Contract Claims

If either party to a franchise, dealership or other distribution agreement breaches an express contractual term, the claim for breach of contract is straightforward. Most often, the claim for breach of contract is not as clear. That is because the agreement is not specific to the precise situation that arises or because the party drafting the agreement has purposefully left its duties unclear which gives wide discretion to act, or not to act.

In these situations, the vulnerable party most often turns to a common law doctrine known as the implied covenant of good faith and fair dealing, which is the law in most states including Illinois. This legal doctrine is among the most hotly disputed in franchising.

Carmen has been a leading advocate for franchisees on good faith and fair dealing and on related concerns about the “unconscionability” of over-reaching provisions in franchise agreements.

Questions of good faith and fair dealing, and questions of “substantial performance” or breach may arise at any phase of a contractual relationship. Some examples of his work in this area include:

  • Adequacy of initial and ongoing training
  • Site selection and approval
  • Evolution of system standards
  • Remodeling or equipment or software upgrading requirements
  • Inspections and grading of unit performance
  • Encroachment by new units or by non-traditional means
  • Pricing of mandatorily purchased supplies
  • Expenditure of advertising funds
  • Access to national account business
  • Terms of the “then current franchise agreement” offered to franchisees or dealers at renewal.

Carmen has advised individual unit, multi-unit and independent franchisee association clients facing all of these issues and has gone on to litigate most of them.

Among some of the franchise matters Carmen has handled are:

  • Interim Health Care of Northern Illinois Inc. v. Interim Health Care, Inc., 225 F.3d 876 (7th Cir. 2000). Victory in the United States Court of Appeals on the questions of whether a franchisor had breached the implied covenant of good faith and fair dealing by withholding referrals of “national account” patients from the franchisee and by deliberately encroaching on the franchisee’s trade area, causing the franchisee to default on royalty payments. The result was that the franchisee was entitled to go to the jury on the issue of whether the franchisor had acted in bad faith, even though the franchisor had statutory “good cause” for termination.
  • Defense of a former franchisee of 39 branded gasoline stations against claims for de-branding fees with counterclaims against the franchisor for: (a) failing to meet designated contractual fuel supply commitments; and (b) “brand damage” by failing to disassociate itself from highly publicized “hate speech” by Hugo Chavez, the president of Venezuela, who indirectly controlled the brand. Though district court rejected Carmen’s counter claims, he obtained a confidential settlement.