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The implied term of “good faith” – a source of franchise disputes?

The implied term of “good faith” – a source of franchise disputes?

Ordinarily, in English Law, there is no term of “good faith” implied into commercial contracts. Sometimes, parties might include their own specific duty to act in good faith towards the other, although this is more the exception rather than the rule in many commercial agreements, including franchise agreements. However, it is not uncommon for parties in dispute to argue that there is an implied term of good faith instead.

The source of the common argument that a duty of good faith exists, even in the absence of an express term to such effect, is a series of authorities starting with Yam Seng Ltd -v- International Trade Corporation Ltd [2013], the High Court concluded that there was such a term implied into relational contracts, i.e. those which require the parties to work together for a long period of time. The court noted that a relational contract was one which was likely to:

“… require a degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangement.”

A number of types of agreement have been recognised to potentially imply a term of good faith, such as joint venture agreements, a private finance initiative, partnership agreements and, of course, franchise agreements. Not all franchise agreements necessarily include an implied term of good faith and, as Fraser J noted in the Post Office Group Litigation cases the content and context would be relevant.

In other cases, including in the context of franchise disputes, the court has refused to recognise an implied term of good faith: Carewatch -v- Focus Caring Services and others [2014].

There are two key parts to any implied term of good faith:

(a) compliance with reasonable commercial standards of fair dealing; and

(b) faithfulness to the purpose of the contract and to the reasonable expectation of the contracting parties.

Any obligation of good faith would not require a party to put their interests behind those of the other, and when clarifying this very point, Leggatt LJ noted extrajudicially:

“It does not require one party to put the other party’s interest before its own. That is the nature of a fiduciary duty. Good faith is different. Good faith demands loyalty, not to the other party, but to the agreement itself – to the bargain the parties have made through which each have sought to advance its own commercial interest by mutual collaboration.”

Issues of good faith often arise in circumstances where a franchisor has exercised some discretion to change terms in the franchise agreement in its favour. A good example of this arose in Esso Petroleum Co Ltd -v- David Addison [2003], a case concerning the exercise of discretion for Esso to vary the margins offered to licensees on products, the court noted that Esso’s discretion was had to key limitations:

(a) it could not make adjustments arbitrarily, capriciuosly or irrationally;

(b) it was not entitled to make adjustments, the combined effect of which was to render the petrol stations commercially impossible.

Franchise disputes often therefore are subject to complex arguments as to whether a term of good faith is implied into the franchise agreement, if it is, what does it mean, and how does that meaning apply to the facts in any given case.

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