Australia: Fine tuning the obligation of good faith – lessons for franchisors
The issue of good faith in a franchise context has recently been considered in Federal Court proceedings brought by the Australian Competition and Consumer Commission (ACCC) against Ultra Tune Australia Pty Ltd. This is the first occasion that the ACCC has prosecuted a franchisor for acting in ‘bad faith’ under the Franchising Code (Code). In this case, the Court found that Ultra Tune’s breaches were so serious as to warrant a $2.6 million penalty.
The ACCC successfully claimed that Ultra Tune did not act in ‘good faith’ in its dealings with a prospective franchisee, due to conduct that included failures in disclosure, the provision of false information and breaches of the Code and Australian Consumer Law. The obligation to act in good faith under clause 6 of the Code extends to all aspects of the franchising relationship from pre-contractual negotiations, contractual performance and dispute resolution through to termination of an agreement.
The Ultra Tune decision confirms that good faith and reasonableness will be considered by Australian courts as interrelated concepts and that, in determining whether a franchisee has acted in bad faith, they will consider whether the franchisor’s conduct ‘is dishonest, capricious, arbitrary or for an extraneous purpose’, and is more than is necessary to protect its legitimate commercial interests.
Franchisors should ensure that decisions made in dealings with franchisees have legitimate business objectives that can be substantiated by the franchisor and avoid conduct that is dishonest, coercive or unnecessarily uncooperative.
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