Good Faith vs. Unconscionable Conduct

I was delighted when, just prior to the Franchise Law Symposium , the New Zealand Government recently confirmed that a case had not been made out for franchising regulation at this time. I have been saying for many years that the Fair Trading Act 1986 and the Contractual Remedies Act 1979 are very useful and powerful statutes for franchisees to use in order to attack franchisors where it is warranted.

In essence, a franchise agreement is a contract between a franchisor and a franchisee and is entered into by the parties freely and willingly. It is a relational contract and Justice Thomas in the New Zealand Court of Appeal case of Bobux Marketing Limited v Raynor Marketing Limited (2002) stated as follows:

"A relational contract is one which involves not merely an exchange but a relationship between the contractual parties. The parties are not 'strangers' in the accepted sense and much of their interaction takes place 'off the contract' requiring a deliberate measure of communication, co-operation, and predictable performance based on mutual trust and confidence. Expectations of loyalty and interdependence mark the formation of the contract and become the basis for the rational economic planning of the parties."

In franchise agreements which I draft, I include clauses under franchisor obligations and franchisee obligations for the relevant party to "act in good faith by acting loyally and faithfully towards the [other party] at all times". In 2004 the Privy Council in the Dymocks case did not make a ruling that the law should impose obligations of good faith on the franchise relationship in the same way as exists in some other legal relationships, and that was unfortunate. It is fair to say that good faith is up in the air but, in my opinion, it will not be very long before a High Court Judge implies a duty of good faith into franchise agreements in New Zealand.

Misleading or deceptive conduct is covered here by the Fair Trading Act 1986.  However, New Zealand has not gone down the "unconscionable conduct" road that was introduced in Australian franchising regulation and I am glad, for just what is "unconscionability"? It is not even defined in the Australian Trade Practices Act 1974 which means that it is left up in the air for the Australian Courts to interpret. What is good faith? In my opinion, if someone acts in bad faith then they are not acting in good faith and I think that it could be defined by reference to behaviour. For example, pocketing one sale in a hundred and not running it through the till would be an act of bad faith which would mean that a franchisee is not acting in good faith. From a franchisor point of view, if a franchisor deliberately withheld a marketing e-mail from one franchisee because that franchisee had not paid the royalties on time then it could be argued that the franchisor was not acting in good faith. After all, the relationship between a franchisor and a franchisee is based upon mutual trust and respect and I liken that relationship to a marriage.

Recently the Court of Appeal released its decision in the case of David v TFAC Limited. The Court of Appeal overruled the High Court and said that it was not wrong to discount the effect of the independent advice requirement and acknowledgement clauses in the franchise agreement. I disagree.  If someone is misled it is no defence to say that "If you had asked someone else you would have found out I was lying to you." There are Australian and New Zealand cases to this effect and they were not cited to the Judge. To me, that was grounds for TFAC to appeal but the Supreme Court has refused leave to appeal the Court of Appeal decision and it stated the following:

"Assuming TFACL correctly identified error of law by the Court of Appeal, it would not involve any question of general or public importance and the error was not of substantial character that it would be repugnant to justice to allow it to go uncorrected in this case."

I disagree and the Court of Appeal decision is bad law in my opinion.

In conclusion, because the Government found that "there is little evidence of widespread problems within the [franchising] sector", there was no need to introduce any form of franchising regulation at this time.  However, I would have liked the Government to comment upon "good faith". In my opinion, and as I said above, it will only be a matter of time before the New Zealand Courts will imply a duty of good faith into franchise agreements so lawyers should take the initiative now and include such good faith clauses in their franchise documentation.

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