Good Faith, Bad Franchisor: case law update

Background

The claimants entered into franchise agreements with JBL to operate as driving instructors. In late 2020, they terminated their agreements, alleging JBL had breached implied duties of good faith. Notably, the franchisees:

• could not delegate or subcontract their work;
• were required to devote substantially the whole of their time and attention to the franchise and could not carry out any other business activities without JBL's permission;
• were restricted from marketing themselves independently;
• had no control over tuition fees or customer allocation; and
• were subject to fixed weekly fees regardless of income.

JBL was also accused of being verbally abusive, intimidating and punishing franchisees by withholding new enquiries whom he had accused of not following the rules.

JBL denied the existence of such implied terms and counterclaimed for damages.

Key Findings

The Court found that the franchise agreements did contain implied terms of good faith and fair dealing.

However, the facts of this case were peculiar, and whilst the judgment does not set a new legal precedent, it is nonetheless noteworthy, as it contains a thorough analysis of recent case law regarding the implication of terms of good faith into English law franchise agreements.

Key points include:

• Just as the judgments in Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB) and Bates v Post Office [2019] EWHC 606 QB have advanced the concept of "relational contacts", into which terms of good faith can be implied, this judgment aligns with Dwyer (UK Franchising) Ltd v Fredbar Ltd and another [2022] EWCA Civ 889 by identifying a sub-set of franchise agreements/relationships which are more akin to employment contracts/relationships, and which therefore require a term of good faith and fair dealing for commercial and practical coherence.
• In this case, the Court reached its decision on implied terms as to fact and did not make a finding one way or the other about an implied term in law either as regards franchise agreements generally or about a sub-set of franchise agreements which are akin to employment agreements or are called relational contracts.
• As an aside, it is interesting to note that counsel for the claimants referred to various other common law jurisdictions where good faith is implied by law into franchise agreements and referred to the British Franchise Association's (BFA) Code of Ethics, which requires its members to adhere to the principles of good faith and fair dealing. On this latter point, given that (i) the franchisor was not a member of the BFA, (ii) it was not suggested that these terms had become customs of the industry and (iii) there was no evidence that most of the driving instructing schools were members of the BFA, there is no reason to imply compliance with the Code of Ethics into the franchise agreements.
• On the facts of this case, it was held that this relationship was akin to an employment relationship, and an implied term of good faith and fair dealing was required for commercial and practical coherence.
• A franchise relationship is likely to be deemed to be akin to an employment relationship if it includes the following hallmarks: (a) the long term of the contract, (b) the need for constant cooperation and collaboration, (c) features which make it akin to an employment contract (such as contracting with an individual/requiring a specific individual to perform the contract, including terms which limit their decisions to take time off), (d) a high degree of control (such as no ability to market their business independently of the franchisor), (e) an inequality of bargaining power (such no legal representation, or ability to negotiate the franchise agreement) and the lack of balance, which would make the franchisee vulnerable to the conduct of the franchisor in the absence of an implied term of good faith and fair dealing.

Conclusion

Franchisors should take note of the Court’s guidance and ensure that:

• franchisees are encouraged to take and have access to independent legal advice;
• franchisees are given ample time to review the franchise agreement;
• franchise agreements avoid overly restrictive or one-sided terms;
• terms of the franchise agreement are not unilaterally varied without the consent of the franchisee.
• The business model itself is suitable for franchising and is closer to a lease of goodwill as opposed an employment contract.

This judgment lands at an interesting time for franchising in the UK. A recent parliamentary debate discussed whether franchising should be regulated in the UK, and we expect to see the much-anticipated High Court case involving Vodafone later this year or in early 2026, which will revive some of the issues raised in this case.

Franchisors should therefore take the opportunity to review their business practices and franchise agreements to mitigate the risk of similar claims arising within their networks.

If you have any particular questions on the above case or you would like assistance in reviewing your franchise agreements, please contact Gordon Drakes.

With thanks to co-author Steve Zhang, for his contributions to this article.