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Franflash: An Implied Duty of Good Faith in English Law Franchise Agreements – is the Genie Out of the Bottle?

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An Implied Duty of Good Faith in English Law Franchise Agreements – is the Genie Out of the Bottle?

Introduction

The English law of contract is well known for not having a general duty of good faith and the approach to dealing with good faith situations in case law has been piecemeal, in line with the general development of common law. One of the main reasons advanced for this is the uncertainty which would arise if a general duty of good faith was imported into contracts generally.

However, judgments in three recent cases have reignited the debate over whether or not English law recognises a general duty of good faith in commercial contracts including franchise agreements and long term distribution agreements.

If you would like to read Fieldfisher's full article on this topic, please click here.

Summary

In a recent High Court case between Yam Seng Pte Limited ("Yam Seng") and International Trade Corporation ("ITC"), the judge, Mr Justice Leggatt, held that a distribution agreement governed by English law contained an enforceable, implied obligation on the parties to act in "good faith".

In an impressive display of legal erudition, Mr Justice Leggatt's judgment includes a detailed summary of English law's uneasy relationship with the concept of a general duty of good faith and argues that the cherished certainty of English common law is not automatically undermined by recognising such general duties. Other common law jurisdictions are, he argues, moving in this direction and English law is "swimming against the tide". He concludes his judgment by noting that contracts involving a longer term relationship and substantial commitment require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence. He observed that these expectations are rarely legislated for in the express terms of contracts, but are implicit in the parties' understanding, and are necessary to give business efficacy to such arrangements.  Examples of "relational contracts" in his view included franchise agreements, joint venture agreements and long term distribution agreements.

Subsequent to the Yam Seng case, the Court of Appeal heard a case between Mid Essex Hospital Services NHS Trust ("NHS Trust") and Compass Group UK and Ireland Limited ("Compass").  The Yam Seng case was cited in the Court of Appeal's judgement in which the Court of Appeal rejected the first instance ruling that there was an implied term which required the NHS Trust not to exercise a contractual discretion arbitrarily, capriciously or irrationally.

An even more recent High Court judgment (TSG Building Services plc v South Anglia Housing Ltd - 8 May 2013) also cited the Yam Seng case but followed the rationale of the Compass case, where the judge ruled that an express good faith clause did not extend to acting reasonably when terminating the contract, and that there was not an implied duty of good faith which would restrict the parties' contractual right to terminate at any time.

What Does This All Mean for Franchisors?

If the Yam Seng judgment was an attempt to let the genie of good faith out of the bottle, the Compass ruling can be interpreted as the Court Appeal acting swiftly to try and push it back in.

Nevertheless, all three cases highlight a growing tendency to attempt to imply obligations of good faith into commercial contracts.  If the Yam Seng case is more than an a mere aberration in English case law, is it indicative of a slow but steady creep towards recognising a general duty of good faith in English law with regard to certain types of commercial contracts?

In light of the Court of Appeal's judgment, it is far too early to say that English law now has a general implied duty of good faith which applies to franchise agreements.

However, it is dangerous to disregard the views of a distinguished High Court judge as merely those of a "lone rider".  The concept of good faith underpins many of the franchise specific regulations which apply in jurisdictions across the world and it may be that English law is "swimming against the tide", albeit valiantly, as it sticks to its common law traditions of developing principles in relation to these matters on a case by case basis. 

One response to this ruling could be to look at franchise agreement boilerplates and consider excluding all implied terms and conditions: but conceivably this may lead to a franchisee asking if a franchisor is therefore intending to engage in commercially unacceptable behaviour! What is clear is that it is prudent for franchisors to take extra care, both when exercising in-term contractual discretions and when they consider the manner in which they provide pre-contractual disclosure (which is a requirement of membership for the British Franchise Association) and ongoing information to franchisees during the course of the relationship.

Businesses which operate corporate and franchise networks should ensure that there is a good two-way line of communication with their franchised network, and carefully consider the implications of whether their supply chains are seen to operate transparently and fairly.

If you would like more information on this topic, please contact your usual franchise team member or Gordon Drakes (Senior Associate) or Chris Wormald (Franchise Partner).

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