7 Franchise L.J. 1 (1987-1988)

handle is hein.journals/fchlj7 and id is 1 raw text is: Termination of Franchises: Application of the
Implied Covenant of Good Faith
and Fair Dealing

by T. Mark McLaughlin and Caryn Jacobs*
Chicago, Illinois

T. Mark McLaughlin               Caryn Jacobs
I. Introduction
The law is well established that every contract contains an
implied covenant which requires the contracting parties to
deal with each other in good faith. In the recent past, several
terminated dealers have claimed that their suppliers acted
without good cause in terminating their contractual re-
lationship, and that the suppliers thereby violated the im-
plied covenant of good and fair dealing. A number of
terminated franchisees have invoked the same common-law
theory in seeking relief for the allegedly wrongful termina-
tion of their franchise agreements.
In many states, statutes exist which prohibit the termi-
nation of franchise agreements without good cause, which
typically is defined as the franchisee's failure to comply sub-
stantially with contractual obligations. In a few jurisdic-
tions, such as Wisconsin and Puerto Rico, dealers are
afforded similar protection.2 Less than half of the states have
enacted legislation regulating dealer and/or franchise ter-
minations. Moreover, as noted above, most of those statutes
cover franchises, as that term is defined in the statute, and
*Mr. McLaughlin is a partner and Ms. Jacobs is an associate with'the
law firm of Mayer Brown & Platt in Chicago. Illinois.

do not apply to distributor relationships under which a dealer
(without paying a franchise fee or undertaking to operate in
a manner prescribed by the supplier) buys a manufacturer's
goods for resale. In addition, even in states that have en-
acted statutes requiring good cause for termination, the stat-
utes typically have not been applied retroactively to cover
agreements that were in effect prior to the statute.3
In the absence of an applicable statute requiring good cause
for termination, a party claiming that its dealer or franchise
agreement was terminated wrongfully must turn, appropri-
ately enough, to the written agreement that governs its re-
lationship. Of course, if that contract provides that
termination is permissible only for specified good cause,
and the terminated party has a colorable claim that good
cause for termination did not exist, a straightforward claim
for breach of the express contractual provision is available.
In many cases in which the governing document did not
permit such a garden variety breach of contract claim, how-
ever, terminated dealers or franchisees have claimed that
(continued on page 15)
Elsewhere in This Issue
Franchising in Mexico: Breaking Tradition .......... 3
Franchising  Currents  ................................. 7
(Including: Timing of Bankruptcy by Defaulting
Franchisees Significantly Impacts Rights of Fran-
chisors-Drafting Techniques May Be Helpful;
Franchisor Could Not Tortiously Interfere with
Contract to Which It Was a Party; Punitive Damages
Awarded for Violation of Missouri Relationship Law;
Trademark Protection Should Be Sought at Initial
Stages of Franchise Development; Choice of Forum
and Choice of Law Issues Continue to be Litigated;
Franchise Lawyers Penalized for Pressing Frivolous
Claims; and others.)

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