KEEPING THE GOOD FAITH IN FRANCHISE RELATIONSHIPS DURING COVID-19
Australia’s franchise industry is facing unprecedented challenges in the COVID-19 world.
Maintaining effective working relationships between Franchisors and Franchisees is more important than ever before, says commercial law firm Cowell Clarke. Ms Megan Jongebloed, Head of Cowell Clarke’s Franchise law group, said the concept of “good faith” will be put to the test in this challenging business environment.
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,” Ms Jongebloed said.
“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.”
Demonstrating you are acting in good faith
Many Franchisors and Franchisees will be faced with difficult decisions to ensure long term viability so maintaining the business relationship is of critical importance. Ms Jongebloed outlines the following key questions to consider when dealing and negotiating during the pandemic:
• Are you being honest with the other party?
• Are you considering the other party’s interests and taking into account the impact of the crisis?
• Are you making timely decisions in responding to the current circumstances?
• As the Franchisor, are you consulting with your Franchisees regarding any proposed changes you may be required to make to protect your business?
• Are you seeking to impose conditions which are not currently necessary to protect your business?
• 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?
“We recommend that Franchisors discuss with Franchisees the challenges both parties are currently facing and then work together to find a solution,” Ms Jongebloed said.
“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 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
Ms Jongebloed warned that 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,” she said.
“At the same time they will be protecting their legitimate commercial interest as it will contribute towards the long term viability of the Franchising business.
“For example, a Franchisor may consider providing its Franchisee network with a deferment, waiver or reduction of fees.
“However obtaining professional advice well in advance can help avoid costly legal disputes down the track.”
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