Good faith obligations in franchise agreements

A duty of good faith is likely to be implied in all ‘relational contracts’, such as franchise agreements, unless there is an express term in the contract that would prevent such a duty being implied – this conclusion can be drawn from the comments by Mr Justice Fraser in Bates v Post Office Ltd (No. 3) [2019] EWHC 606 (QB). A finding of a good faith obligation can mean a significant number of individual terms are implied into a contract which would not otherwise be the case.

Relational contracts as a category had previously been identified by Mr Justice Leggatt (as he was then) in Sheikh Al Nehayan v Kent [2018] EWHC 333 (Comm) as being:

 “a category of contract in which 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 recent case of Bates v Post Office 2019 (judgment no.3), involving a group litigation by sub-postmasters against the Post Office the court was asked to provide a separate ruling (before the main litigation) on two questions. The first was whether the agreement between the Post Office and its sub postmasters was a relational contract such that the Post Office was subject to a duty of good faith and secondly, if so what terms out of a list of 21 could be implied into that agreement.

Mr Justice Fraser held that the circumstances of the relationship between the parties, defined by the terms of the agreement, set in its commercial context, is what decides whether a contract is relational or not. In this case the court determined that the agreement between the Post Office and sub postmasters was a relational contract which imposed an implied duty of good faith on both parties. He identified 9 characteristics as being relevant:

1. There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.
2. The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.
3. The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.
4. The parties will be committed to collaborating with one another in the performance of the contract.
5. The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
6. They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.
7. The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.
8. There may be a degree of significant investment by one party (or both) in the venture. This significant investment may be, in some cases, more accurately described as substantial financial commitment.
9. Exclusivity of the relationship may also be present.

Most of these will be present in a franchise agreement, and franchise agreements have been generally acknowledged to be relational contracts. The judge did say however that no single one of the above list was determinative apart from the first one - if the express terms prevent the implication of a duty of good faith, then that will be the end of the matter.

So what does a duty of good faith mean in a relational contract? According to Mr Justice Fraser, it means:

• honesty;
• refraining from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people; and
• transparency, co-operation, trust and confidence.

In this case, the sub-postmasters claimed that 21 individual terms should be implied into the contract. The judge held that 17 of the terms were implied as a result of his finding of a good faith obligation. This finding was very significant for the sub-postmasters – although the judge went on to find that a further 4 terms were implied on the basis that they were necessary for business efficacy, the judge said that if he was wrong on the finding of a good faith obligation, only 4 of the 17 terms could have been implied on this basis.

This case involved a preliminary ruling and no findings were made at this stage as to breach, causation or loss which remains to be determined in later litigation. However, the ruling here opens the door wider for the argument of good faith and no doubt will prove a useful weapon in a franchisee’s arsenal.