A franchise agreement implies a term of good faith and fair dealing as a legal incident of the contract, obliging each party to exercise contractual powers in good faith and reasonably, and not capriciously or for an extraneous purpose. However, where the franchise agreement confers no exclusive territorial rights and the parties were aware that expansion was ordinary business practice, the implied term does not prohibit the franchisor from opening competing stores or offering new licences to third parties, unless the franchisor acts for an extraneous purpose such as punishing or removing the franchisee. The question whether extreme impact on a franchisee's business could itself give rise to an inference of bad faith was left open.
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