In short
A party bound by an express good faith obligation may terminate on a third party's adverse assessment and rely heavily on it. In Sech Finance the breach lay in finishing the decision while a gap the decision-maker had himself identified in that assessment was still unresolved.
- No cause, merits review, repeat investigation or contractual hearing was required.
- The franchisee was the obvious source for the missing link, within anti-money laundering limits.
- The loss was a 12.5 per cent chance of a better outcome, not the value of the franchise.
What happened
A bank's subsidiary ended a mortgage broking franchise on the bank's recommendation, after its own managing director had said he could not see the evidence behind it. RAMS Financial Group ran the RAMS home loan franchise network and was wholly owned by Westpac. Franchisees arranged RAMS home loans as authorised credit representatives of RAMS, and Westpac was the lender that decided each application.
The Fairfield franchise had signed a new five-year agreement with RAMS in late 2021. Both the agreement and the Franchising Code required the parties to deal with each other in good faith. During 2022 Westpac subjected Fairfield's applications to a review far more intensive than ordinary credit assessment, using information and techniques that were not available to the loan writers, and recorded concerns in a large majority of them.
On 30 September 2022 Westpac recommended that RAMS consider removing Fairfield and its principal from its credit licence and then terminating the franchise. RAMS revoked the authorisations and gave notice that it proposed to terminate the franchise. Its authorisation of the franchisee could be revoked at any time on written notice under section 68(1) of the National Consumer Credit Protection Act 2009 (Cth), and the agreement linked termination of the franchise to revocation of that authorisation.
HeldLee J. RAMS breached the express and Code obligations of good faith, in a confined respect: it completed its consideration of the matter while a deficiency its own decision-maker had identified as material remained unresolved. The breach caused the loss of a chance, assessed at 12.5 per cent, that a proper process would have kept the franchise going for a commercially useful period. Quantum is yet to be assessed.
The judgment is a first instance decision. Final orders have not been made, and Lee J has proposed a mediation on the amount before any further hearing.
Law current at 7 October 2026. This article states the Franchising Code in the 2024 Regulations at Compilation No 1 (law as at 21 October 2025), the National Consumer Credit Protection Act at Compilation No 52 and the Anti-Money Laundering and Counter-Terrorism Financing Act at Compilation No 62 (each law as at 1 July 2026). The facts are taken from the judgment as Lee J found them.
What good faith did not require
Most of the judgment is about what good faith did not demand of RAMS, and that part favours the party holding the power. The power to revoke was broad: "at any time" under the statute and "in our discretion" under the franchise agreement. Lee J held that a court cannot replace a discretion of that kind with one exercisable only for sufficient cause, and cannot substitute its own judgment for the decision-maker's.
Good faith also did not require the decision to be objectively reasonable. The Court said in terms that the question was not whether it would have revoked the authorisations on the same material. Reasonableness mattered only as evidence of whether the power had been genuinely exercised.
RAMS was entitled to place substantial reliance on Westpac, which was its parent, its sole lender and the party with the investigators and the systems. On that point Lee J was emphatic:
I reject any notion that an obligation of good faith required RFG to reproduce the work of SLTF before it could take that assessment into account.
[2026] FCA 1458 [204]. RFG is RAMS; SLTF is Westpac's Secured Lending Task Force, which carried out the review.
Nor did good faith stop Westpac or RAMS from changing their appetite for risk. The Court accepted that the system was not frozen at the standards that applied when the agreement was signed, and the Code, then and now, says the obligation does not prevent a party from acting in its legitimate commercial interests. The contract gave no right to be heard before this kind of termination, and good faith did not create one.
Where the breach lay
The breach was in the interval between the decision-maker seeing a gap in the case and deciding anyway. On 4 October 2022 the RAMS managing director asked Westpac for more granular information. On 5 October, having read the briefing note, he wrote:
some of the categories of concern relate to pretty serious potential misconduct, [but] I can’t get the link from a statement saying have [sic] a concern and evidence that supports/links to that? If I can it makes the decision much quicker.
