The duty of good faith can play a crucial role in shaping the relationship between franchisors and franchisees. We explore the duty of good faith in franchising agreements under English law, its significance and its impact on fostering trust and sustainable relationships.

Duty of good faith under English law

There is no one-size-fits-all definition of what the duty of good faith encompasses – different jurisdictions have different approaches. In many European jurisdictions, there is an established duty of good faith that applies to all commercial dealings, including pre-contractual relationships. There is no general doctrine of good faith in English law, although authorities have made distinctions in certain contractual relationships, including franchising. 

Implied duty of good faith 

English courts can imply terms into contracts in certain circumstances. As a general principle, a duty of good faith will not be implied into English law contracts. That changed in Yam Seng Pte Ltd v. International Trade Corp Ltd [2013] EWHC 111, in which Mr Justice Leggatt stated the hostility towards the doctrine of good faith was misplaced. He highlighted "relational" contracts, which typically involve a long-term arrangement in which parties make a substantial commitment. This type of arrangement will be based on mutual trust and confidence and will therefore import expectations of loyalty that will not be spelled out in the contract but will be implicit.

This was a groundbreaking decision that recognised for the first time the principle of good faith in the realm of English contract law for certain contracts, including specifically franchising agreements. 

Although it may seem promising to parties that the English courts may be willing to imply a duty of good faith, there remains a lot of uncertainty. First, the court needs to be persuaded that it is necessary to imply a term at all – for example, because the contract would lack business efficacy without such a term. Secondly, if the court does imply a term, there is no guarantee that it will go as far as a party wants. To date, the English courts have demonstrated the desire to limit the scope of the implied duty. For example, in Apollo Window Blinds v. McNeil [2016] EWHC 2307 (QB) there was no obligation on Party A to inform Party B of Party B's own contractual rights under the contract, such as their right to terminate. 

Express duty of good faith 

Whether the agreement is relational or otherwise, it is not prudent to go into a contract relying on a general duty of good faith to be implied by law. If you want such a term to apply, include an express provision to that effect.  

If so, you will need to be clear what this means. Do you want the duty to apply to all the terms or just some and, if the latter, which terms? 

An express term that the parties must act in good faith or utmost good faith (between which English law does not distinguish) can, for example, impose an obligation on one party to disclose material facts to the other party at the time of entering into a contract (Horn v. Commercial Acceptances [2011] EWHC 1757 (Ch)). Express terms can impose clear obligations on parties which help reduce the possibility of uncertain, costly litigation around contractual interpretation.  

What does "act in good faith" actually mean?

In recent years, the courts have gone on to give guidance on what a duty of good faith, whether implied or express, will encompass. The body of law surrounding the duty of good faith in "relational contracts" blossomed further when Mr Justice Leggatt, who delivered the judgment in the Yam Seng case, expanded on his views in the case of Al Nehayan v. Kent [2018] EWHC 333 (Comm). The judge referred to the approach taken in Australian case law, where the obligation of good faith was characterised as:

"an obligation to act honestly and with fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained."

Mr Justice Leggatt also cross-referred to his earlier decision in Astor Management AG v. Atalaya Mining Plc [2017] EWHC 425 (Comm) where he described the duty of good faith as:

"a modest requirement. It does no more than reflect the expectation that a contracting party will act honestly towards the other party and will not conduct itself in a way which is calculated to frustrate the purpose of the contract" or "which would be regarded as commercially unacceptable by reasonable and honest people."

He also made clear that this was a lesser duty than the positive obligation to use all reasonable endeavours to achieve a specified result – wording which is often seen in commercial contracts. 
More recently, in Compound Photonics Group Ltd [2022] EWCA Civ 1371, Snowden LJ further clarified that a breach of duty of good faith is not limited to dishonest behaviour. Rather, a duty of good faith may be breached by conduct taken in bad faith, and this:

"could include conduct which would be regarded as commercially unacceptable to reasonable and honest people, albeit that they would not necessarily regard it as dishonest."

How does this impact your franchising agreement?

Franchise agreements under English law occupy something of a middle ground when it comes to good faith. If you are used to dealing with franchise agreements in other (particularly European) jurisdictions, you may be surprised by the leeway that the English courts will allow parties to behave in a way that might seem unfair. If you are more used to English commercial contracts, you might not appreciate that the parties to a relational contract, such as a franchise agreement, will owe any duties of good faith to each other.

In practical terms, the English courts will expect parties to refrain from conduct that might be regarded as "sharp practice" or dishonest. If you want the obligations to extend beyond that, to require a higher standard of fairness in the parties' dealings, consider including an express good faith term that sets out exactly what the parties expect from each other.

If you are considering entering into a new franchising agreement, Dentons can assist with advising and drafting the agreement to accurately reflect your intentions. Relying on implied terms will lead to uncertain, costly litigation. In addition, using our global platform, we can advise on how other jurisdictions approach the duty of good faith.