Franchise Lawyer Blog

Covenant of Good Faith and Fair Dealing

Franchisee’s Lawsuit against Franchisor Survives Motion to Dismiss.

When drafting a franchise agreement, franchisors typically seek to reserve the right to exercise broad discretion in their role in overseeing the franchise. A recent case (Wojcik v. InterArch, Inc., 2013 WL 5904996 (N.D.Ill. November 4, 2013)) highlights how this may open the franchisor to liability, as courts may infer a covenant of good faith and fair dealing in the exercise of franchisor’s discretion.

In the suit, franchisees David J. Wojcik and Denise J. Wojcik allege violations of the Illinois Franchise Disclosure Act and Illinois Consumer Fraud Act, common law fraud, conspiracy to commit fraud, breach of contract and negligent representation against the  franchisor. The case has significance in the application of the covenant of good faith and fair dealing to franchise agreements, a matter the court recognizes is “far from settled under Pennsylvania law[i].”

The court described the covenant of good faith and fair dealing as an interpretive tool, used to determine the parties’ justifiable expectations in an action for breach of contract. To allege a breach of the covenant, the court held that the plaintiff must allege “the existence of a contract, that defendants failed to comply with the covenant of good faith and fair dealing by breaching a specific duty imposed by the contract other than the covenant of good faith and fair dealing and the resultant damages.” [internal citations omitted, emphasis in original]. Good faith, the court held, varies with context, but typically entails faithfulness to an agreed common purpose, and consistency with the justified expectations of the other party. As examples of bad faith, the court cited lack of diligence and evasion of the spirit of the bargain, among others.

In this case, the court held that because the franchisor endowed itself with broad discretion over its performance under the contract, it may be liable for breaching that contract, if it did not exercise good faith in that discretion. The court noted the following provisions of the franchise agreement in reaching its conclusion:

  • “Franchisor has the right to change Franchisor’s standards and specifications in Franchisor’s discretion.”
  • “Franchisor will provide Franchisee continuing consultation and advice as Franchisor deems necessary and appropriate regarding the management and operation of the Restaurant.”
  • “Franchisor will make a good faith effort to expend Brand Development Fund contributions in the general best interests of the System on a national or regional basis.”

The above clauses may read to some as typical boilerplate franchise agreement provisions. For practitioners drafting agreements to be enforced in Pennsylvania, however, the case may be worth following. It may be prudent to advise clients to be specific where possible in regard to their performance obligations to avoid the court’s application of good faith and fair dealing, a broad clause open to interpretation, later on.

This case will continue. We will follow it and keep you abreast of its development.

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