The recent £120 million high court lawsuit pending against Vodafone UK highlights lessons for any businesses engaged in or looking to be engaged in the franchise sector.
The Background
In December 2023, a group of 62 current and former Vodafone franchisees filed a claim alleging primarily (1) breach of contract, (2) bad faith, (3) unjust enrichment and (4) causing severe financial and (5) emotional hardship. The core allegations were as follows:
- Unilateral Commission cuts: Franchisees say Vodafone slashed commissions with little to no prior consultation or justification, making stores unprofitable.
- Excessive Penalties: Some franchisees reported disproportionate fines, of up to 30% of total commissions for infractions that franchisees labelled as minor.
- Misuse of COVID relief data: allegedly, Vodafone leverages confidential relief info to reduce commission payouts, offsetting actual aid for its own benefit.
The claimants argue that their actions breached the spirit of their franchise agreement and pushed many to the brink of financial ruin, with some also citing emotional distress. Vodafone strongly refute the claims and responded by terminating the contracts of 12 franchisees who remained in the programme while participating in the lawsuit, citing negative campaigning and reputational concerns.
A key issue here is the issue of good faith and whether it can be implied into franchise agreements. Traditionally, courts have been reluctant to do this, but recently, they have shown a growing willingness to do so in respect of long term ‘reputational contracts’.
Allied to this is the ‘Braganza duty’, this principle means that when a party has a right to exercise its discretion, they must exercise that rationally and in good faith. The franchisees argument is that Vodafone’s decision to cut commissions and impose fines breaches this duty as they were poorly justified and heavily onerous.
Broader risks for businesses
This case is not just about franchising, there are key takeaways for business from various sectors:
- Use of clear and fair contract terms – it is important to commission structures, fines, change mechanisms and termination terms are transparent.
- Uphold the duty of good faith and rational discretion – even if a contract allows changes, the exercise of such discretion must be justifiable, documented and rational. Any variation should not appear arbitrary or opportunistic.
- Communicate and document – gather input from franchisees and partners, record the decision making and rationale. Show that changes were considered and fair.
- Handle disputes proactively – early dialogue and mediation can assist in preventing escalation to litigation, Vodafone’s failure to resolve the dispute via mediation highlights the risk here.
- Audit and remedy past actions – consider corrective steps, before litigation forces you to. Proactivity can help to mitigate legal and reputational damage.
The Vodafone franchise lawsuit illustrates how fraught franchise and network relationships can become when discretion is misused or perceived as unfair. It serves as a timely prompt for both franchisors and franchisees to safeguard fairness, ensure clarity and consistence in their agreements and in practise.
This is a case to watch closely. If the claimants succeed, it could mark a pivotal moment in English contract law, strengthening the position of smaller businesses with corporate giants. It’s a powerful reminder for all businesses that a robust contract is not just a shield, but a blueprint for a fair and sustainable partnership.
It is important to review any gaps in your franchise or partner agreements, ensuring they reflect transparent governance, document decision-making and allow for early resolution paths. If you are unsure where your business stands, are considering commissioning a contract check or review with your legal advisors, get in touch at [email protected].
