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Keeping the 'good faith' in franchise relationships

Business

The franchise industry is facing unprecedented challenges in the COVID-19 world, argues Megan Jongebloed from Cowell Clarke Commercial lawyers.

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It’s a national industry with an estimated value of more than $180 billion with 80,000 or so individual franchised outlets, according to the Franchise Council of Australia.

In South Australia, franchising is a vibrant sector encompassing small operations to large well-known brands from retailing and gardening services to real estate and other professional services.

As economic conditions tighten, revenues are under increasing pressure, commercial leasing arrangements under greater scrutiny and management is having to make difficult calls on staffing.

Maintaining effective working relationships between franchisors and franchisees is more important than ever before.

However, there’s a critical legal concept adding another level of complexity and it’s something upon which all our strategic conversations with our franchisor clients is benchmarked.

Good faith put to the test

The business relationship between franchisors and franchisees is regulated by the Competition and Consumer (Industry Codes Franchising) Regulation 2014.

A central concept to this code is an obligation to act in good faith.

In times of crisis, the obligation for franchisors to act in good faith is of critical importance when dealing with franchisees who may be facing a range of challenges. This is particularly relevant where the franchisor itself may be facing the same challenges.

It’s important to remember that the obligation to act in good faith does not prohibit the Franchisor from protecting its legitimate commercial interests.

Self-assessment in challenging times

Many franchisors and franchisees will be faced with difficult decisions to ensure long-term viability so maintaining the business relationship is of critical importance.

There are a range of questions to consider when dealing and negotiating during the pandemic:

Are you acting for some ulterior purpose? For example, are you looking to use the crisis to further a purpose that has not arisen out of the current crisis?

At Cowell Clarke we recommend that franchisors discuss with franchisees the challenges both parties are currently facing and then work together to find a solution.

Pro-active communication is the preferred approach.

It is likely that disputes will arise between parties due to the various pressures everyone is currently facing. When dealing with disputes it’s important to ensure you attempt to resolve such disputes in accordance with the process outlined in the code.

Ultimately, if you act in a manner that is honest and fair you can be assured you are acting in accordance with the obligation to act in good faith. This approach will also contribute to how well the relationship withstands the COVID-19 crisis.

Dealing with the F-word

Franchisors continuing to charge franchise fees, whilst franchisees are forced to close temporarily or are suffering a significant loss, may be considered to be in breach of the duty of good faith.

By supporting the Franchisee through the Covid-19 crisis, franchisors will be acting in accordance with the good faith obligation. At the same time they will be protecting their legitimate commercial interest as it will contribute towards the long-term viability of the franchise business.

For example, a franchisor may consider providing its franchisee network with a deferment, waiver or reduction of fees.

Help is available

There are some reliable online resources available including the Australian Competition and Consumer Commission and the Franchise Council of Australia.

However, seeking professional legal advice that takes into account a party’s specific circumstances can help avoid costly disputes down the track.

Megan Jongebloed is head of the franchise Law group at Cowell Clarke.

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