The concept of good faith is one that has left many franchisors and franchisees alike scratching their heads. Many franchisees enter into a franchise arrangement assuming, of course, the franchisor will act in good faith. Indeed, many legal claims are premised on such a term implied into the relevant franchise agreement.

On 1 January 2015, changes were made to the franchising code of conduct that formally put in place a legislative obligation of good faith for parties to a franchise agreement. But what about franchisees that signed before this date?

What Did the County Court Decide?

The County Court of Victoria has recently handed down a decision that explores the concept of an implied term of good faith in the context of franchise agreements entered into pre 1 January 2015. If you’re a franchisee, you may want to look away now.

In the matter of United Petroleum Franchise Pty Ltd (ACN 127 764 989) Plaintiff v Gold Fuels Pty Ltd as Trustee of the Nijhawan Family Trust (ACN 153 627 484) & Ors, it was argued that the franchise agreement contained an implied term of good faith that the franchisor owed the franchisee.

Was a Term of Good Faith Implied Into the Contract?

In considering whether such a term was indeed implied into the contract, and as such enforceable, the Court considered two questions:

  1. Whether such a term existed as a matter of law; and
  2. If it did, was it breached as a matter of fact.

Regarding the first issue, the Court noted that the Victorian Court of Appeal had in prior cases rejected the notion that a broad duty of good faith should be implied into every commercial contract. The Court then considered the factors in the widely applied precedent of Esso Australia Resources v Southern Pacific Petroleum (“Esso”) to consider whether factors existed to imply such a term in this instance.

Here, the Court examined whether the relationship between United and Gold Fuels was “clearly unbalanced” and if the franchisee could be shown to be “at a substantial disadvantage and particularly vulnerable.”

In reaching its decision, the Court noted the following factors in determining that an implied term didn’t exist in the franchise agreement:

  • The advice the franchisor provided the franchisee;
  • The level of experience of the franchisee;
  • The communications exchanged in pre-contractual negotiations; and
  • Other factors.

In determining the implied term did not exist in this franchise agreement, the Court relied on Esso where it was held that the Court should only interfere in the interests of certainty in contracts when:

  • The relationship between parties is unbalanced; and
  • One party is at a substantial disadvantage; or
    • Is particularly vulnerable in the context of a franchise agreement.

It was unnecessary, having answered ‘no’ to the first questionfor the Court to examine the factual matters alleged to have constituted a breach.

Key Takeaways

Lessons for franchisees? If you have a renewal term coming up, and can elect to maintain the same terms or enter into the franchisor’s current franchise agreement, you may want to consider going for the latter. That way, you can be sure a term of good faith exists. Questions? Get in touch with our franchise lawyers on 1300 544 755.

Emma Jervis

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