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Posted:06-March-2014

Franchise First: Nature Trails' 'good faith' clause is about honesty, fairness and trust

When the founders of Nature Trails pre-school nursery, Steve and Alison Dyke, decided to franchise their successful business, they were adamant that they didn’t want a franchise agreement full of legalese.

In what is believed to be a first in UK franchising, the couple has broken industry norms by insisting on a ‘good faith’ clause in their franchise agreement. This commits Nature Trails explicitly to certain conditions during the terms of their agreements with franchisees, rather than leaving them absent or as 'implied' by UK contract law.

Steve said: “Alison and I wanted a good faith clause because existing franchise agreements seemed too one-sided in favour of the franchisor.”

He believes that easing the contractual tone helps to engender trust at the outset and is crucial in the formation of a healthy franchise network. He continued: “We’re in the top five nurseries in the country and have brilliant relationships with our staff, parents, and the children we look after. Nature Trails has been built on a foundation of honesty, fairness and trust, and we’re determined for that ethos to continue as the business expands through franchising.”

He adds: “The operative word in the phrase ‘franchisor-franchisee relationship’ in our opinion is relationship, and that relationship really begins, and is cemented, when both parties sign a five-year franchise agreement; franchisees may be unhappy about that contract because it is full of onerous clauses – but know that if they want to be a part of the network they have to sign what you’ve loaded in your favour… put it this way, we were never happy about that. We wanted a better start, and putting a good faith clause in the contract has enabled us to do that.”

John Pratt
John Pratt, senior partner at Hamilton Pratt and one of the best-regarded legal practitioners in the franchise sector, drafted Nature Trails’ franchise agreement and was instrumental in developing the good faith clause. It follows on from legal developments in the franchise sector, about which he presented at the bfa’s recent legal seminar.

John says: “Franchise agreements tend to give the franchisor broad discretion, primarily because they are drafted by the franchisor’s legal team to protect the franchisor from claims. However, in a recent High Court decision, a judge indicated that in relational contracts, which include franchise agreements, English Courts may imply a ‘duty of good faith’, even though at present it is not exactly clear what that means or involves.

“I think the crucial point here is that Nature Trails expressed a real desire to ensure that their contract with franchisees reflected a commitment to honesty and fair dealing.

“This is the first time in the UK, as far as we are aware, that a franchisor has committed to a duty of good faith, contractually defining what that means, and it will be interesting to see how it is received.

”Elements of the good faith clause in the agreement include: ‘We will not make hidden profits and mark ups or retain hidden payments from third parties,’ and ‘we will not require you to take measures that seek to increase franchisees’ turnover if the likely effect is to reduce your overall profits’.

“These are groundbreaking clauses when taken in context,” says Steve, “and we’re proud of them. We’re a well-established leading nursery now expanding through franchising. We’ve set a high benchmark in the nursery sector, and we want to do the same in the franchise arena.

“Good faith is not a gimmick, it’s an ethos that flows through everything we do. It implies reciprocity, and that’s something we believe will produce a healthy network over time.
 

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