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Articles 27th Jan 2015

5 top tips on establishing good faith in franchise relationships

Last year saw the UK courts tentatively establish a principle of good faith in relational contracts such as franchising. This principle – whilst long established in other jurisdictions – was unusual in the UK in circumstances where a formal contract existed between the parties, as traditionally English courts are reluctant to imply terms where detailed contracts exist. This left the franchise industry with less certainty of the security provided by its robust contracts. Contracts long thought one-sided in favour of the franchisor were suddenly capable of challenge as courts appeared to attempt to redress the balance of power between the franchisee and franchisor. This period of flux has however resulted in establishing much clearer guidelines going forward of what a franchisor should do to avoid challenges of failing to act in good faith towards it franchisees.

  1. Do unto others as you would do unto yourself – Pretty simple really – avoid doing anything really bad to your franchisees, without good reason, and vice versa as the franchise relationship relies on the parties working together for each other’s mutual benefit. If you hike the franchise fee essentially making the franchise unprofitable for your franchisees – expect a challenge.
  2. Do not attempt to profit from your own misdeeds – The courts take into consideration whether the parties are complying with the terms of the contract in establishing whether a party is acting in good faith or not. Parties seeking to rely on a good faith doctrine – must come with clean hands or courts will not find in their favour. This means if you are competing, or in any other way failing to comply with your franchise contract, don’t expect the courts to help you out.
  3. Don’t get it twisted – Acting in good faith towards a franchisee does not mean that you have to do everything in their favour. The very nature of a franchise relationship means that a franchisor must take tough but commercial decisions in order to protect the network and its own reputation. Courts will support franchisors in taking such decisions even if the result is unfavourable to a particular franchisee.
  4. Reduce your exposure – make your contract your shield – Litigation is a costly business. Rather than await the determination of a court as to what the implied terms of good faith are in your franchise contract – include your own good faith clause in your franchise contract that clarifies for both parties what the obligations of good faith are.
  5. Don’t be an emu – get your head out of the sand – Whilst good faith is still an emerging concept in England – it has been repeatedly endorsed by English courts and it isn’t going to go away. It is not just about the contract, it’s about the practice. Implement practical steps to show you are acting in good faith towards your franchisees.

The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.

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