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Franchise Agreements - Implied Duties of Honesty, Integrity and Good Faith

A duty of good faith has never been entirely at ease in English contract law. The  preferred view of the Courts has traditionally been that two (or more) commercial parties negotiate at arm's length and are each capable of looking after their own interests. The Courts will usually give effect to the terms of the contract on the basis of a strict interpretation of what is written without considering whether the agreed terms (or importantly conduct of the parties under the agreement) would pass a Good Faith test. The Courts see contract negotiations as an combative process  even where (as is usual) it is the parties' ultimate goal to foster a mutually beneficial long term contractual relationship. 

What is Good Faith?

Good Faith can best be described as an overriding duty to your contracting counterparty based on the principle of fair and open dealing. That is, all of the parties' conduct, in dealing with one another in relation to the agreement, is fair and honest. A position most contracting parties would, without question, expect in any event.

Even where there is an express requirement to act in "utmost good faith" the Courts have not required one party to put the other parties interests before its own.  However the good faith requirement states parties must:

  • stick to the spirit of the contract;
  • act in line with reasonable commercial standards of fair dealing;
  • be faithful to the agreed common purpose, and
  • act according to the justified expectations of the parties.

When does Good Faith Apply?

The Courts are now beginning to lean towards  implying a duty of Good Faith (or as it has sometimes been called, a duty of honesty and integrity) in some specific circumstances even where it is not a written term of the contract. The Courts are more willing to require the parties to act in Good Faith when there is a "relational" contract which requires a "high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty". Franchise Agreements are a clear example and franchising parties should expect the Courts to require them to act in good faith towards one another.

Why is Good Faith Relevant?

An implied duty of Good Faith should be regarded as a useful tool by which the Courts can consider the conduct of the parties and determine whether conduct, may be considered a breach of contract or to assist the Court in determining how serious such a breach is. So for example where a Franchisee has rights under the franchise agreement which are the subject of the Franchisor's discretion, the franchisee may have a strong argument that the Franchisor's discretion must be exercised fairly and in good faith. Failure to do so could, depending on the circumstances, amount to a breach of contract which may entitle the franchisee to terminate the contract, seek damages and free itself of any post contract restrictive covenants.

Equally where a franchisee is engaging in conduct which is not strictly prohibited by the contract but represents, for example, sharp practice (e.g. providing service X and dressing it up as service Y on the basis that service Y attracts a lower fee payable to the Franchisor) the Franchisor may rely on an implied duty of Good Faith to say that the practice amounts to a breach of contract.  

Conclusion  

Franchising parties should consider the impact of Good Faith at every stage of their franchising relationship. The franchise agreement may, for example, seek to set out the "justified expectations" of the parties or perhaps more importantly what cannot be expected.

If matters are becoming fraught between the parties, a gentle reminder to the other that it is required to act in good faith may be enough to restore the collaborative approach anticipated when the parties set off on the franchise journey. In conclusion a well-managed franchise with a loyal franchise base will have nothing to fear and nothing to gain from the court's movement toward good faith as it will already be the cornerstone of the contractual relationship.

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