The implied common law obligation of good faith has become increasingly important in the realm of franchise relationships. Australia, the most franchised country in the world, is a jurisdiction lacking clear High Court authority relating to the implied good faith obligations in franchises but which is otherwise characterised by a substantial body of good faith litigation surrounding franchises.
The Franchise Relationship
A franchise agreement goes far beyond a mere bilateral contract. Unlike many business transactions, franchises involve long-term relationships, interdependence, mutuality and co-operation. These special characteristics pertaining to franchises have led to academic and judicial recognition of the unique “relational” character of franchising which arises not only from written documents but also from the norms of the ongoing relationship. This understanding guides the rationale for development of an implied obligation of good faith.
The Role of Good Faith
Good faith is the tool that has been used to bring the resolution of franchise disputes in line with realities of the franchise relationship. It has been used by Australian courts in disputes concerning the franchisee’s compliance with a franchisor’s established operation requirements and franchisor’s changing the franchise’s system’s operating requirements or design. An implied obligation of good faith has been invoked in these types of disputes to remedy the incompleteness of franchise contracts, filling the gaps.
The Content of Good Faith
The content of an implied good faith obligation is increasingly likely to be based on the reasonable expectations or legitimate interests of the contractual parties. In Burger King [2001] NSWCA 187, the court held that the franchise development agreement in question was subject to implied terms of co-operation, good faith and reasonableness. The Federal Court decision in Australian Competition & Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 examined the conduct of the franchisor company and found that their conduct was calculated to damage the franchised business and demonstrated a lack of good faith on their behalf.
Implications for Commercial Franchisors
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Provided due regard is had to these expectations or interests, the implied obligation of good faith is unlikely to be breached.
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The most common allegation of conduct contrary to a good faith requirement is likely to involve an examination as to whether a contractual right has been exercised whimsically, impulsively, unpredictably or for some extraneous purpose.
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The mere fact that a franchisee may suffer financially as a result of a franchisor’s decision is not, in itself, sufficient to constitute a breach of the good faith obligation (Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310).
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The obligation will manifest itself in a requirement to treat individual franchises as consistently as possible where multiple franchises have been granted except to the extent that any discriminatory treatment arises due to special features or circumstances affecting a particular franchisee (Kellcove Pty Ltd v Australian Motor Industries Ltd (unreported, Fed Ct, Woodward J, 6 July 1990).
Can It Be Avoided?
As the law currently stands, there is nothing to preclude a well drafted contract from containing an express term which seeks to preclude the implication of a common law good faith term. However, when considering such an exclusionary clause it must be appreciated that it will deprive both parties from relying on the implied term and may be to the disadvantage of either party. Moreover, not every “opting out” clause will be upheld given public policy considerations which seek to avoid dishonesty and unconscionability.
Please do not hesitate to contact a member of our Franchising team if youhave any queries.
