Virk Pty Ltd (in liq) v YUM! Restaurants Australia Pty Ltd [2017] FCAFC 190
Contract; contents; universal terms; duty of good faith and reasonableness
Facts: Franchise agreements were entered into between Yum! Restaurants Australia Pty Ltd (Yum) and various franchisees in Australia. The agreements gave Yum a contractual power to set maximum prices for pizzas sold in pizza outlets operated by their franchisees. In response to declining market share, Yum developed and tested a new business model which significantly reduced the prices at which pizzas could be sold. Individual franchisees objected to the new model on the grounds that, with such prices, they could not operate at a profit. On this basis they argued that the decision to implement the new business model was a breach of an implied term that Yum act in accordance with an obligation of good faith and reasonableness.
Issue: Does the term requiring good faith and reasonableness implied by law into the franchise agreements impose separate duties of ‘good faith’ and ‘reasonableness’, or a single duty?
Decision: The term requiring ‘good faith and reasonableness’ must be understood as describing a single requirement and not two separate ones. In the circumstances, there had been no breach of this term by Yum.
Reason: The test whether a term requiring ‘good faith and reasonableness’ has been breached is to be judged on the evidence of the particular case and in the context of the particular contract, having regard to acceptable norms of commercial conduct. It is appropriate to use an objective element of reasonableness in fair dealing, in conjunction with considerations of honesty, and fidelity to the objectively ascertained contractual objects and purposes of the parties. However the obligation of good faith should not be equated with a duty to exercise due care and skill or to produce a reasonable outcome.