The Franchising Code of Conduct (Code) requires all parties who
enter, or intend to enter a franchise agreement to act in good
faith. Whilst most parties are aware of this obligation, the
details regarding the duty to act in good faith remain unclear.
Read on to discover what acting in good faith looks like, who it
applies to and what penalties arise from failing to uphold this
What is good faith?
The Code currently offers no clear definition of 'good
faith'. However, it is inferred that the duty to act in good
faith is consistent with the expectations set at common law.
Together, the Code and common law outline basic standards of good
faith, in which a court must consider when determining if the
obligation has been fulfilled. Courts will consider whether the
Acted honestly and not arbitrarily
Behaved co-operatively to achieve the purpose of the
Had regard for the interests of both parties
Acted for legitimate commercial interests or for an ulterior
How can I show that I have acted in good faith?
To demonstrate that you have acted in good faith, you
Be able to demonstrate that your decisions have been motivated
by legitimate commercial interests
Keep detailed records concerning:
Internal decision making
Correspondence (and/or negotiations) between yourself and the
Respond appropriately and act in a timely manner.
In addition to the above, franchisors should also demonstrate
that their actions are of good faith by:
Avoiding unnecessary withholding of consent to renewals or
transfers specified with the franchise agreement
Ensuring that the default notice clearly addresses the nature
of the breach and possible solutions to rectify the situation in
situations where a breach has occurred
Instigating mediation sessions with the franchisee before
terminating the agreement in the event the breach cannot be
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Do not depart from the contract terms, or encourage the other party to do so, unless you plan to alter the contract.
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