The franchisor compliance manual

Good faith & legitimate business conduct

What is ‘good faith’?

The meaning of ‘good faith’ under the Code takes on the same meaning that exists at common law, which will continue to develop and evolve in Australia over time.

Under common law, the duty of good faith will require you to act reasonably and not exercise your powers arbitrarily or for some irrelevant purpose. Your conduct may lack good faith if you act dishonestly, for an ulterior motive or in a way that undermines or denies the other party the benefits of a contract.

The obligation of good faith will extend to all aspects of the franchising relationship, including:

  • pre-contractual negotiations
  • performance of the contract
  • dispute resolution
  • the end (including termination) of an agreement.

The obligation to act in good faith may not end when your agreement comes to an end. For example, if your agreement imposes obligations that will continue after the agreement has ended, you or the franchisee may be required to carry out these obligations in good faith.

Legitimate business conduct

While good faith requires a party to have due regard to the rights and interests of the other party, it does not require a party to act in the interests of the other party. Neither does it prevent a party from acting in their own legitimate commercial interests.

For example, while good faith will require parties to act honestly and cooperatively during the negotiation of a franchise agreement, it is unlikely to compel a franchisor to make requested additions or changes to an agreement. Similarly, the decision by a franchisor not to offer a franchisee an option to renew or extend their franchise agreement does not mean that the franchisor has not acted in good faith in negotiating the agreement.

Conduct that may show a lack of good faith

Conduct that may raise concerns under the obligation of good faith include:

  • a franchisor treating a franchisee differently to other franchisees because the franchisee has raised concerns about the system
  • a franchisor raising numerous minor and immaterial breaches with a franchisee in an aggressive and intimidatory manner designed to extract concessions or cessation of complaints
  • franchisees using confidential information provided by the franchisor to compete with the franchisor
  • franchisees using social media to post negative comments about their franchisor or their dispute with their franchisor.