement.
7. Approach Dispute Resolution in an antagonistic manner: The emphasis that the Code places upon mediation is actually to your benefit – if you engage fully and properly in the process, you increase the chances of settling the matter and avoiding the cost and time involved in court proceedings.

Key Takeaways

Listed above are only some of the ways that “good faith” could apply to your franchising relationship. It is an important aspect of franchising law – with breaches of this obligation attracting a maximum fine of $54,000. If you’re unsure whether you or the other party is complying with their obligations, have a chat to our experienced franchise lawyers on 1300 544 755. We would love to help.