What is Good Faith in a Franchise Agreement? 

The concept of good faith is a legal principle and also a valued standard within UK franchising. Good faith refers to the obligation of parties to act honestly and fairly in their dealings with one another. This means adhering to the contract’s terms and acting in a manner that promotes mutual trust and cooperation. The principle, however, is not automatically applied to franchise agreements unless franchisors include an express term incorporating a duty of good faith. This article will explain the concept of good faith and its relevance to franchise agreements. 

How Does Good Faith Apply to Franchise Agreements? 

Franchise agreements create a long-term partnership where collaboration between the franchisor and franchisee is essential for success. Franchisors and franchisees invest substantial time and money into this relationship. Both parties rely on one another. Therefore, trust is a core component of their working relationship. 

Franchise agreements are legally binding, so if you or a franchisee breaches the terms, there will be cause for legal action. However, a duty of good faith does not automatically exist in every franchise agreement. Unless a party expressly includes it, it does not always apply to commercial contracts. 

If a duty of good faith exists in your franchise agreement, you and your franchisees must deal with each other honestly, fairly and transparently for the duration of your business relationship. Good faith can add an extra layer of protection and trust to the relationship. To ensure a duty of good faith, you should include it as a term in your franchise agreement. 

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Good Faith and the British Franchise Association 

In their Franchising Code of Ethics, the British Franchise Association (BFA) states that franchisees and franchisors ‘shall exercise good faith and fairness in their dealings with one another’. They highlight that good faith is a principle that the Code of Ethics relies upon. Additionally, they indicate the importance of the principle regarding:

• notification of contractual breaches; 
• complaints, grievances and disputes; and 
• seeking alternative dispute resolution if necessary. 

The BFA discuss good faith not only as a contractual principle but also as a foundation for the franchisee-franchisor relationship. It refers to fundamental principles of honesty, fairness and mutual trust. 

It is crucial that you, as the franchisor, act in good faith throughout your dealings with your franchisees. You can exercise good faith with your franchisees by:

• providing accurate and complete disclosure; 
• acting honestly; 
• facilitating direct and transparent communication; 
• providing ongoing support, guidance and assistance; 
• setting a clear dispute resolution framework in the franchise agreement; and
• being willing to consider franchisees’ views. 

Likewise, franchisees must adhere to the terms of the agreement. They need to operate their businesses according to your standards. They must also strive to achieve the agreed-upon performance targets. 

How to Incorporate the Principle of Good Faith

You can rely on the principle of good faith by explicitly including a good faith clause in your franchise agreement. Without explicitly including a good faith principle in your agreement, a court may not automatically assume good faith obligations exist. This means if there is a dispute and you want to rely on good faith, you might not be successful.

For example, if your franchisee started a competing business that directly steals customers from your brand, you would have a strong case against them.  This is because you have provided training, support, and even shared trade secrets – all while your franchise agreement clearly states they must act in good faith. Engaging in a competing business directly undermines your brand and breaches this good faith clause. Even if you had a non-compete clause, the good faith provision acts as an extra layer of protection, covering a wider range of potential issues.

Key Takeaways

Understanding the concept of good faith in a franchise agreement is crucial for fostering a productive and mutually beneficial relationship. The BFA expects franchisors and franchisees to act in good faith throughout the relationship. This means the relationship should be one of mutual trust, transparent communication, and support.

In UK franchising, good faith is a valued principle, but it is not automatic. To ensure both parties act honestly and fairly, you, the franchisor, need to explicitly include ‘good faith’ as a term in your franchise agreement.  This clarifies your expectations and strengthens your position if you ever need to enforce fair dealing. A lawyer can help you draft the contract with clear good faith provisions.

If you would like advice about your franchise agreement and your obligations as a franchisor, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.