The Implied Covenant of Good Faith & Fair Dealing and Questions of Performance
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, mainly because the agreement is not specific to the precise situation that arises during the term, or because the party drafting the agreement has purposefully left its duties unclear, giving itself 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 and Carmen D. Caruso has been a leading advocate for franchisees on good faith & fair dealing and on related concerns about “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 the relationship.
Some leading examples:
- 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
- The expenditure of advertising funds
- Access to national account business
- The terms of the “then current franchise agreement” offered to franchisees or dealers at renewal.
Carmen D. Caruso Law Firm has advised individual unit, multi-unit and independent franchisee association clients facing all of these issues and has litigated most of them. Some case highlights:
- 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 & fair dealing by withholding referrals of “national account” patients to the franchisee, and by deliberately encroaching the franchisee’s trade area, such that the franchisee defaulted in royalty payments – with the end result being 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.
- Defended a former franchisee of thirty-nine (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; (b) “brand damage” by failing to disassociate itself from highly publicized “hate speech” by Hugo Chavez, the president of Venezuela, who indirectly controls the brand. The district court rejected our counterclaims but we nonetheless obtained a confidential settlement of the entire case.
- Successful arbitration award obtained for a business opportunity investor on a breach of contract claim for failure by the promoter to fulfill its obligation to provide a suitable site.