In Short
- Franchisors must act in good faith to ensure fair dealings under the Franchising Code.
- Good faith involves honesty, transparency, and cooperation in franchise relationships.
- Non-compliance can lead to significant fines and potential legal challenges.
Tips for Businesses
To comply with good faith obligations, ensure clear communication and transparency in all franchise dealings. Prioritise mutual benefits and fairness while maintaining your commercial interests. Regularly review franchise agreements and decision-making processes to align with the Franchising Code’s requirements.
As a franchisor, you must fulfil a critical obligation under the Franchising Code of Conduct (the Code) to act in ‘good faith’. The concept of good faith is somewhat vague and can often be challenging to define. This article clarifies its meaning and guides ensuring compliance with the Code.
Why Is There an Obligation to Act in Good Faith?
As a franchisor, you naturally hold more bargaining power in your relationship with franchisees. Owning a proven business model allows you to dictate how franchisees should operate their businesses, ensuring a consistent brand image and protecting your reputation. Consequently, franchisees may have minimal control over their business operations.
Therefore, the obligation to act in good faith primarily aims to prevent such abuse. It ensures that all parties in the franchise relationship conduct themselves with integrity in all dealings.
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What is ‘Good Faith’?
The intention behind the good faith obligation may be clear, but defining ‘good faith’ is more challenging. The Code rather unhelpfully states that good faith holds the same meaning as it is given in the common law. At common law, good faith primarily ensures that a party acts fairly and honestly when dealing with another party.
As a franchisor, to ensure you are acting in good faith, consider whether you are:
- being honest and transparent in your communications with franchisees, including disclosing relevant information and explaining your decision-making process; and
- cooperating with franchisees to achieve mutually beneficial outcomes.
If you do these things, you are likely operating in good faith. However, if you undermine your franchisees’ ability to succeed or act unreasonably in your dealings, you could be acting in bad faith.
Continue reading this article below the formGood Faith Obligations Under the Code
Clause 6 of the Code mandates that you engage with your franchisees in good faith. Failure to do so may result in fines of up to $198,000. Therefore, it is essential to prioritise your good faith obligations when interacting with franchisees. Review your franchise agreements carefully. Any clauses that attempt to limit or negate your responsibility to act in good faith may attract the same penalties.
Your good faith obligations extend to all aspects of the franchising relationship. This includes:
- including pre-contractual negotiations;
- dispute resolution processes; and
- the conclusion of the franchise agreement.
However, the Code clarifies that acting in good faith does not require you to act against your legitimate commercial interests. As a franchisor, your primary concern is the success of your own business. Sometimes, you may need to make decisions that do not benefit your franchisees but are necessary for the franchise network’s overall good. As long as you are transparent with your franchisees about these actions and their rationale and do not intend to harm their businesses, you will not breach your obligation to act in good faith.
Key Takeaways
The obligation to act in good faith can be hard to define. As a franchisor, your best chances of ensuring you comply with this obligation are by:
- ensuring that you are honest and transparent with your franchisees;
- cooperating with franchisees to achieve mutually beneficial outcomes; and
- not making arbitrary and unjustified decisions that hurt your franchisees.
However, you should remember that you do not need to sacrifice your commercial interests to act in good faith.
If you want to clarify your obligations as a franchisor, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.
Frequently Asked Questions
The obligation aims to prevent franchisors from exploiting their power imbalance over franchisees, ensuring integrity and fairness in all dealings.
Good faith involves acting fairly and honestly in all dealings, being transparent in communications, and cooperating with franchisees to achieve mutually beneficial outcomes.
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