Good Faith Obligations Under the Australian Franchising Code of Conduct

In Australia, the Franchising Code of Conduct (the Code) imposes a critical obligation on both franchisors and franchisees to act in good faith in their dealings with each other. This requirement is designed to ensure fairness and equity within franchise relationships and is a fundamental aspect of the regulatory framework governing franchising in the country. The obligation to act in good faith is detailed in Part 2, Division 3 of the Franchising Code of Conduct, which operates under the Competition and Consumer Act 2010 (Cth).

What is the Obligation to act in Good Faith?

The Code mandates that both franchisors and franchisees must act in good faith during all stages of their relationship, including the negotiation of the franchise agreement and throughout its term. This obligation is continuous and applies to all interactions between the parties.

While the Code does not provide a precise definition of good faith, it generally encompasses:

– acting honestly, fairly, and not arbitrarily or for an ulterior motive;
– not misleading or deceiving the other party (whether by false statements or by silence);
– considering the other party’s legitimate interests of the other party when making decisions.

However, the obligation to act in good faith does not restrict a party from pursuing its legitimate commercial interests. For instance, franchisors are permitted to make business decisions that benefit the overall franchise network, provided these decisions are made with honesty and fairness.

Court Interpretation

The interpretation of good faith can be informed by common law principles and judicial decisions. Courts may consider factors such as fairness, reasonableness, and honesty when determining whether a party has acted in good faith.

The good faith requirement can significantly influence how contractual terms are interpreted and enforced. For example, if a franchisor decides to implement significant changes to the franchise system, they must consider the impact on franchisees and ensure these changes are made reasonably and fairly.

Franchisees are also bound by the good faith obligation, which includes adhering to the system and complying with the terms of the franchise agreement. This fosters a cooperative and mutually beneficial relationship between the franchisor and franchisee.