The judge stated that these ‘relational’ contracts: ‘…may require a high 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’.
The judge indicated that franchise agreements were ‘relational’ contracts. The extent of this duty of good faith and whether other courts will follow the decision in Yam Seng is unclear. However, it is very likely that franchisors will in future have to provide all relevant information to their franchisees whether or not franchisees ask for it. Franchisors should also, not knowingly provide false information to franchisees or refuse to answer a franchisee’s questions. So that, for instance: if a franchisee asks a franchisor whether it is retaining supplier discounts and if so ‘how much is being retained’ a franchisor would have to answer.
In addition, franchisors will also be subject to other implied terms deriving from a duty of good faith. The first is that if the franchise agreement confers on the franchisor a power to make unilateral decisions which affect both the franchisor and franchisee, the franchisor must exercise that power ‘honestly and in good faith’ for the purposes for which it was conferred, and the power must not be exercised ‘arbitrarily, capriciously or unreasonably’.
As a result franchisors do not, on a renewal, have an entirely free hand to amend their franchise agreements in whatever way they choose and certainly franchisors cannot make changes to the franchise agreement which would result in their franchisees being unable to operate their franchisees profitably. Further where the consent of the franchisor is needed, for instance in relation to a transfer of a franchisee’s business, then the franchisor cannot withhold its consent unreasonably. Finally any particularly unusual or onerous contract terms contained in a franchise agreement must have been fairly brought to the attention of a franchisee. This would mean that if, for instance, a franchisor wants to limit his liability by reference to a clause in the franchise agreement this would need to be brought to the attention of prospective franchisees.
The Yam Seng decision has created a fruitful area for franchisees lawyers to argue that a franchisor is subject to implied terms based on good faith. We are only at the beginning of this process but all those involved in franchising need to take note.
John Pratt , IDI franchising country expert for UK