Imagine being asked to sign a contract to be in business with someone else for 5, 10, or 15 years or longer. Over the years many new situations will arise: Over 15 years you will likely face new competitors, new technologies, and shifting demand for your product or service. You and your new business partner must work together as things evolve, which means you must trust each other to make this business relationship work over the long term, right?
Now imagine that in the proposed 15 year contract, your prospective business partner makes the statement:
[mk_blockquote style=”quote-style” font_family=”none” text_size=”12″ align=”left”]Over the next 15 years, as we embark together in our new business, you agree that I reserve the right to do whatever the heck I want — whatever I think will work out best just for me. I have no obligation to consider what is good for you. I have no obligation to be fair or act in good faith toward you. If you later think I am acting in bad faith or unfairly, that will be your problem. You won’t be able to sue me.[/mk_blockquote]
The good news is that few people would sign a contract that says this.
The bad news is that a large group of people routinely sign contracts that really say this but not in so many words. These people are called “franchisees.”
Every day, franchisees sign franchise agreements designed by franchisors to eliminate what the law calls “the implied covenant of good faith and fair dealing” or the “implied covenant” for short. This is accomplished with various legalese added to the franchise agreement. Some examples: “the franchisor has absolute discretion” or “there are no implied legal duties” or “the franchisor is entitled to exercise reasonable business judgment.” There is only one reason franchise agreements contain language like this, and that is to deprive the franchisee of the legal protections of the implied covenant.
What exactly is the implied covenant of good faith and fair dealing? In a case we won in the United States Court of Appeals a few years back, Interim Health Care of Northern Illinois v. Interim Health Care, Inc., the Court explained:
[mk_blockquote style=”quote-style” font_family=”none” text_size=”12″ align=”left”]In Illinois [and most other states], a covenant of good faith and fair dealing is implied in every contract absent express disavowal … Problems relating to good faith performance are most common where one party to an agreement is given wide discretion, and the other party must hope the discretion is exercised fairly … When one party to a contract is vested with contractual discretion, it must exercise that discretion reasonably and with proper motive, and may not do so arbitrarily, capriciously or in a manner inconsistent with the reasonable expectations of the parties.[/mk_blockquote]
It is really too much to ask that franchisors act with proper motive, exercise their discretion reasonably and act in a manner consistent with the reasonable expectations of the parties? For too many franchisors the answer is sadly “yes.”
When asked to review franchise agreements for prospective franchisees, the first thing we check is if the franchisor is trying to eliminate the implied covenant. Whenever this attempt is made, we immediately advise our client to “run, don’t walk” away from the proposed deal.
No one, least of all prospective franchisees or dealers sinking their savings into their new franchised business, should ever sign a franchise agreement containing an attempted waiver of the implied covenant of good faith and fair dealing.
Carmen D. Caruso is a trial lawyer in Chicago with his own firm. He represents franchisees and dealers across the country in serious cases. He will continue his discussion of good faith and fair dealing and related topics in subsequent posts.