Email of 5 October 2022, set out at [2026] FCA 1458 [148].
On 10 October Westpac replied that it had provided all the information it was able to share and that it was now for him to decide. On 14 October he decided to proceed on Westpac's recommendation, recording that it was unfortunate the investigators could not give him the evidence or details. Outside the privileged material the Court could not see, nothing in the evidence shows the gap was closed in those four days.
Lee J started from the proposition that a power governed by an express good faith obligation has to be exercised by the party that holds it:
There is no doubt that where the exercise of such a power is governed by an express obligation of good faith, the power must actually be exercised by the contracting party honestly and for the purposes for which the bargain permits it to be exercised.
[2026] FCA 1458 [188].
The finding itself is narrower than that sentence might suggest. The Court did not find that the managing director formed no judgment of his own, or that Westpac exercised RAMS's power. It found this:
Its decision-maker identified a want of connexion between grave concerns and the information said to support them and RFG completed its consideration of the matter while a deficiency which its decision-maker regarded as material remained unresolved.
[2026] FCA 1458 [225].
Lee J then said that the breach should be stated no more broadly. He made no finding of dishonesty, caprice or ulterior purpose. RAMS was not bound to reject Westpac's view, to investigate separately, to disclose protected information or to reach an objectively reasonable decision. The failure was one of fidelity to the bargain, in a process that was about to end a five-year agreement in practice.
The obvious source, and what the money laundering rules allowed
Once the investigators could not supply the link, the franchisee was the obvious place to look for it, and the anti-money laundering rules limited what could be said without removing the step. The managing director himself described Westpac's investigators as working on behalf of RAMS. Lee J reasoned that, since they could not provide RAMS's own decision-maker with the evidence, "there remained an obvious source from which information bearing upon at least some of those concerns could have been sought: Sech, Mr Lubarda and the relevant Fairfield loan writers."
The constraint was real. Westpac was a reporting entity under the anti-money laundering legislation, and the tipping-off offence prevented it from disclosing that it had made, or had to make, a suspicious matter report. Westpac had itself applied to AUSTRAC in October 2022 for an exemption, explaining that it was significantly constrained in disclosing suspected misconduct to the principal so as to give him an opportunity to respond under applicable Westpac policies. That application did not succeed.
The Court therefore confined what RAMS could have done to what it was lawfully able to say. It could have told the franchisee that revocation was under consideration because a substantial number of applications had unresolved concerns about the reliability and completeness of supporting information. It could have identified, without disclosing protected information, the categories of concern already raised in individual loan requests. And it could have invited a response on Fairfield's practices, supervision and remedial measures.
The tipping-off provision, section 123 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth), has been recast since 2022. The current offence turns on whether a disclosure would or could reasonably be expected to prejudice an investigation, and it extends to members of a reporting group and their officers and employees. The judgment considered the earlier form, and how the case would run under the current one has not been tested.
The franchisee was not vindicated on the merits
The franchisee won on process, and the judgment is careful to say that it did not win on the substance. The franchisee did not prove that Westpac's concerns were mistaken, and the Court was not asked to decide which of them were substantiated. Lee J found it established "beyond peradventure" that there were matters which reasonably caused concern and justified investigation, and his cross-examination showed that several applications raised points capable of legitimate inquiry.
Westpac had substantial grounds for its investigation and acted on genuine and serious concerns. The franchisee's separate claim of statutory unconscionability failed outright, Lee J remarking that "The claim goes nowhere." On causation the franchisee's success was, in his words, "substantially more limited than the case they advanced".
The Court also drew a distinction that any business acting on an investigation should keep in view. A matter may warrant investigation without being an established irregularity. An unexplained irregularity may reveal no failure by the person who submitted the application. A failure is not necessarily dishonesty. And the label "anomaly" answers none of those questions, which is why a count of anomalies told the decision-maker little about what had been established, by whom, and with what consequence.
