Good Faith – It’s Important and is Here to Stay and Grow!

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In 2015 any debate as to whether there are obligations to act in Good Faith within the franchising industry ended with the Franchising Code of Conduct (the main law regulating franchising in Australia) expressly confirming Good Faith exists in franchising and cannot be excluded or limited.

The obligation to act in Good Faith applies before, during and after the existence or potential existence of any Franchise Agreement and while the Franchising Code of Conduct does not provide a precise definition (effectively leaving the Courts to develop the law around this area), it does outlines certain matters that a Court may consider when determining whether a party has acted in Good Faith, including whether a party has:

• acted honestly and not arbitrarily; and
• co-operated to achieve the purposes of the Franchise Agreement.

The approach taken by the Courts to date suggest that parties should look at each matter on a case by case basis, look at the above factors and also consider whether the relevant party exercising its power did such for the purpose the power was intended, and not for an improper purpose.

Saying this, the Code confirms that Good Faith does not necessarily stop a party acting in their legitimate commercial interests, even if this may negatively impact the other party.

Consequently, given the potential financial and reputational damages, liabilities, as well as financial penalties a party can now be exposed to if they breach this obligation, franchisors and franchisees should ensure they actively consider whether they are acting in Good Faith as they deal with each other. Furthermore, where unsure or there is any material risk, we would always recommend they speak with their franchising specialised lawyer first.

Please note this does not purport to be comprehensive advice relevant to your circumstances. Consequently, specific legal advice for each of your circumstances should be obtained first before taking or not taking any action in respect to this area.