Good faith obligation

What it means

Good faith is a statutory duty that both parties owe each other. It draws on the unwritten common-law meaning of the term, which generally requires acting honestly, not acting arbitrarily or for an improper purpose, and having regard to the other party's legitimate commercial interests. It does not, however, require a party to act against its own legitimate interests or prevent it from making hard commercial decisions.

The obligation applies to the whole life of the relationship: pre-contract negotiations, the operation of the agreement, renewal and transfer discussions, and the way disputes are handled. It cannot be limited or excluded by the franchise agreement, and it applies even where the agreement is silent on a particular issue.

Because good faith is broad, courts look at conduct in context. Examples of possible bad faith include refusing without reason to consider a franchisee's proposals, providing misleading information, or exercising a contractual power dishonestly or capriciously. Under the 2025 Code, breaching the good-faith obligation on important matters can attract substantial civil penalties, reflecting how seriously it is now treated.

In practice

For franchisees, the duty is most useful as a check on how a franchisor exercises its discretionary powers, such as approving a transfer, enforcing standards, or making network changes. A franchisor that uses those powers arbitrarily or to punish a franchisee for raising concerns may be acting in bad faith. It is a two-way street, so franchisees are equally expected to be honest and cooperative, for example in providing accurate sales figures.

In disputes, alleging a breach of good faith is common, but it is not a catch-all remedy for any commercial disappointment. The party has to point to conduct that is genuinely dishonest, arbitrary or contrary to the other's legitimate interests, not merely a decision they disliked. Keeping records of communications and decisions helps demonstrate whether each side acted reasonably.

A real example

A franchisee finds a qualified buyer for their outlet and asks the franchisor to approve the transfer. The franchisor delays for months, refuses to give reasons, and provides no explanation for withholding consent while a corporate-owned relocation is planned nearby. The franchisee argues the franchisor breached its good-faith obligation by exercising its approval power arbitrarily and for an improper purpose.

Good faith obligation — FAQs