Goldstein: Franchise Attorneys

A RECENT DISTRIBUTOR CASE IN FEDERAL COURT IN MAINE, involved a manufacturer, DuPont, and its distributor, NES. The franchise agreement permitted DuPont to terminate the distribution agreement without cause with 60 days

notice. After DuPont and NES became embroiled in a dispute, DuPont terminated NES, even though NES had invested over the years hundreds of thousands of dollars into the business. One argument that the franchisee made was that the franchisor, DuPont, was required to act “reasonably” in terminating the distribution agreement. The court quickly and without hesitation rejected this argument stating:

The covenant of good faith and fair dealing “requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the contract.” A court should invoke the covenant only when [it is] clear from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of as a breach of the implied covenant of good faith — had they thought to negotiate with respect to that matter. If the answer to this question is yes, then . . . a court is justified in concluding that such act constitutes a breach of the implied covenant of good faith.”

NES claimed that DuPont violated the covenant by failing to disclose its intention to terminate NES, terminating upon only sixty days’ notice and doing so without cause. DuPont argued expectedly that that the covenant cannot be construed to require performance or a condition that is in conflict with an express provision of the contract.

The federal court embraced DuPont’s argument that:

“By asserting that DuPont should have disclosed the termination earlier, provided more notice or not terminated without cause, Plaintiff essentially seeks to modify the terms of the contract. The parties specifically addressed termination in the contract; the covenant of good faith and fair dealing will not be used to rewrite the contract.”

Note, however, that there are a few limited courts who have found a breach of the covenant in similar, but not identical, circumstances. For example, a New Jersey state court found found a breach of the covenant where the franchisor had decided to terminate the franchisee’s distributorship, and withheld that information while encouraging Plaintiff in a major expansion and signing a five year lease.

The DuPont distributor also argued that DuPont violated the covenant of good faith and fair dealing when DuPont acquired NES’ customer lists and sales data through false representations. In February 2006, DuPont invited all distributors of Corian(R) products to participate in the “Get a Cool Deal on Corian” promotion and requested that the distributors submit certain data to DuPont. In March 2006, a DuPont representative requested that NES provide a more accurate customer list and stated that NES’ participation in the promotion would be approved once the information was received.” The court held that the narrow issue of the the customer lists, but not the termination, might be viewed as unlawful. The case awaits trial.