Is there an obligation (express or implied) to deal in good faith in franchise relationships?
Franchise & Licensing
Yes, Law 18/03 provides in article 41 that both the franchisor and the franchisee must act with good faith when performing their obligations.
The franchise-specific legislation in each of the six disclosure provinces imposes a duty of fair dealing (which includes a duty to act in good faith and in a commercially reasonable manner) on all parties to a franchise agreement. This duty applies in respect of both the performance and enforcement of the franchise agreement.
As already mentioned, the general provisions on good faith of the Chilean Civil Code apply to the franchise relation. These general provisions require the parties to disclose to each other all matters pertaining to the future agreement that will be material to the other party's final decision to execute the agreement. Moreover, the good faith principles contained in the Chillan Civil Code govern all aspects of the franchisor-franchise relationship, from pre contractual disclosure matters to the post termination provisions included in the agreement.
Danish contract law recognises the principle of good faith. This means that the parties to an agreement are obliged to care for each other’s interests and to give each other information that is necessary to mitigate losses, as well as to avoid acting contrary to previous behaviour and to avoid an abuse of rights.
The principle of good faith has not been expressed in any statutory provision, but its existence is presupposed in some statutes, for example in Section 36 of the Contracts Act.
Unfair actions and omissions as well as actions and omissions carried out in bad faith by a contracting party may give rise to an action for breach of the agreement.
Apart from the post-term fair competition rules there are no express obligations to deal in good faith. However, Article 724 of the Civil Code of the Republic of Azerbaijan obliges the Franchisor to provide the Franchisee with necessary information and assets (tangible and intangible) related to the franchise in the same manner as used by the Franchisor himself.
Yes, there is a legal obligation stipulated under the Egyptian Civil Code in Article (148) which states that “the contract shall be executed according to its provisions and in a manner that is compatible with bona fide/good intention requirements.”
Article 1104 of the French Civil Code expressly requires that all contracts be carried out under a general principle of good faith.
The obligation to deal in good faith derives from various provisions of Greek law and it is considered one of the fundamental principles thereof. Among others, art. 288 of the Greek Civil Code provides that all obligations must be performed in accordance with good faith and business morals.
In terms of the Federal Civil Code (FCC), a party’s consent in an agreement will not be considered valid in such party was in “error” at the time of granting the consent. When a legal or factual error exists with respect to the party’s main motive for entering into an agreement, such error may nullify the agreement. The FCC defines bad faith as “the dissimulation of an error by a party to an agreement that was known by the said party”.
Therefore, it is vital for both parties to deal with each other in good faith while executing the agreement and during the term thereof, in order for such agreement to be valid.
In Lebanon, there is an obligation to deal in good faith in any contractual relationship according to Article 221 of the Code of Obligations and Contracts (“Covenants concluded according to regulations are binding on those who are party to it. They must be understood, interpreted and carried out in conformity with good faith, equity and usage.”). This rule also applies to the franchise relationship.
Yes. It is also provided that the principles of voluntariness fairness, honesty and trustworthiness must be observed in any engagement of franchise operations.
The Peruvian Civil Code establishes in Article N°1362 that agreements must be negotiated, agreed and executed according to rules of good faith and the common intention of the parties.
The Civil Code provisions on obligations and contracts require the contracting parties to comply with their obligations in good faith. Bad faith in the performance of the contract will render the party acting in bad faith liable for damages.
Parties to a franchise agreement are subject to an implied duty of good faith. Good faith and fair dealing are the fundamental principles of the national civil law, which are set out by Articles 1(3) and 10(5) of the Russian Civil Code. These principles are usually supported and enforced by local courts in all disputes involving domestic contracts and cross-border transactions, including in the context of franchising.
The current law has no express or implied obligation to deal in good faith. However, many franchise agreements contain express good faith clauses. In relation to the franchisee’s obligations the clause might state as follows:
“The franchisee shall act loyally and in good faith towards the franchisor at all times.”
In relation to the franchisor’s obligations the clause might state as follows:
“The franchisor shall act loyally and in good faith towards the franchisee at all times.”
Most courts recognise the common law covenant of good faith and fair dealing, requiring parties to act honestly and observe commercial standards of fair dealing, in all commercial contracts. This common law covenant does not generally create obligations and restrictions where none exist. Instead, it requires the parties to perform their express contract duties in good faith.
