Good Faith in the Context of Franchise Agreements

The relation arising out of a contract between the parties to an agreement of franchise (Franchisee and Franchisor) is often a long-lasting relationship. Owing to the long-term nature of the agreement, the standard of good faith for franchise agreements is comparatively robust. Even though there is no master-servant relationship in a franchise contract, a franchisor must fulfill duties towards the franchisee.

Duty to disclose: The franchisors, to fulfill the obligation to act in good faith, must provide accurate, relevant, and material information to the potential franchisees. The duty of disclosure is a general obligation and may also extend to specific disclosures under respective franchise statutes.

Duty to Provide Support: The franchisors must also exercise diligence and prudence towards the respective franchisee. The duty under good faith also obligates the franchisors to provide the necessary support, be it technical, commercial, or of any other nature, through collaborations with the franchisees.

Duty of Fair Competition: Even though there is a duty to exercise good faith on the part of both the parties to a contract of the franchise, this, however, will not affect any competition that might take place between the parties except for situations where there is a contractual obligation barring the same.

Duty to Protect the Brand: Even though not an express obligation under the contractual terms, the franchisor must protect the franchisor’s brand and network due to the good faith obligation. The obligation to protect the brand extends from individual franchisees to the entire network.

Challenges
Although there is a duty of good faith, due to lack of any express statute for good faith, especially in the context of franchise law, gives rise to ambiguity. The issues that give rise to ambiguity are:

No uniform definition: Due to the lack of a uniform definition of good faith and dissimilarity in the civil law and common law contexts confuse. In civil law, good faith is a positive obligation where a franchisor must provide, support and protect the franchisee. However, in the common law context, the meaning of good faith implies that the franchisor must not deceive the franchisee, which is a negative obligation.

Practicality: Although terms like honesty and loyalty might seem lucrative at first, the practical application of these superficial values is complicated. On the one hand, the franchisor must ensure support, protection, while on the other hand, the franchisor has no obligation under good faith to ensure the franchisee’s success.

Duty versus freedom of contract: A pertinent issue is that the obligations under good faith sometimes interfere with the parties’ contractual freedom. A lack of certainty not only creates confusion but is also very disturbing.

Solution
Franchisors should always exercise prudent care while entering into a franchise agreement. There should be a clear definition of the standard of good faith. With the expansion of a franchise globally, the franchisor must keep in mind to adhere to the standard of good faith at a national and international level.


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