High Court finds franchisor breached duty of good faith towards driving instructors
The High Court has recently considered whether duties of good faith can be implied into franchise agreements, with important implications for businesses operating under similar arrangements.
Background
An implied term is a legal obligation not expressly written into a contract but recognised by the courts as part of the agreement. Terms may be implied to reflect established custom, to give effect to the parties’ intentions, or where necessary to make a contract workable. Where a contract is long-term and heavily dependent on mutual trust, the courts may imply duties of good faith and fair dealing to ensure it operates fairly.
The case of Ellis v John Benson Ltd was not an employment tribunal case, but the judgment draws heavily on employment law concepts. In the case, twenty driving instructors challenged their franchise agreements with a national driving school. The agreements were restrictive and long-term: instructors could not subcontract, had to devote their full time to the franchise, and had no right to terminate early or transfer their business. Fees were fixed weekly and increased annually regardless of lesson prices. Requests to display personal contact details were usually refused, ensuring new pupils booked centrally. Many instructors described public humiliation, intimidation and a fear of reprisals if they spoke out.
The franchisor denied the allegations, arguing that franchise agreements are standard commercial contracts without any implied duty of good faith. It counterclaimed for large sums it said would have been payable if the agreements had run their full course.
The decision
The High Court held that, although franchise agreements do not normally carry an implied duty of good faith, these particular contracts were “akin to an employment relationship” because of the high level of control, the inequality of bargaining power and the lack of exit options. A duty of good faith and fair dealing was therefore implied in fact, as it was necessary to give the contracts practical and commercial coherence.
The franchisor was found to have breached that term in multiple ways, including:
- making repeated sexist, racist and homophobic remarks
using intimidatory language and behaviour towards franchisees - boasting about taking legal action against former instructors and their guarantors
- unreasonably restricting the franchisees’ ability to market themselves by banning the display of personal phone numbers and prices
- attempting to unilaterally extend the length of agreements during the first COVID-19 lockdown.
Taken together, these breaches went to the root of the contracts and entitled the instructors to terminate. Their terminations were lawful and they were no longer bound by the agreements.
Learning points for employers
Although not an employment tribunal decision, this judgment is striking because of its parallels with employment law. The Court described the arrangements as “akin to an employment relationship” and implied a duty of good faith in a way similar to the implied term of trust and confidence in employment contracts. One interesting question is whether the claimants could have pursued worker or employee status before an employment tribunal and, if so, what the outcome of that route might have been.
For organisations, the case highlights the risks of heavily one-sided terms and arbitrary exercises of discretion in long-term relationships. Leaders’ conduct, language and approach to contractual changes must build, rather than erode, trust and confidence. The outcome was fact-specific and should not be seen as creating a general rule or undermining commercial certainty.