In the last two classes, we've had judges tell us that good faith means different things in termination cases than in formation cases or in cases where there is discretion in the midst of a contract's performance. Well, today, we're going to be looking at a termination case. We're looking at a 1980 Massachusetts case entitled Zapatha versus Dairy Mart, where the court considered how the duty of good faith applied to an at-will termination clause in a franchise agreement. In this case, Zapatha purchased a franchise from the defendant, Dairy Mart, an operator of a chain of franchise convenience stores. Zapatha relied on representations by Dairy Mart that the franchise business would be his own, stable and secure. The franchise agreement allowed either party to terminate without cause on 90 days written notice. When plaintiff refused to sign a new agreement modifying the terms of the franchise, defendants sent written notice that the franchise was terminating. Zapatha sued, claiming that Dairy Mart's termination was dishonest and in bad faith. The trial court found for Zapatha, but the instant court reversed. The central issue is this. Was Dairy Mart's arbitrary termination of its franchise agreement with Zapatha invalid because of bad faith? And the court answered, no. The court found that the franchise agreement was not terminated in bad faith. The court turned to the UCC as adopted by Massachusetts which says that good faith requires among merchants "Honesty and fact, and the observance of reasonable commercial standards of fair dealing in the trade." The honesty and fact requirement of good faith is a bit redundant with fraud, so most of the action in these cases will be about whether there was an observance of reasonable commercial standards at fair dealing. The court held that, "There was no evidence that Dairy Mart failed to observe reasonable commercial standards of fair dealing in the trade in terminating the agreement. And it also found that the terminations may have been arbitrary but it was not dishonest." Next, the court pointed out that although the legislature had limited the rights of certain franchisors to terminate franchise agreements without cause, it "Has not adopted limitations on the right to terminate all franchise agreements in general." Finally the court declined to rule that all at-will termination clauses are invariably prohibited, and the court only ruled that Dairy Mart lawfully terminated the franchise agreement. In another part of the opinion, the court considered the plaintiff's additional claim that the termination clause was unconscionable. We talked about unconscionability in past classes. What's the difference between procedural and substantive unconscionability? Well, you should remember that procedural unconscionability concerns the how of the contract, how the contract was negotiated and whether the bargaining disparities allowed one party to take advantage of a more vulnerable party. Substantive unconscionability concerns the what of the contract, whether the resulting terms were substantively unfair or one-sided. The court and Zapatha held that the contract was neither procedurally nor substantively unconscionable. The plaintiff was specifically shown the termination clause prior to signing and later testified that it was "Straightforward." And the plaintiff failed to show that the clause allocated the risks and benefits of termination in an unreasonably disproportionate way or that the clause was unreasonably related to legitimate commercial needs. In Zapatha, Dairy Mart reserved broad power to terminate the franchise without cause and followed the clause to the letter in exercising that power. The court looked at whether Dairy Mart acted in good faith when exercising that power. But if terminating because the franchisee refuses to modify the franchise in terms more favorable to the franchisor is not a bad faith, what is? Well, suppose that the franchisor discriminated against a minority franchisee, or suppose that the termination was in retaliation because the franchisee had reported salmonella in the ice cream to state health authorities, or suppose the purpose of the termination was to capture a thriving franchise for the benefit of the president's brother-in-law. Any of these reasons might have been bad faith. Federal and state statutes have increasingly regulated the power to terminate a franchise relationship. One example is the Automobile Dealers Day in Court Act, which provides that a dealer may sue an automobile manufacturer for damages "By reason of the failure of said automobile manufacturers to act in good faith in terminating, canceling, or not renewing the franchise with said dealer." Good faith, however, is narrowly defined as "The duty of each party to guarantee freedom from coercion, intimidation, or threat of coersion or intimidation from the other party." Termination clauses are relevant not only for franchisees but also for at-will employees. For more than a century, American courts firmly adhered to the view that an employment contract of no fixed duration was terminable at-will. This means that an employee could quit or be fired for any reason, good or bad or even no reason at all. In recent years, both judges and legislatures have significantly limited employers' powers to discharge employees. Legislatures have adopted statutory protections and judges have developed common law limitations on the ability of employers to fire employees at-will, especially limiting the ability to fire for bad reason. An employer will be liable if the employee terminates for a variety of bad reasons including race and gender discrimination. Tort Law allows a cause of action for wrongful discharge based on making the employee making public policy claims from being a whistleblower. And in 1991, the National Conference of Commissioners on Uniform State Laws formally approved the Model Employment Termination Act. Although, as of now, no state has yet adopted it. Let's review. Today, we 've considered an at-will termination clause in a franchise agreement, and looked at a case where a court held that an honest, albeit, arbitrary termination of a franchise agreement in accord with the contract terms was valid and not in bad faith. We also discussed the trend away from at-will employment, at least in the sense giving the employer the right to terminate for bad reasons.
