First Principles of Business Law
The contents of a contract

6. Terms implied by law into all contracts

6.3. A universal 'duty of good faith'

 

 

 

Read the facts and the question and then choose the best answer.

A enters into a franchise agreement with B, the owner of a restaurant chain. The agreement provides that the franchise can be terminated if A fails to comply with municipal health regulations. Six months later B decides he wants to terminate A's franchise because A's restaurant is competing too successfully with one owned by B's sister. Discovering that A has just been fined for a minor contravention of the health laws, B terminates the franchise.

Does the contract between A and B allow B to act in this way?

(a) Yes, if the contract gives B the power to end the contract, he can do so, whatever his motive might be.

(b) No, even if B has a contractual power to end the contract, he must exercise that power in accordance with a duty of good faith that becomes a term of all contracts.

 

 

 

 

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