Historically, the English legal system has treated the concept of good faith with caution. However, this recent decision has positioned it as a key principle within franchising. As a result, it is foreseeable that franchisees will increasingly invoke good faith in disputes with their franchisors.
Background
The Claimants, all driving instructors, operated under franchise agreements with JBL until late 2020, when they terminated their contracts, asserting they were entitled to do so because JBL’s conduct amounted to a breach of implied terms of good faith. Notably, the franchise agreements did not contain express termination rights for franchisees until the expiry of a minimum term, which was often three years or longer. Their claim centred on allegations that JBL’s actions were abusive and cultivated a hostile atmosphere. Some instructors reported being subjected to, or witnessing, racist, misogynistic, and homophobic comments. Other alleged breaches of implied terms of good faith included:
- Preventing instructors from advertising their service prices;
- Unreasonably restricting the display of instructors' own contact details on their vehicles;
- Unilaterally extending the term of the franchise agreements during the pandemic;
- Setting unreasonably low price caps for instructors whilst simultaneously increasing franchise fees payable.
JBL contested the claim, asserting that there was no implied duty of good faith in the agreements and counterclaimed for wrongful termination. It argued franchisees had no right to terminate early as there was no express right allowing them to do so. Importantly, the franchise agreements made no express exclusion of good faith obligations.
Court decision
The Judge observed that whilst franchise agreements have traditionally been considered closer to standard commercial agreements, they can in certain circumstances, be “akin to an employment contract”. The Judge determined that aspects of the franchise agreements resembled those of an employment relationship and pointed to factors such as, the inability of franchisees to delegate or subcontract performance, the requirement for franchisees to devote substantially the whole of their time to the franchise, and the degree of control JBL exercised over the fees franchisees could charge (at least until January 2020).
Importantly, the Judge identified the inequality of bargaining power as a key factor in evaluating whether the agreements contained an implied term of good faith. This inequality was exacerbated by the absence of insistence that the franchisees take independent legal advice and the “take it or leave it” approach of JBL, who would not permit potential franchisees to review the agreement at home. This the Judge noted, “would have been different if the franchisees had been advised in strong terms to get independent advice with information as to how to find a legal adviser.”
Ultimately, this imbalance, as well as factors such as the degree of control JBL exercised over franchisees, the dependency of franchisees on JBL for referrals and the long-term nature of the agreements, meant it was necessary to imply a term of good faith to give business efficacy to the agreements. The judge was careful to emphasise that this decision is set in the context of an agreement akin to an employment relationship. The effect of this is that the terms requiring good faith are implied by fact, and not in law.
In the current case, it was not held necessary to consider whether there is scope for an implied term in law of good faith to be imported into franchise agreements more generally.
It was also emphasised that had there been an express exclusion of good faith being implied into the contract, the court would not have implied such a term.
In conclusion, the Judge found that JBL had committed several breaches of the implied terms of good faith and fair dealing, damaging the relationship of trust and confidence between the parties. These breaches were repudiatory in nature, entitling the franchisees to terminate their agreements without any liability to JBL. In simple terms, a repudiatory breach is a serious violation that undermines the whole contract, allowing the innocent party to walk away. This was significant because, in the absence of any express right for franchisees to terminate early, the finding of repudiatory breach provided the only legal route for the franchisees to exit otherwise inescapable long-term contracts.
What this means for franchising agreements
Franchise agreements are typically structured in a manner that affords franchisees minimal opportunity to negotiate terms or terminate fixed, long-term contracts. This case establishes that when there is a notable disparity in bargaining power and the agreement resembles an employment contract, there are constraints on how franchisors may treat franchisees, as considerations of fair dealing, transparency, and honesty are emphasized.
Looking forward, franchisors should consider incorporating specific provisions into their agreements to minimise the possibility of implied terms of good faith arising within franchise contracts. These measures include requiring independent legal advice for franchisees, limiting restrictive or long-term commitments without reasonable exit options, and providing franchisees with a degree of autonomy. Implementing these measures may involve practical challenges, when trying to balance flexibility with maintaining oversight to ensure brand protection.
From a franchisee perspective, it affords some comfort that franchisor's may be held to a certain standard, thus giving them some ammunition for when disputes arise.
Ultimately, whether a duty of good faith will be implied into a franchise agreement will be a question determined on the facts of each case.
The judgment is set in the context of a recent UK Parliamentary debate on the regulation of the UK’s franchise market. The current system does not seek to regulate franchising, unlike other jurisdictions that have specific franchising laws. Whilst no decisions were made off the back of the debate, the judgment in Ellis v Benson provides a useful illustration on why franchise agreements may need implied terms of good faith to essentially fill the gap left by insufficient regulation.
If you would like to discuss any points raised in this article, or think your business could be affected, please contact the authors below.
Thank you to Rachael Burke and Georgia Flage for the production of this article.
