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Obligation to Act in Good Faith

Posted on 10 November 2014

The current Franchising Code of Conduct states that nothing in the Code limits an obligation to act in good faith.

So, while the provision really didn't add anything, it certainly didn't detract from the evolving law of good faith.

At clause 6 of the new Franchising Code of Conduct (coming into effect from 1 January, 2015) it is clear that each party must act in good faith to the other and that the meaning of "good faith' is basically the law as it evolves.

One interesting change is there is a potential penalty of $51,000 if a party fails to act in good faith.  This applies to both franchisees and franchisors.

The provision specifically notes that it also applies to a person who is a potential franchisee or potential franchisor and their actions leading up to entering into a franchise agreement.

Sub-clause (3) goes on to state the court may have regard to whether the person acted honestly and not arbitrarily and if it co-operated to achieve the purposes of the agreement.

Franchisors should be mindful that rushing a franchisee to make a decision may be a breach of its duty.

Amongst other things, fFranchisees may breach their duty if they have been dishonest in the information they have given the franchisor.

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