A claim against a UK mobile telecoms provider by its current and former franchisees alleges that the franchisor acted in bad faith. We look at what role good faith has to play in franchise agreements – and whether we are likely to see more disputes over this issue in future.
According to media reports and other publicly available materials, over 60 current and former franchisees of Vodafone UK are claiming £120 million from the company for a range of alleged breaches. The franchisees argue that Vodafone's decision to reduce commission rates on products and services was in bad faith and unlawful. They also allege that in the period after levels of commission were reduced, Vodafone began to enforce its franchise agreements more strictly – for example, by exercising its right to impose substantial - and in the view of the claimants, disproportionate - fines (running into tens of thousands of pounds) for errors by franchisees. Vodafone maintains that it treated its franchisees fairly and that where issues were raised, it sought to rectify them, for example, by repaying almost £5 million to franchisees (including "retrospective reimbursement of fines and clawbacks").
Franchise agreements typically give the franchisor considerable discretion to take decisions which may have a material impact on the franchisee. This may extend – as appears to be the case here – to unilateral rights to vary rates of remuneration. As explained in our briefing Price review clauses: when can suppliers force through an increase?, such unilateral rights have been upheld by the courts in previous cases – even though they may appear very one-sided. However, as we also pointed out, such rights also typically involve the exercise of contractual discretion. The courts normally expect a party exercising such a discretion to do so honestly, in good faith and in a manner which is not arbitrary, capricious or irrational. In practice, this normally imposes some level of constraint on how far the party exercising its discretion can go.
Following the Supreme Court's ruling in Braganza v BP (2015), the courts have shown an increasing willingness to subject parties' decision-making on contractual discretion to fairly detailed scrutiny (see this briefing for a recent example). Whether Vodafone will be found to have gone too far remains to be seen – and it may be that other factors need to be taken into account which could count in its favour, such as the overall level of support provided to franchisees, the lack of a requirement for any upfront investment and any payments already made to franchisees.
It's worth noting that a number of recent franchise disputes have also involved the exercise of the franchisor's discretion in relation to approval of new franchisee candidates and termination / renewal rights.
Hunters v Brybond (2022)
Hunters, an estate agency chain, had granted a Master Franchise Agreement (MFA) to Brybond. The MFA required Brybond to meet certain targets for finding new franchisees in the territory. Brybond argued that in refusing to approve certain prospective franchisees, Hunters had acted with an ulterior motive, which was to put Brybond in breach of the MFA, so that they could terminate it. The court accepted that there was a Braganza duty. However, it ruled that Hunters had in fact acted consistently with its policy of not approving new franchises where it would adversely affect an existing franchisee with an exclusive territory – and hadn't taken the decision based on illegitimate factors like wanting to put Brybond in breach. See also Winkworth v Goble (2023), which involved a similar dispute (relating to refusal of an estate agency franchisor to extend the franchisee's existing agreements).
Whilst the franchisee's claim failed in both these cases, the court accepted that the franchisor's exercise of its contractual discretion was open to scrutiny.
On the whole, the English courts tend to be reluctant to accept that business to business agreements contain a general duty to act in good faith which permeates the entire contract – unless the parties have made it clear that this is what they intended. However, as noted above, franchise agreements can be quite one-sided arrangements, with many provisions drafted in favour of the franchisor. This may provide scope for franchisees to argue in favour of an implied duty of good faith – as occurred in Bates v Post Office (2020), the High Court case which led to the setting up of the public inquiry into the Post Office Horizon IT scandal. For more on that case and its relevance to franchising, see our briefing: The Post Office litigation: 4 lessons for franchisors and franchisees.
