Keeping the faith: Why acting honestly is important

Franchise parties need to act honestly, exercise their powers reasonably and have regard to each other’s legitimate interests – in other words, act in good faith.

Articles in the media have been asking if franchisors are acting in good faith. This raises the question of how the critics exactly define “acting in good faith”, and to whom specifically their comments apply.

How can franchises be certain their members are acting appropriately?

“Good faith” can mean different things to different people. However, it is important to remember that it is a legal concept; what “good faith” means under the law might not be same as what it means in daily use.

The concept of good faith has been a central part of the mandatory national Franchising Code of Conduct since the beginning of 2015. It shapes how franchisors and franchisees (including potential franchisees) deal with each other. At its core, good faith requires parties to act honestly, exercise their powers reasonably and have regard to each other’s legitimate interests. It is important to note that the obligation applies at all stages of the franchise relationship, including:

  • negotiating the terms of the franchise agreement
  • performance of the contract
  • dealing with disputes
  • deciding whether to consent to transfer a franchise agreement, and
  • ending a franchise agreement (including termination).

Franchisors are in a powerful position in the franchising relationship, and the obligation for them to act in good faith is an important constraint on their power. However, it is important for franchisees to remember that the good faith obligation works both ways. You have a right to expect your franchisor to act in good faith, but you must also exercise good faith in return.

Be honest

Imagine a franchisee who runs a commercial cleaning business where the franchisor allocates clients but starts to service some clients “off the books” while telling the franchisor they no longer want the service. In that case, it would be reasonable to say the franchisee was not acting in good faith as they have been dishonest with the franchisor in order to gain more direct business for themselves.

There are some simple things franchisees can bear in mind and should also look out for in their relationship with their franchisor. These include being honest and taking the time to consider their interests as well as your own.

If disputes arise, good faith can fly out the window as emotions run high. Where possible, try to resolve disputes as they arise in a calm, reasonable and fair manner. Try to understand the other person’s point of view.

It may also be useful to suggest mediation in a situation where you cannot quickly resolve disputes, but remember, a mediator can only help the parties reach an agreement – it is not a mediator’s job to formulate an agreement.

If you or your franchisor are proposing to make any changes to your franchise or franchise agreement, it is important to consult to discuss these changes fully before moving ahead. Both sides should be given a chance to understand what changes will mean for them.

Third party

While good faith requires parties to have regard to each other’s rights and interests, this does not mean they have to put the other person’s interests above their own. For example, if you are trying to negotiate a change to your franchise agreement, good faith suggests the franchisor should act honestly and co-operatively during the process, but it would not mean they have to make the change for you.

In difficult situations where there are competing interests, it may be useful to involve a neutral third party.

It is also important to keep in mind that neither the franchisee nor franchisor should use their rights, powers or discretion for an ulterior purpose. For example, imagine a franchisee buying into a physiotherapy franchise in which they have to use the franchisor’s software system to book appointments for clients. However, the system has glitches known to the franchisor but not to the franchisee before their agreement was signed. When the franchisee raises concerns about the software system, the franchisor is not helpful. With such a situation continuing, it leads to a breakdown in the relationship.

While waiting for the software problems to be resolved, the franchisee starts recording bookings in a spreadsheet. The franchisor becomes aware of this and issues default notices, alleging the franchisee has not complied with the booking requirements under the agreement.

In this scenario, the franchisor has likely not acted in good faith as they had an ulterior purpose – they wanted to be rid of the franchisee and knew the franchisee could not fix the issue by themself.

Talk first

If you suspect your franchisor is not acting in good faith, initially the best course is to first discuss the problem to find a way forward. If the problem is not resolved, mediation becomes a good option. Mediation services are provided by state and federal Small Business Commissioners, among others.

Failing mediation, you can also contact the ACCC to report alleged breaches of the Franchise Code of Conduct, including a breach of the good-faith provisions.

A failure to comply with the good faith requirement in the code could result in the ACCC taking court action to seek a financial penalty, or issuing an infringement notice. The ACCC determines the appropriate enforcement tools on a case-by-case basis, taking into consideration the alleged contravention, the business involved and the impact of the conduct.

Dr Michael Schaper is the deputy-chair of the Australian Competition and Consumer Commission