The Duty of Good Faith in Franchise Relationships
Under common law, the duty of good faith requires both franchisors and franchisees to exercise their contractual powers reasonably and in good conscience. This obligation is also embedded in the Franchising Code of Conduct, which expressly refers to circumstances that may constitute a failure to act in good faith.
What Constitutes Bad Faith?
Conduct may be considered to be in bad faith if a party:
- Acts dishonestly or arbitrarily
- Fails to take into account the legitimate interests of the other party
- Acts with an ulterior motive
- Intentionally undermines the other party’s ability to enjoy the benefits of the agreement
The Code specifically states that conduct may be in bad faith if a party is uncooperative and refuses to work towards the objectives of the franchise agreement.
When Does the Duty of Good Faith Apply?
The obligation to act in good faith applies throughout the entire franchising relationship, including:
- Pre-contractual negotiations
- Ongoing performance of the franchise agreement
- Dispute resolution processes
- Termination or non-renewal of the agreement
- Post-termination conduct, such as enforcing restraints or handling final payments
What Good Faith Is Not
The duty of good faith does not require a franchisor to act in the best interests of the franchisee. Nor does it prevent either party from pursuing their own legitimate commercial interests.
For example, a franchisor choosing not to offer a renewal or extension of a franchise agreement where no such obligation exists, does not, by itself, amount to a breach of good faith.
Assessing Whether Good Faith Has Been Met
When assessing whether a party has acted in good faith, several factors may be relevant, including:
- Has the party acted honestly and transparently?
- Have they considered the interests of the other party?
- Were decisions made in a timely manner?
- Has there been consultation on proposed changes or key issues?
- Does the franchise agreement allow the conduct in question?
- Are conditions being imposed that are unnecessary to protect the franchisor’s legitimate interests?
- In the event of a dispute, has there been a genuine attempt to resolve the matter through mediation or discussion?
- Is there evidence of an ulterior purpose or hidden agenda?
Understanding and upholding the duty of good faith is critical to maintaining a compliant and commercially viable franchise relationship. If you believe the other party has failed to act in good faith, early legal advice is essential.
Let me know if you would like this expanded into a downloadable factsheet or paired with a case law summary on how courts have interpreted “good faith” in franchising.
Frequently Asked Questions
Franchisor Not Acting in Good Faith?
It means acting honestly, fairly, and considering the interests of the other party in all dealings.
When does the duty to act in good faith apply?
Throughout the entire relationship:
- During negotiations
- While operating
- In disputes and termination
- Even post-termination
What are signs of bad faith?
Bad faith may include:
- Dishonesty or delays
- Ulterior motives
- Unreasonable conduct
- Ignoring the other party’s interests
Is the franchisor required to act in my best interests?
No, but they must not deliberately undermine your rights or breach their duty of good faith.