What the breach was worth
The franchisee lost a chance to persuade, not the franchise, and the chance was valued at 12.5 per cent. Lee J built the counterfactual by changing only the conduct that constituted the breach. Westpac's concerns, its continued scrutiny and its entitlement to decide whether to lend all stayed in place. What changed was that RAMS told the franchisee what it lawfully could, gave it a reasonable opportunity to respond, and genuinely considered the response.
In the counterfactual, Sech and Mr Lubarda would have had an opportunity to persuade; they were not entitled to success in the persuasion.
[2026] FCA 1458 [231].
RAMS could still have revoked after a proper process. The franchisee therefore had to prove, on the balance of probabilities, that the breach cost it a real opportunity of more than negligible value. It did, because some anomalies were capable of explanation and the principal could have proposed remedial measures. The value was then assessed by weighing probabilities and possibilities, and the Court placed it between 10 and 15 per cent and took the midpoint.
| Head of loss claimed | Outcome | Reason given |
|---|---|---|
| Profits for the rest of the five-year term | Rejected | Any surviving business would have stayed under heightened scrutiny, and RAMS stopped accepting new home loan applications in August 2024 |
| A chance of extension or renewal | Rejected as misconceived | By the end of the term there was no continuing new-lending franchise to renew |
| Access to alternative loan products | Rejected | Highly speculative on the evidence |
| The opportunity a proper process would have given | Established at 12.5 per cent | A real but limited chance of a commercially useful continuation |
The percentage is applied once, to the value of the business as it would have traded under continued scrutiny, and the same factors are not to be used again as a further discount. Lee J noted that expressing the result as a percentage "may give it a patina of precision which the underlying evidence does not warrant", and observed that the amount ultimately recoverable is likely to be very modest compared with the costs already incurred. He proposed a mediation before any hearing on quantum, which our note on preparing for mediation addresses.
What the case does not decide
The decision rests on an express obligation of good faith, so it is no authority that one is implied into a contract that lacks it. Lee J noted that the express terms made it unnecessary to enter the still unsettled debate about implying good faith into commercial contracts. Even where an express clause exists, its content is a question of construing that particular bargain. Here it was informed by the Code's own factors, by the five-year term, and by the practical finality of revoking the authorisation on which the whole business depended.
| Question | Position |
|---|---|
| Breach of the express and Code obligations of good faith | Decided, in the confined respect stated at [225] and [226] |
| Loss of a chance, and its value | Decided at 12.5 per cent; the dollar amount is not yet assessed |
| Whether good faith is implied into commercial contracts | Not decided, and expressly not entered |
| The contractual route to termination, and its effective date | Not decided, including whether a credit authorisation is a "licence" under the agreement |
| Whether matters discovered later would have justified termination | Not decided; RAMS abandoned that defence during the trial |
| The related class action over another franchise | Settled in principle, subject to court approval; nothing in it was decided |
| Whether the existing loan book carried any residual value after August 2024 | Reserved for the quantum stage |
| Costs and declarations | Preliminary view that the franchisee should have its costs of the trial, qualified by the limited success; to be argued |
An appeal remains open once final orders are made. The step most open to argument is the one RAMS pressed throughout: that where the contract provided notice and remedy machinery for some terminations and not for this one, the absence of an opportunity to respond should not bear on good faith at all. Lee J held that it could bear on the character of the exercise of the power, without becoming a free-standing procedural right.
Is your agreement a franchise agreement?
A distribution, licence or dealer agreement can be a franchise agreement under the Code whatever it is called, and if it is, the good faith obligation applies by force of law, and so does the rest of the Code. The Code defines a franchise agreement by substance. Three elements matter, and the third is usually the decisive one for a distribution arrangement.
