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Why Good Faith Is Needed in the Law

I have seen a lot of questions raised by the other side (and by non-sympathetic legislators) on why good faith is really NOT needed in statutory law. This is usually accompanied by some side statement about good faith and fair dealings (GFFD) being imposed on all contracts. Opponents argue that good faith does nothing but create another claim for lawyers and does not add any additional protection for franchisees.

The reality is that statutes like California's Senate Bill 610 (SB610) are desperately needed—because the obligation we all think everyone has to act in good faith is under assault. When it comes to adding statutory good faith, here are some points that I would make to lawmakers:

  1. Franchisees face an uphill battle whenever a franchisor makes a decision that is in contravention of the franchisee's rights. In an estimated 95% or more of today's franchise agreement, a franchisor is given almost unlimited ability to "modify the system." This gives franchisors the ability to inflict hundreds of thousands of dollars in additional CAPEX investment by the zees (in the event of a change of image or product line requiring new equipment) and/or the creation of massive amounts of additional operating costs (particularly labor costs associated with "improved products"), all in the name of what is "best for the brand."

  2. In an estimated 80% of all franchise agreements, jury trials and punitive damages have been waived. This lessens protections for franchisees, and more importantly, removes an important "check" that a franchisor would typically have in considering whether to make changes that might deprive a franchisee of the benefit of his or her bargain.

  3. But wait you say, the covenant of Good Faith and Fair Dealings will protect the franchisee against bad faith conduct when a franchisor exercises the unlimited discretion it has to make changes to system—right? WRONG. Black-letter law says that the IMPLIED covenant of Good Faith and Fair Dealing exists in every contract UNLESS it is disclaimed by the parties. You know what is coming….

  4. In a growing number of franchise agreements, franchisors are requiring franchisees to agree that the franchisor DOES NOT HAVE TO ACT IN GOOD FAITH!! By way of example, here is a clause I dealt with THIS YEAR. This is a franchisor based in San Francisco, and they are represented by a multinational law firm's California office. This is all California:

    "Express Agreement. The parties acknowledge that their business relationship is based solely upon this agreement and agree that it should be enforced according to its express provisions. The language of this agreement is to be construed according to its plain meaning, and not strictly against a party because it drafted this agreement. Neither party intends or expects either party's rights and obligations in this agreement will be defined or determined to be other than as expressly written, or that additional obligations will be imposed on either party that it has not expressly assumed in writing. It would be contrary to the parties' intentions and expectations to impose any doctrine, rule of interpretation, or implied covenant, such as an 'implied covenant of good faith and fair dealing.'"

    (Emphasis added.) Just read this. Franchisor not responsible for ambiguities, can do anything it wants if it has granted itself sole discretion, and disclaims an implied obligation to act in good faith (I assure you there is no express obligation in the writing)! The ONLY check remaining would be SB610.

  5. Absent the new statute, all of the California-based franchisees in this California based system will NOT have any expectation that their franchisor must act in good faith. This agreement also has the jury waiver, the punitive damages waiver, and a provision that says the franchisor can do anything it sees fit in its sole discretion when it comes to modifying the system. Is this right? Should a small business owner and investor have to expect that she gives up even a right as basic as expecting the franchisor will not act in bad faith as a condition of making this investment? And imagine the franchisees facing renewal—they have to sign this or lose everything they built up in the business in the prior 10 years.

The ONLY solution to the continual overreach by franchisors is enacting laws like SB610.


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