Friday, 30 December 2016

Franchising and Good Faith



The Franchising Code of Conduct pursuant to the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 regulates the conduct of franchisors and franchisees within the franchising industry in Australia.

One of the ways in which the Code regulates this conduct is through the notion of “good faith”.  Clause 6 of the Code requires each party to a franchise agreement to act towards the other party with good faith, within the meaning of the unwritten law [as historically determined by the courts under common law].

Under the Code, this good faith obligation extends to:
  • any matter, dealing or dispute relating to the franchise agreement; 
  • negotiations relating to the agreement; and
  • the Code. itself

In determining whether a particular party has acted in good faith, the Codes states that the Court might consider:
  • whether a party acted honestly and not arbitrarily; and
  • whether a party cooperated to achieve the purposes of the agreement. 

Some examples of conduct which might not be in good faith include:
  • one party acting for some ulterior motive;
  • a party fails to have regard to the legitimate interests of the other party;
  • conduct which is not in pursuit of legitimate commercial / business interests, such as conduct which is strategically motivated to put a franchisee out of business;
  • an arbitrary / unreasonable exercise of contractual discretion;
  • conduct which effectively renders the franchisee's interest under the franchise agreement worthless;
  • failure to give serious and genuine consideration to the other party's position in a negotiation;
  • deliberate failure to disclosure relevant information;
  • the purported termination of a franchise agreement by relying on technical or minor breaches in circumstances where the breaches are not the real motive for the termination;
  • unnecessary withholding of consent to renewals of the franchise agreement or a sale/transfer of the franchised business;
  • seeking to terminate without first pursuing dispute resolution mechanisms.
A Court can also take into account other matters it considers relevant.

A franchise agreement must not contain a clause that limits or excludes the obligation to act in good faith, and if it does, the clause is of no effect.

However, the obligation to act in good faith does not prevent a party from acting in their legitimate commercial interests. For example, although a franchisor is required to act honestly and cooperatively during the negotiation of a franchise agreement, there is doubt whether a franchisor is obligated to make additions or changes to an agreement which might be requested by a franchisee.

Just because a franchise agreement states the franchisor will not agree to extend the agreement past its end date, does not of itself mean the franchisor has acted in bad faith.

A failure to act in good faith could result in significant penalties under the Code and/or the issue of infringement notices and fines by the ACCC.

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Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

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