Franchising Law in Australia changed significantly on 1 January 2015 with the introduction of the new and improved Franchising Code of Conduct. Perhaps the most significant change is the requirement that each party to a franchise agreement acts in “good faith” in respect of any matter regarding a franchise agreement. This requirement will apply to conduct after 1 January 2015 in relation to all franchise agreements entered into after 1 October 1998 and will apply not only during the term of a franchise agreement, but also during pre-agreement discussions and negotiations and disputes after termination.
What does ‘good faith’ actually mean?
In the franchising context, it’s not entirely clear how this statutory provision will be interpreted as, simply, the statutory provision is so new, no Court cases have yet been determined on its meaning or application yet. This has left a lot of franchisees and franchisors (and indeed franchise lawyers) scratching their heads.
But all is not lost. The concept of ‘good faith’ is not a brand new legal concept, indeed it has been considered and applied in many cases before in other contexts, including employment law and commercial contracts. The interpretation of the obligation in those other areas of law provide valuable insight as to how the provision will be interpreted in Australia in the franchising context.
Consideration of the obligation of good faith took place in the 2010 NSW decision of Renard Constructions (ME) Pty Ltd v Minister for Public Works, where the Court found the obligation encapsulates the following obligations:
- to act honestly and with a fidelity to the bargain;
- not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for;
- to act reasonably and with fair dealing having regard to the interests of the parties (which will inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained.
It’s important to note in that case, the Court held that none of these obligations requires the interests of a party to be subordinated to those of the other, which accords with general principals of contract law and commercial bargaining.
Good Faith in Franchising
Put in a franchising context, we believe some areas/actions where the obligation of good faith may found to have been breached, taking note of the interpretation of good faith in other areas of law, include:
- Where the Franchisor prevents a Franchisee from conducting legitimate business activities under the Franchise;
- Where a breach notice or termination is issued for a trivial or non-consequential breach;
- Where the nature of the Franchise operations are unilaterally changed by the Franchisor to their own benefit, or without consideration of the franchisees interests;
- Where a Franchisor terminates a franchise agreement after the Franchisee has requested a compulsory mediation or otherwise enacted the dispute resolution procedure as set out in the Franchising Code;
- Where a Franchisor acts in competition, or to derive trade away from, the activities of the Franchisee;
- Where a Franchisor diverts an enquiry from a Franchisee; or
- Where a Franchisor refuses to listen to and consider issues raised by the Franchisee in performance of the franchise agreement.
If you’re a franchisor or franchisee and are a little in the dark as to how the obligation of good faith will apply to you, and need guidance to make sure you’re protected and ready to comply, contact a Franchise lawyer at LegalVision.