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Good Faith And Fair Dealing In Franchising Redux

Author Richard Solomon is a conflicts and crisis management lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.

The ultimate common thread issue of franchisees has for many years been the quest for a legal doctrine called "Good Faith and Fair Dealing".

For the most part this has been fantasy delusion, an attempt to rewrite franchise agreements to insert provisions that were not there in the first place and never intended by the franchisor whose contract it is.

Courts are fairly unanimous in holding that courts do not rewrite agreements for parties, inserting clauses they themselves never included when it was signed. Attempts to undermine the 'you're a grownup and will be held to agreements you sign" law of almost all states have usually been rebuffed. Notably, some years back in a Burger King case a federal court held that there is an implied doctrine of good faith and fair dealing in every franchise agreement. That was immediately reversed on appeal and other courts considering the same doctrine have mostly followed suit.

There are certain states that have "Relationship" franchise statutes which purport to impose constraints upon how far franchisors can go in enforcing the strict explicit language of their franchise agreements. Moreover, under the Uniform Commercial Code dealing with the sale of goods, there is an implied covenant of good faith and fair dealing. Where franchises include products rather than services, resort to the UCC has been made for that very purpose. The supreme court of at least one state, Texas, has specifically stated that there is no implied covenant of good faith and fair dealing in franchise contract construction.

Franchisee plaintiffs continue to ask for such a rule in most litigation. Many courts will strive to impose it in some round about manner in the face of rather blatant abuse. This is a slippery slope.

The most important doctrine in commercial law is that contracts are enforceable according to their terms. Without that reliability markets would collapse. The conflict between wanting to have mercy upon ignorant adults who sign draconian agreements and wanting to protect the integrity of business agreements calls for value judgments. Are there other ways to prevent franchise fraud and abuse that do not include impugning the integrity of commercial agreements?

Ignorant people sign agreements they do not understand to become enabled to conduct businesses they know nothing about, based upon wildly exaggerated claims of potential success, control over one's own destiny, proven concepts, and ongoing critical operational support from the franchisor. Most of these people come out of corporate life where they never acquired any requisite skill in operating a small business. Having swallowed the Kool Aid sales pitch, they do not obtain competent assistance in corroborating the claims made. They hire lawyers for small fees to "read the contract" - an absurd exercise.

Few lawyers have experience in advising about franchise relationships and how they work. The can read. However. they cannot read with comprehension and they do not know where else to look to find some reliable corroborative information concerning claims made in sales brochures and disclosure documents. The money paid to these lawyers is totally wasted because the client is no better informed after the consultation than she was before the consultation.

Consequently, expectations are rarely fulfilled and requisite skills rarely acquired. Break even and profits do not occur or do not occur before the franchisee runs out of working capital. Failing, they go to find a franchise lawyer, few of whom are competent litigators and most of whom sell the absurd service of forming associations to convince the franchisor to give up revenue streams permitted by the franchise agreement. Can you get any stupider than that?

This approach almost always fails, leading to utter collapse of the association attempt or its impotence. The association degrades into a bitching club and accomplishes nothing. The franchisor has many ways to cause association members to desist from supporting any aggressive action. As time progresses, conditions of the relationship worsen and the association collapses. The members then go on the Internet and whine about life's unfairness. I have a word for this, but most people are offended when I use it.

Franchise investments have their legal dimensions and their economic dimensions. If you vet the investment by reading the agreement with some lawyer who can read but who cannot vet the economics, you will become toast. Franchise forensic due diligence is something almost no lawyers and damn few accountants and financial advisors can provide. Without the benefit of legal and economic/functional due diligence, the odds are usually better in Las Vegas. The extent of absurdity that people invest in would make you cringe, and it is not the exception.

Before you hand over upwards of a half million dollars and accept, over time, another ten million dollars of financial risk, get competent forensic pre investment due diligence assistance. Failure to do so will leave you with no legal remedy and no financial prospects for success. Scores of such people come to me every year, too far gone for anything but bankruptcy. Usually, they had lawyers review the 'papers" and talked to other franchisees before investing. They simply can't understand why what they did was totally useless.

No doctrine of good faith and fair dealing provides any remedy for people in those circumstances.

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