Burger King Corp v Hungry Jack's Pty Ltd (2001) 69 NSWLR 558
Contract; contents; universal terms; duty of good faith; dishonest use of contractual power.
Facts: Hungry Jack's (HJ) was a large Australian franchisee of Burger King Corp (BK). However, over the years, difficulties emerged in the relationship between the two companies. BK decided to force HJ to sell out of its franchising rights. To achieve this, BK exercised certain of its contractual powers in a way that made it impossible for HJ to perform its franchise obligations. In particular, BK refused to approve new sub-franchise outlets that, in terms of the franchise agreement, HJ was obliged to open each year. BK then gave HJ notice that it was terminating HJ's franchise rights because of HJ's failure to open the required sub-franchise outlets.
Issue: Among other issues, the court considered whether BK owed a duty of good faith to HJ, and had breached that duty.
Decision: A duty of good faith was implied by law into this contract and had been breached by the refusal to approve the sub-franchise outlets.
Reason: There are now numerous Australian cases recognising an implied duty of good faith in appropriate contracts - perhaps in all commercial contracts. The duty will exist if, without it, the rights conferred by a contract would be made worthless or seriously undermined. In the light of this duty, BK was obliged to exercise its contractual powers (such as the power to approve sub-franchise agreements) honestly and reasonably, and not for a purpose outside the contract - for example, to thwart HJ's contractual rights.