Sub-postmasters were required to enter into agreements which were similar to franchise agreements. The Post Office claimed that they had found shortfalls – some small, but others large, in the accounts of 550 sub-postmasters. The Post Office demanded repayment, but the sub-postmasters argued that the shortfalls did not arise through their carelessness or dishonesty but arose from coding errors and defects in the software system that they were required to use by the Post Office.
The decision largely found in favour of the sub-postmasters. Significantly the Judge clarified the position concerning the implication of good faith obligations.
Ever since the High Court decision in Yam Seng in 2013 there has been a great deal of uncertainty as to whether the concept of a “relational contract” to which implied duties of good faith could apply was recognised by English law. A relational contract is a long term contract between parties who make a substantial commitment. The Judge accepted by reference to a decision in Carewatch Care Services involving a franchisor and franchisee that an implication of a duty of good faith will only be possible where the language of the contract, viewed against its context, permits it, but nevertheless the Judge had no difficulty in finding that the sub-postmasters’ agreement was a relational contract which did give rise to duties of good faith. The Judge set out what he considered to be the characteristics relevant in establishing whether a contract was relational or not as follows:-
“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. The 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.”
The Judge then went on to specify the numerous obligations of good faith to be implied, including:-
“- Not to suspend or terminate [Franchisees]: (i) arbitrarily, irrationally or capriciously; (ii) without reasonable and proper cause; and/or (iii) in circumstances where the Franchisor was itself in material breach of duty in respect of the matters which the Franchisor considered gave it the right to suspend or terminate;
– Not to take steps which would undermine the relationship of trust and confidence between Franchisees and the Franchisor;
– To exercise any contractual, or other power, honestly and in good faith for the purpose for which it was conferred;
– Not to exercise any discretion arbitrarily, capriciously or unreasonably;
– To exercise any such discretion in accordance with the obligations of good faith, fair dealing, transparency, co-operation and trust and confidence.”
Other important issues relevant to franchising were dealt with by the Judge including, implying terms into contracts, whether onerous or unusual terms need to be brought to the attention of a party entering into a standard form contract, whether terms frequently found in franchise agreements are subject to the Unfair Contract Terms Act and therefore unenforceable, and generally contractual interpretation.
John Pratt, IDI Country Expert for franchising in UK