It highlights key issues flagged in previous cases such as Dwyer v Fredbar of the importance of taking into account the type and nature of your franchisees and having good on boarding practices. It is however a case that ultimately is very much based on its specific facts and conduct that is not typical of most ethical franchisors.
The facts
The central question was whether the franchise agreements between the 20 claimants (driving instructors) and the defendant (JBL, a driving school) included an implied duty of good faith and fair dealing. The case concerned claims made that the managing director of the defendant JBL created an abusing and intimidating environment which the franchisees found so intolerable that in late 2020 each of the claimants terminated their franchise contracts with JBL in the belief they were entitled to do so because of these actions. The claimants sought declarations that their terminations were lawful and that they were discharged from their franchise agreements. JBL stated the terminations were not lawful, instead amounted to breaches of contract entitling them to claim significant damages consisting of the franchise fees and other charges payable had the agreement not been terminated which amounts were significant counterclaims that cumulatively amounted to circa 2 million pounds.
The court considered 3 specific issues:
- Were the franchise agreements entered into by the parties contracts under which the parties owed duties to conduct themselves in good faith and to deal fairly with each other
- Were express of implied terms of those contracts breached and if so by whom
- Were the franchise agreements lawfully discharged and by whom
Material factual circumstances
The facts of this case are central to the decision made by the court and there are several key issues specific to the parties.
Who the franchisees were
The Franchisees were new to franchising and operating a driving school and many of whom had limited academic ability and came to the driving school following difficult work history – redundancy, home commitments or challenges and were generally of limited personal homes (often not owning their own homes).
The history of the Franchise
The franchise was long established – over 30 years and during that time had pursued approximately 90 court cases against franchises or former franchisees. During this time it would have had between 1300-1400 franchises and that now there were 100 and many that had been with the network for in excess 10 years.
The franchise agreement
The franchise agreements were non-negotiable and the claimants were not given the opportunity to read the agreement themselves or seek independent legal advice. Agreements were presented in envelopes with no opportunity to take it away and pressure to sign.
The agreement contained a statement “if you are in any doubt as to the meaning of this agreement you should consult a solicitor. A copy of this agreement can be sent to your solicitor upon request and before signing.” However this happened only a dozen times and the franchisor provided no assistance to find a suitable solicitor. None of the claimants in this case took independent legal advice.
The agreement contained personal guarantees and again independent legal advice was not advocated by the franchisor.
The agreements were entered into before the franchisee had qualified to offer tuition.
The franchise agreement was for a long term initially for 36 months post training without opportunity to terminate but was repeatedly extended to significantly longer where a franchisee faced difficulties in making payments with many tied into agreements up to 10 years.
The franchise agreement did not contain a mechanism to sell the driving school business as a route out of the agreement early and enabling the franchisee to benefit from the goodwill it had built up in the area and receive a return on its investment in the franchise. At the end of the agreement it had to hand customers over to the Franchisor.
The duration provisions in the agreement were complex and hard to understand.
The JBL franchise model
The Franchisor has the ability to exercise significant control over the way its franchisees operate, including prohibition on use of their own Business mobile numbers on cars, prohibiting franchisees effectively marketing their own businesses, control of leads sent to them for customers, controls on lesson pricing that failed to keep up with inflation or corresponding hikes in franchise fees.
The conduct of the MD of the Franchisor
The managing director of the franchisor was deemed to be overbearing and belligerent during the court proceedings which helped to substantiate the claims made by the claimants that he acted the same way towards them. This was backed up by contemporaneous evidence in the form of messages to the network about what happens to defaulting franchisees and language used with franchisees at times of vulnerability, evidence of racist and sexist comments made by the MD franchisor, and treatment of franchisees during COVID.
Court’s Findings
1. Nature of the Relationship
The court found that the franchise agreements were long-term commercial relationships requiring cooperation, collaboration, and predictable performance, with expectations of loyalty.
Although not employment contracts, the franchise agreements in this case bore many hallmarks of employment relationships, including:
- Significant control by JBL over franchisees.
- Restrictions on autonomy (e.g., pricing, advertising).
- Inequality of bargaining power.
- Lack of insistence on franchise specialist independent legal advice for franchisees prior to entry into franchise agreements.
2. Implied Terms in Fact
- The court held that terms of good faith and trust and confidence were implied in fact into the franchise agreements.
- These terms were necessary to give business efficacy to the contracts and were so obvious as to go without saying.
- The court rejected the need to imply such terms in law for all franchise agreements, preferring a case-by-case factual analysis.
3. Scope of the Implied Duty imposed on the Franchisor
The duty of good faith included obligations:
- Not to substantially deprive franchisees of the benefits of the contract.
- Not to undermine the terms of the bargain.
- Not to exercise discretion arbitrarily or capriciously.
- To refrain from conduct that would be regarded as commercially unacceptable by reasonable and honest people.
- Not to act, without reasonable or proper cause, in a way likely to seriously damage the relationship of mutual trust and confidence.
Conclusion
The court concluded that the franchise agreements in this case which were unduly onerous and unusual were subject to implied terms of good faith and trust and confidence, based on their specific features and context. JBL’s conduct, including aggressive and intimidatory behaviour, arbitrary decision-making, and lack of transparency, breached these implied terms enabling the franchisees to legitimately treat their franchise agreements as being discharged. This does not automatically mean that all franchise agreements would be subject to the same treatment. The decision clarifies the importance of Franchisors having agreements that are ethical and take into account the principles set out in the BFA Code of Ethics, insisting on its prospective franchisees having suitable independent legal advice on their agreements prior to signing them and the need to rationally and fairly engage with your network.
