It is striking that the uproar was prompted by a TV drama. But in fact the details had been well-known by the political establishment for many years. The events took place in the 2010’s, and Bates v Post Office1, the case upon which the show was based, dates back to 2019.
The case had a significant impact on the interpretation of franchise agreements under English law.
It is a significant link in a chain of legal decisions in recent years that has forced franchisors and their lawyers to substantially re-think the drafting and enforcement of franchise agreements. Gone are the days when franchise lawyers confidently assumed that what they wrote in a franchise agreement could be enforced literally, regardless of its fairness or balance.
Exclusion of liability for misrepresentation
As early as 20011, the Papa John’s case2 cast doubt on the assumption that a franchisor could exclude their liability for pre-contractual misrepresentations made to franchisees. The court held that the franchisee in this case had substantially relied on the franchisor’s financial projections and consequently that the exclusions of liability in the franchise agreement were void under the Unfair Contract Terms Act 1977.
From that point on, franchisors had to be much more cautious about forecasting. Wildly optimistic and aspirational forecasts have had to give way to conservative, evidence-based numbers. Some franchisors now even avoid giving financial projections altogether.
Braganza duty
A further milestone was reached with the establishment of what we now call a “Braganza” duty. In 2015 in the Braganza case3 the court held that, in the absence of an express contractual exclusion, a contractual discretion must be exercised honestly and rationally, not capriciously or unreasonably. Despite references in agreements to the franchisor’s “absolute discretion”, it does not now necessarily follow that the franchisor can make any decision they like with impunity.
Implied duty of good faith
The traditional assumption in the past was that no implied duty compelled a franchisor to act in good faith towards their franchisees.
In 2013, however, in the Yam Seng case4, the court issued a significant judgment: ‘good faith’ in the sense of honesty should be implied into commercial agreements which are relationship-based. The judge cited franchise agreements as being one example of “relational” agreements.
A similar argument, specifically in the context of franchising, was run in the Carewatch case5 in 2014, but the franchisee’s claim in that case failed. The court held that there was no implied duty of good faith in those particular circumstances.
Nevertheless, the notion of implied “good faith” in franchising relationships has taken root, and was the basis for the landmark decision in the Post Office case.
The judge in that case relied on a previous case decision on the definition of a relational contract. This being where “the parties are committed to collaborating with each other, typically on a long term basis, in ways which respect the spirit and objectives of their venture but which they have not tried to specify, and which it may be impossible to specify, exhaustively in a written contract. Such ‘relational’ contracts involve trust and confidence. It is trust that the other party will act with integrity and in a spirit of cooperation”.
In the Post Office case, Mr Justice Fraser determined that the agreement between the Post Office and sub postmasters was indeed a “relational” one, which imposed an implied duty of good faith on both parties. Thus the parties had to refrain from conduct which would be regarded as commercially unacceptable by reasonable and honest people. It involved more than a requirement to act honestly.
It was the circumstances of the relationship, defined by the terms of the agreement in its commercial context, that decided whether a contract was relational. The following characteristics were relevant in deciding whether a contract was relational, although the list is not exhaustive:
(a) no express terms preventing a duty of good faith being implied
(b) a long-term contract, with a mutual intention of a long-term relationship
(c) an intention for the parties’ roles to be performed with integrity and fidelity to their bargain
(d) a commitment for the parties to collaborate in performing the contract
(e) the spirits and objectives of the venture being incapable of exhaustive expression in a written contract
(f) the parties reposing trust and confidence in one another, but of a different kind to that involved in fiduciary relationships
(g) a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty
(h) a degree of significant investment by one or both parties
(i) exclusivity of the relationship.
Point (a) above is significant for franchisors. Whilst duties of good faith can indeed be implied into franchise agreements, they will not be where the agreement in question expressly says otherwise.
Where does that leave franchisors as regards their duties under their franchise agreements? Taken together with the decision in Yam Seng and other similar cases since then, well-advised franchisors now draft an express Good Faith clause in their franchise agreements, which (i) defines a specific scope to the franchisor’s duties of good faith (for example, that the franchisor will not use its discretion arbitrarily, capriciously or irrationally); and (ii) expressly states that no additional duties of good faith may be implied into the agreement.
Conclusion
Whilst legal decisions vary, it is abundantly clear that the direction of travel is towards a greater onus on franchisors to act reasonably and in commercially good faith. This should dovetail neatly with the aim of creating a mutually successful franchise network. But franchisors can no longer safely assume that they can draft their way out of acting fairly.
1 Bates v Post Office Ltd 9 (No. 3) [2019] EWHC 606 (QB)
2 Papa Johns (GB) Ltd v Elsada Doyley [2011] EWHC 2621 (QB)
3 Braganza v BP Shipping [2015] UKSC 17
4 Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB)
5 Carewatch Services Ltd v Focus Caring Services Ltd & Others [2014] EWHC 2313 (Ch)
