Franchising offers entrepreneurs a way to enter into certain markets with a proven model to achieve success. Contracts guide these relationships, most commonly the franchise agreement and option contract. It is important to carefully review the terms of these arrangements as the rules that address questions of “good faith” do not always favor the franchisee.
What is “good faith” in franchising?
Franchise agreements are complex, involving a delicate balance between the franchisor’s brand control and the franchisee’s operational autonomy. While contracts outline explicit terms, they may not fully capture the spirit of the agreement or the parties’ natural expectations. This can lead to situations where actions, though not explicitly prohibited, undermine the relationship’s integrity.
When entering the agreement, the franchisees likely anticipate support, fair treatment, and a level playing field. It is reasonable to expect franchisors to act in a manner that promotes mutual success. Franchisors generally enter these agreements with the expectation that franchisees uphold brand standards and contribute positively to the network’s reputation.
When these expectations are not met, traditional remedies are often inadequate. The law typically limits recovery to breaches of express contract provisions. This limitation can leave aggrieved parties without sufficient recourse.
What remedies are available?
For years, legal scholars have called for the implementation of a “Fairness in Franchising” rule to establish a standard test for good faith and fair dealing. This rule would provide courts with a framework to evaluate actions that, while not contractually prohibited, violate the parties’ reasonable expectations. It would better ensure that both parties act within the spirit of the contract and provide reasonable damages in the event that one party fails to do so. Proponents argue that the shift is necessary and akin to one the courts made in the 1960s, shifting from the “master over employee” laws that governed employment relationships to provide employees with greater protection. In much the same way, it may be time to shift away from a “franchisor over franchisee” system and provide franchisees with more protection.
Until such a rule becomes available, parties can seek relief for such violations but are generally limited to the application of the terms of the contract and the implied covenant of good faith and fair dealing.
It is possible such changes will move forward in the near future. Until then, franchisees who find themselves facing a dispute with a franchisor are wise to seek legal counsel with experience in this niche area of the law. We offer free consultations and can provide guidance on legal remedies that can apply to your specific situation.
