Good faith in franchising: Lessons from the High Court’s Decision in Ellis v JBL

The recent High Court ruling of Ellis v John Benson Ltd ("JBL") held that, whilst there is no automatic duty of good faith in all franchise agreements (and this case does not change that position), it is possible that such a term may be implied into a franchise agreement, subject to the specific nature of the franchise relationship.

This case demonstrates that where an agreement between a franchisor and a franchisee resembles an employment-like relationship (for example, by virtue of an imbalance of power in the franchisor's favour or the franchisor having an element of control over the franchisee), it is possible that an implied duty of good faith and fair dealing could be found to exist within the franchise agreement.

Consequently, any actions of the franchisor which breach that duty are likely to give rise to a repudiatory breach, entitling the franchisee as the affected party to terminate the franchise agreement and to be released from restrictive covenants contained in the agreement.

Ellis v JBL (the facts)

A claim was brought against JBL (a driving school franchise) by 20 former franchisees who had each terminated their agreements with JBL in late 2020, alleging that JBL had breached implied terms of good faith and fair dealing in the agreements. JBL denied that any such terms existed in the agreements, contending instead that the franchisees' termination was a repudiatory breach and pursuing counterclaims for damages, in some cases in excess of £100,000.

It is important to note that the franchisees in this case were typically individuals with no prior business knowledge or experience; they had entered into the franchise agreements without independent legal advice; and the agreements were generally non-negotiable and long-term. In this instance, JBL was in a position of significant power and advantage over the franchisees.

Where JBL went wrong

The issues which gave rise to this claim broadly boil down into two categories: first, provisions included within JBL's franchise agreement; and, secondly, JBL's general conduct.

In respect of provisions within JBL's franchise agreement, the judge in this case considered that the agreements which the franchisees had entered into included a number of elements which made them akin to that of an employment relationship. These included:

• each franchisee was 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;
• the weekly franchise fees paid to JBL were fixed rather than being calculated by reference to turnover, meaning that the scope for the franchisees to be able to take any time off was limited (as they had to pay the weekly fees);
• JBL did not allow franchisees to control their own customer base, rather it was all handled centrally by JBL, allowing JBL to allocate customers as it saw fit; and
• the franchisees could not delegate or subcontract any performance of their obligations.

As regards JBL's conduct towards the franchisees, JBL was found to have breached implied terms of good faith and fair dealing. Such conduct included:

• using intimidating and abusive language;
• withholding referrals of customers arbitrarily; and
• unilaterally extending contract terms in order to recoup lost fees (following the COVID-19 pandemic).

It was ultimately decided by the court that this conduct (as well as other elements not listed above) destroyed the relationship of trust and confidence necessary for the franchise relationship to function.

What is the impact of this ruling?

This judgment signifies that courts are more likely to consider the overall "fairness" of a franchise agreement, particularly where the franchisee is deemed to be vulnerable or where there is a perceived imbalance of power between the franchisee and franchisor.

In practice, though, it does not establish a specific rule for franchisors to follow in relation to their agreements. However, it does highlight that a duty of good faith may be implied into the agreement, particularly where the agreement includes features which are akin to an employment relationship. On that basis, this case is a template for points to avoid when negotiating or entering into a franchise agreement.

It is also worth noting that there are similar cases on the horizon waiting to be decided by the court, such as APK Communications Ltd & Others v Vodafone Ltd. It is therefore possible that we will see an expansion of, or even a doubling down on, the principles outlined in this judgment which will further codify the ruling.

Good practice

Set out below are some general points to consider adopting as good practice, which will mitigate the risk of similar issues arising in franchise relationships.

Drafting considerations

• Include a clear and express "good faith" clause in the franchise agreement which provides details of the franchisor's specific duties (e.g. not using its discretion arbitrarily, irrationally or capriciously, etc.) and expressly stating whether any additional good faith duties may or may not be implied into the agreement.
• Avoid excessively one-sided or overly franchisor-favourable drafting which might suggest that the agreement and/or the relationship has an imbalance or be perceived as controlling or dependent.
• Include reasonableness and/or consultation processes in respect of any discretion which may be exercised under the agreement (such as relating to fee changes, market restrictions, etc.).

Franchisor considerations

• Be transparent and consultative when making changes or exercising discretion.
• Avoid conduct which could be deemed unfair, controlling or oppressive (be as helpful as possible).
• Conduct periodic compliance audits of franchise operations and agreements to ensure fairness and balance.
• Document decision-making processes (particularly relating to any contractually granted discretion) in order to demonstrate rationality and good faith actions.

Franchisee considerations

• Always seek independent legal advice and review in relation to any franchise agreement.
• Allow adequate time to review the agreement – they are often complicated agreements which require significant consideration, and it is best to avoid being pressurised into entering the agreement too hastily.

Not all franchise arrangements will fall into the realms of an employment-like relationship; as such, it is not the case that these duties will be implied into all franchise agreements, although it is something to be mindful of making an assessment of the risks arising out of a franchise agreements.

Ultimately this case highlights how deeply relational a franchisor/franchisee relationship can be and how the courts are ready to acknowledge this, even if the franchise agreement between the parties does not necessarily reflect or document this.