In the past, we covered what a franchise is, but have you ever heard the term good faith in your franchisor/franchisee dealings? Have you heard the term before, but have no idea what it actually means? Do not worry, this article will walk you through it.
All Franchisor/Franchisee agreements have good faith implied. You cannot even contract out the term. Division 3 of the Franchising Code of Conduct requires Good Faith in every contract. However, good faith was directly in the Code.
Good faith is described by what it is not. For example, the 4 elements of good faith are:
- Do not act with an ulterior motive in mind;
- Good faith means not using contractual power unreasonably;
- Good Faith does not mean acting in your partner’s commercial interests;
- If within reason, acting in your own commercial interests, even to the disadvantage of your partner franchisor/franchisee does not breach Good Faith.
Good Faith is involved in an agreement’s 4 stages. These are:
- Pre-contractual dealings
- Performance of contract
- Disputes and arbitration
- Post contractual matters
E.g. Territorial exclusion clause limiting business for a period after contract termination.
Examples of Good Faith Breaches:
Ulterior Motive
| Scenario: Franchisor is a restaurant called Big and Bad Burgers. It enters into a franchisor/franchisee agreement with John Smith. The agreement is successfully created. John Smith was granted an exclusive territorial right in the suburb of Sunny Meadows. Big and Bad Burgers wants to open another store in Sunny Meadows, but contractually cannot. Big and Bad Burgers aims to terminate the agreement, so it can open another store in Sunny Meadows. It begins harassing John Smith claiming that he is not following the agreement’s invoicing terms correctly. John Smith denies this. Both parties enter dispute resolutions, but no headway is made. The franchisor/franchisee agreement is prematurely ended. Big and Bad Burgers then sets up a new store in Sunny Meadows. Breach: Big and Bad Burgers breached its Good Faith duty to John Smith. Its secret motive was to prematurely end the contract so that it could open its own store in Sunny Meadows. However, it pretended the real reason for ending the contract was because of John Smith’s alleged non-compliance with invoicing terms. |
Misuse of Power
| Scenario: Franchisor is a lawn cutting business called Matt’s Mowing. Matt’s Mowing wants to franchise out. Jerry Smith is interested in Matt’s Mowing. They begin negotiating a franchisor/franchisee agreement. Jerry wants exclusive territorial rights for the Rainy Mountains region. Matt’s Mowing disagrees. Matt’s Mowing threatens a future breach of contract if Jerry insists on exclusive territorial rights. Jerry fears future damage and agrees to drop the exclusive territorial clause. Breach: Matt’s Mowing was in a stronger position than Jerry. Matt’s Mowing used this power to threaten Jerry. This was not acting in Good Faith. |
Commercial Interests
| Scenario: Jumping Castles is a franchisor. Dan Samuels is a Jumping Castle franchisee. There is no exclusive territorial clause in the franchisor/franchisee agreement. Jumping Castles adds another franchise within Dan’s territory. Dan performs poorly. Jumping Castle does not offer Dan the franchise. Dan claims Jumping Castles has breached their Good Faith duty. No Breach: Jumping Castles did not breach their duty. It does not have to act within Dan’s interests. Their agreement had no exclusive territorial clause. Dan’s franchise performed poorly and Jumping Castles ignored him because of this. It acted within its commercial interests. Therefore, there was no breach. |
Why Good Faith Matters
Breaching Good Faith results in serious damage. Not only will it damage your reputation, but it will cost you too. For example, the innocent party may be able to withdraw from the agreement altogether.
Good Faith exists in all franchisor/franchisee agreements. Therefore, you need to know. Contact a company lawyer to find out more.
Want to know more? Contact a LawPath consultant on 1800 529 728 to learn more about Good Faith and to obtain a fixed-fee quote from Australia’s largest legal marketplace.