| Element of the definition | The question to ask |
|---|---|
| A right to carry on a business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor | Does your manual, your pricing guidance or your sales model shape how the Australian business operates? |
| The business is substantially or materially associated with a trade mark, marketing or commercial symbol owned, used, licensed or specified by the franchisor or an associate | Does the business trade under your brand? |
| The franchisee must pay, or agree to pay, the franchisor or an associate an amount, such as a fee, a royalty or a payment for goods or services; payments for goods and services supplied on a genuine wholesale basis are among those that do not count | Is everything the distributor pays you a genuine wholesale price, or is there a fee, a margin for training, or a payment for the right itself? |
Employment, partnership, landlord and tenant, and lender and borrower relationships are not in themselves franchise agreements, and the Code does not apply to some arrangements built on a supply relationship of at least two years that will produce no more than 20 per cent of the business's turnover in its first year. Those exclusions are narrow and fact-specific. A European supplier appointing an Australian distributor under its brand and its system should test the arrangement against the definition before relying on a termination clause, in the same way as it would test its standard terms against the unfair contract terms regime.
The obligation under the current Code
The good faith obligation applied in this case is carried into the 2024 Code in substantially the same words, and the current Code attaches a civil penalty to it. The Fairfield agreement was governed by the earlier Code, which continues to apply to agreements that existed before 1 April 2025 until they are terminated, transferred, renewed or extended. Agreements entered into on or after that date fall under section 18 of the 2024 Code:
Each party to a franchise agreement must act towards another party with good faith, within the meaning of the unwritten law from time to time, in respect of any matter arising under or in relation to: (a) the agreement; and (b) this Code.
Franchising Code of Conduct, in the 2024 Regulations, s 18(1).
The obligation carries a civil penalty of 600 penalty units. A franchisor must not enter into an agreement that limits or excludes it, including by incorporating the words of another document. The court may have regard to whether the party acted honestly and not arbitrarily, and whether it cooperated to achieve the purposes of the agreement, and the obligation does not prevent a party acting in its legitimate commercial interests.
The notice provisions do not do the work that good faith did here. Where an agreement allows termination because the franchisee no longer holds a licence it must hold, section 57 requires seven days' written notice, and the franchisee cannot notify a dispute to delay it. That was the kind of route RAMS used. For agreements entered into from 1 November 2025, sections 43 and 44 also require early termination compensation where the franchisor withdraws from the market or restructures its network, and a reasonable opportunity to earn a return on required investment. Our article on unfair trading practices in franchising covers the related reforms.
If you are the one deciding
Where a contract obliges you to act in good faith and you are acting on someone else's adverse assessment, the record of your own decision is what will be tested. The Court reconstructed the decision almost entirely from contemporaneous emails, because the managing director was not called. Evidence assembled years later could not enlarge what he had in front of him, and the Court would not assume that privileged legal advice had supplied the missing link.
- Write down what the assessment establishes and what it does not. Separate concerns that warrant investigation from findings, and findings of irregularity from findings of fault.
- If you identify a gap, record how it was closed. Ask for the evidence, and record the answer. If the answer is that nothing more can be provided, the gap is still open.
- Go to the counterparty within the limits of the law. Tell it that termination is being considered, identify the categories of concern you can lawfully disclose, and invite a response on practices, supervision and remedies.
- Take advice early on confidentiality limits. Where a bank, regulator or investigator cannot share its reasons, work out what can be said before the decision rather than after it.
- Consider the response genuinely, and record that you did. You remain free to terminate. The protection lies in being able to show that you decided after the gap was addressed or confronted.
- Use the termination route the contract actually provides, and check the Code's notice provisions for the ground relied on.
The same habit of recording the basis for a decision is described, in another setting, in our note on directors' duties.
If you are the one being terminated
A franchisee, distributor or broker facing termination on a third party's assessment should ask for the case against it before the decision, and should expect a damages claim to be valued as a chance. Requests about individual transactions are not the same thing. Lee J was careful to distinguish questions about a single loan application from notice that the whole relationship is at risk, and a business that answers only the former has not been given the latter.
Put the request in writing, say what you could explain or change, and keep the correspondence. If termination follows without any opportunity to address the accumulated case, expect the claim to be valued as the opportunity lost, measured against a business that would still have faced the same scrutiny. In Sech Finance that was a small fraction of the value of the relationship, and the costs of proving it should be weighed against it from the outset.
