What does it mean, commercially, to ‘act in good faith’? What does the Franchising Code of Conduct (the Code) say about good faith obligations and how can they impact on the franchise relationship between franchisor and franchisee?
The boundaries of the franchisor-franchisee relationship are established within the terms of the disclosure document, the Code and the Franchise Agreement itself. More often than not, the franchisor has more bargaining power in the relationship and is favoured under the Franchise Agreement. As the owner of a tried and tested model, the franchisor will impose many restrictions and requirements regarding the running of the business to ensure that the brand image is consistent across the network of franchisees. In fact, it is commonplace for franchisees to have very limited control over the running of the business, and to be required to follow very stringent requirements set out in the Franchise Agreement.
Enter, new Franchising Code of Conduct
The inherently imbalanced franchise relationships have, to some extent, been restored by the recent amendments to the Code, which require both parties act in good faith during their commercial dealings.
The new Code does not define ‘good faith’. Instead, the Code stipulates that ‘good faith’ should be interpreted in the same way that it is interpreted in the Australian common law. The common law, as some of you will know, is constantly evolving, making it difficult to accurately define the term with any absolute certainty. As guidance for interpreting the term, the Code promotes honesty and cooperation in terms of how the parties deal with one another. The parties should aim to achieve the goals of the Franchise Agreement. Any conduct that could objectively be seen to be unjust, harsh, unreasonable or arbitrary could lead to a breach of the good faith obligation.
How does good faith apply when it comes to franchise relationships?
Keep in mind that the good faith obligations carry through the entirety of the franchise relationship. This means that the good faith obligations continue after termination and begin before the Franchise Agreement is signed. Having said this, the good faith obligations are not intended to prevent the parties from acting in their own commercial interests, provided they are legitimate. The franchisor is still allowed to refuse an extension or renewal request if it is reasonable to do so, or may issue the franchisee with a default notice when the franchisee has breached the Franchise Agreement.
What constitutes a breach of good faith obligations?
There are a number of scenarios that would constitute a breach of the good faith obligations, including:
- Changing the Franchise Agreement without mutual agreement;
- The franchisor is taking commercial advantage of the franchisee’s exclusive territory;
- By proceeding to terminate the Franchise Agreement without a good reason, i.e. the franchisee has breached because of some very minor technicality;
- The franchisor has issued a default notice without proper cause;
- Refusing to assist the franchisee where the franchisor is required to do so under the Franchise Agreement; and
- The franchisee is unable to meet the minimum performance criteria without opening additional stores, but any request to do so is unreasonably denied by the Franchisor.
It is worth noting that franchisees have their own obligations to the franchisors. A good example is the obligation not to dishonestly defame the franchisor by publishing false representations (reviews, social media posts, etc.) online.
Breaches of good faith obligations
Do not underestimate the severity of the penalties that the Australian Competition and Consumer Commission will impose. Some infringement notices reach $8,500.00, and civil penalties in the Federal Court can be as high as $51,000.00.
The risk of failing to uphold the good faith obligations of the new Code is very real. To ensure that there is no breach of good faith, try to maintain a good working relationship with the other party to the franchise relationship, while also looking out for your own legitimate commercial interests.