Claims that franchisors have breached the implied covenant are typically asserted where the franchisee believes that the franchisor engaged in some act or practice that allegedly denied the franchisee the benefits of its franchise agreement or failed to exercise its contractual discretion reserved under the franchise agreement in a reasonable fashion. While these types of franchisee claims historically achieved success, in response, most savvy franchisors took action and updated their form franchise agreements in the following manner in an effort to defeat any future such claims: (i) wherever possible, expressly state that certain actions or omissions are required and/or prohibited (as mentioned above, the implied covenant is meant to address contractual ambiguities, rather than contravene express provisions); (ii) expressly state that the franchisor has exclusive and sole right to exercise its discretion (i.e., so the franchisee is on notice that the franchisor need not exercise its discretion reasonably); and/or (iii) replace the concept of “discretion” with the concept of the franchisor’s “business judgment” (i.e., in an attempt to provide franchisors with as much leeway as corporate executives under the corporate law concept of the “business judgment rule”).
Representing an unexpected turn of events, in a 2017 case out of California, Bryman v. El Pollo Loco, 2017 WL 9772377, Sup. Ct. (2017), the court completely uprooted this practice and declared that franchisor El Pollo Loco violated the implied covenant of good faith and fair dealing by placing a company-owned restaurant in close proximity to a franchised restaurant even though the parties’ franchise agreement explicitly permitted El Pollo Loco to do so. The court held that the subject franchise agreement’s grant of permission to El Pollo Loco to place company-owned restaurants anywhere, even proximate to franchisee Bryman’s restaurant, was “substantively unconscionable” and so one sided as to “shock the conscience.” Accordingly, it would be wise for franchisors to take caution when exercising even their express contractual rights and to weigh the likelihood of an implied covenant claim (though it should be understood that the Bryman case is at odds with precedent and is currently being appealed).
In addition, a number of states have gone a step further and enacted legislation specifically aimed at regulating the contractual relationship between franchisors and franchisees (via so called, relationship laws). These relationship laws mandate that certain minimal franchisee rights and franchisor obligations be imposed, regardless of whether such rights and obligations are expressly stated in the parties’ franchise agreement (and, in fact, often times contrary to what is stated in the parties’ franchise agreement). By way of example, the relationship laws of a number of states require that the franchisor have “good cause” to terminate a franchisee, and specify what types of defaults constitute “good cause” grounds for termination. Additionally, the relationship laws of a number of states provide that regardless of whether or not a franchise agreement grants a franchisee the right to renew upon expiration of its term, franchisors are required to grant their franchisees operating in such states the right to renew.
Norwegian contract law in general is based on an implied obligation to deal and act in good faith and in accordance with good business practice in contractual relationships. In franchise relationships this has been the topic in case law with the example as referred to in response to item 7 above, whereby a franchise agreement was deemed invalid because the franchisor had not provided sufficient and relevant information to an inexperienced franchisee hence it was unreasonable to uphold the agreement. There is also a 'good faith' standard/principle applicable for the interpretation of contracts, such as a franchising agreement. According to this standard/principle, a party to an agreement that understands or should understand that the other party has a different understanding of a clause or wording, can't expect its own understanding to be applicable, because that party is not acting in good faith.
Art. 6.1 of The Franchise Law, under the heading “pre-contractual behaviour obligations”, states that “the Franchisor shall exercise goodwill, fairness and good faith at all times in dealing with the prospective Franchisee and shall provide the prospective Franchisee with any information the Franchisee should consider necessary or useful for the purposes of the franchise agreement in a timely manner”.
Similarly, Art. 6.3 of The Franchise Law, states that “the prospective Franchisee shall exercise goodwill, fairness and good faith at all times in dealing with the Franchisor and shall provide the Franchisor with any information that is necessary or appropriate for the purposes of the franchise agreement, in a timely, correct and comprehensive way, even if such disclosure is not expressly requested by the Franchisor”.
The provisions contained in art. 6 above are expression of the general principal contained in the Civil Code, according to which parties must observe good faith during negotiations and in the performance of the contract (Articles 1337 and 1375 of the Italian Civil Code).
There is no statutory duty of good faith under English contract law. However, judgments in a number of recent cases have reignited the debate over whether or not English law recognises a general duty of good faith in commercial contracts, including franchise agreements. In a growing line of authorities, the English courts have confirmed that a duty of good faith will be implied into certain types of agreements as a matter of law. This special category of agreement is referred to as "relational contracts". Whether an arrangement will be considered a "relational contract" will depend on the facts and context of each arrangement, but it is likely that most franchise agreements will be considered to be relational contracts. For further information on "relational contracts" please see response to question 31.
Further, members of the BFA are subject to a general duty of good faith and fair dealing which requires both franchisor and franchisee to commit to resolving complaints, grievances and disputes in good faith through fair and reasonable direct communication and negotiation and, where necessary, to resolve the dispute through mediation and/or arbitration.