Steven Ellis & Ors v John Benson Limited

A franchise agreement does not automatically attract implied duties of good faith and fair dealing. Such duties may nevertheless be implied in fact where the particular relationship is long-term, highly dependent and controlled by one party, involves substantial inequality of bargaining power, and otherwise lacks commercial or practical coherence without the implied terms.

The duties may prohibit conduct that undermines the bargain, substantially deprives the weaker party of contractual benefits, exercises contractual discretion arbitrarily or capriciously, or seriously damages mutual trust and confidence. Repeated abusive, intimidatory and commercially unacceptable conduct, together with an unauthorised attempt to extend the contractual term, may cumulatively amount to repudiatory breach.

The claimants were twenty former driving-instructor franchisees of John Benson Ltd. They alleged that their franchise agreements contained implied duties of good faith, fair dealing and trust and confidence, and that the defendant had breached those duties through oppressive contractual arrangements, abusive conduct, restrictions on marketing, and its response to the COVID-19 lockdown.

The defendant denied the implied terms and alleged that the claimants’ terminations were repudiatory breaches. The court tried three preliminary issues: whether the implied terms existed, whether they had been breached, and whether the agreements had been lawfully discharged.

1. Implied terms. The agreements were not employment contracts, and the court did not decide that franchise agreements generally contain implied duties of good faith. On the particular facts, however, the agreements were closer to employment relationships than ordinary commercial contracts. Relevant features included long minimum terms, personal performance, extensive control, dependency on referrals, restrictions on other business and marketing, standard-form terms, lack of negotiation or independent legal advice, and substantial inequality of bargaining power.
2. The implied terms were implied in fact. Applying the conventional tests, a reasonable person in the parties’ position would regard the obligations as obvious or necessary to give the agreements commercial or practical coherence. The term required good faith and fair dealing, prohibited undermining or substantially depriving the claimants of the bargain, required contractual discretions not to be exercised arbitrarily or capriciously, and included an obligation not, without reasonable or proper cause, to cause serious damage to mutual trust and confidence.
3. Breach. The defendant breached those terms through a continuing course of conduct including repeated racist, sexist and homophobic remarks, abusive and intimidatory treatment, threats and boasts concerning litigation and property, disproportionate sanctions, restrictions on franchisees’ personal telephone numbers and prices, and an insensitive and self-interested response to COVID-19. The refusal to permit personal numbers and the prohibition on publishing prices were capricious restrictions on the franchisees’ ability to market their businesses.
4. The defendant also purported to suspend the agreements and add the suspension periods to their minimum terms. There was no contractual power to do this, and the communications were not offers of variation accepted by the franchisees. The purported extension was therefore ineffective, but its imposition was itself a breach of good faith because it sought to obtain a contractual advantage during a period of vulnerability.
5. Repudiation and election. The breaches were numerous, related and continuing. In the context of these particular relationships, they went to the root of the agreements and caused serious damage to trust and confidence. Each represented claimant was entitled to accept the repudiatory breaches and treat the agreement as discharged. The claimants had not affirmed their agreements: the delay was reasonably required to obtain advice and attempt resolution, and continued payment did not amount to unequivocal affirmation in the circumstances.
6. The court resolved the three preliminary issues in favour of the represented claimants. Their agreements were lawfully discharged. Consequential orders and the position of the unrepresented claimants were left for further submissions.

First-instance decision. No earlier appellate decision is stated in the judgment.