Court rulings on franchise agreements don't come round very often, but a recent High Court judgment will be of interest to franchisors and franchisees, particularly in sectors where franchisees are individuals with limited business experience. The case involved twenty former franchisees of a regional driving school franchisor who alleged that the franchisor, through its managing director, created an abusive and intimidating environment, breached franchise agreements, and imposed unfair contract terms.
The Court found in favour of the franchisees, holding that the franchise agreements contained implied terms of good faith and fair dealing, and that the franchisor's conduct amounted to repudiatory breach, entitling the franchisees to terminate their contracts.
The Court was asked to rule on three preliminary issues:
- Whether the franchise agreements contained implied terms requiring the parties to act in good faith and deal fairly with one another;
- Whether those terms (or any express terms) were breached, and if so, by whom; and
- Whether the contracts were lawfully discharged, and if so, by whom.
Implied terms of good faith and fair dealing
The Court undertook a detailed analysis of the franchise relationship, noting that, while the agreements expressly described franchisees as independent contractors, the reality was a relationship marked by significant control, dependency, and inequality of bargaining power. Key findings included:
- Franchisees were typically individuals with little or no prior business experience, often entering into long-term, non-negotiable contracts without independent legal advice.
- The franchisor exercised extensive control over franchisees' business activities, including pricing, advertising, and even the ability to display personal contact information.
- Franchisees were required to devote their full time to the business, act in the franchisor's best interests, and comply with detailed operational guidelines.
Drawing on recent case law, the Court concluded that these franchise agreements were "closer to an employment relationship than a commercial contract", and that it was both necessary and obvious to imply terms of good faith and fair dealing to give the contracts commercial coherence. The Court declined to find that such terms are implied in all franchise agreements as a matter of law but held that, on the facts of this case, the implication was justified.
Findings of breach
The Court found that the franchisor, through its managing director, had engaged in a sustained course of conduct that breached the implied terms of good faith and fair dealing, including:
- Creating a culture of intimidation, with repeated sexist, racist, and homophobic remarks, and public humiliation of franchisees.
- Boasting about litigation against former franchisees and their guarantors, including threats to take homes and ruin lives.
- Imposing arbitrary and disproportionate sanctions, such as withholding referrals or removing franchisees from internal communication channels.
- Exercising control over franchisees' ability to market themselves, including refusing to allow personal phone numbers on vehicles and prohibiting the publication of lesson prices.
- Responding to the COVID-19 pandemic by initially insisting on continued payment of franchise fees, then unilaterally extending contract terms to recoup lost fees, without proper consultation or agreement.
The Court held that these breaches, taken together, went to the root of the contract and destroyed the relationship of trust and confidence necessary for the franchise relationship to function.
The right to terminate
The franchisees were found to have lawfully terminated their agreements in response to the franchisor's repudiatory breaches. The Court rejected the franchisor's argument that the franchisees had affirmed the contracts by continuing to pay fees or delay in giving notice, noting the complexity and gravity of the situation, the need for legal advice, and the ongoing nature of the breaches.
The ruling emphasises the importance of fair dealing and good faith in franchise relationships, particularly where franchisees are vulnerable or dependent on the franchisor. Franchisors should review their contractual practices and operational conduct to ensure compliance with these evolving legal standards. This case also highlights the potential for significant financial and reputational consequences where a franchisor's business model or management style is found to be oppressive or unfair.
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