Franchising in Good Faith: The Nonrenewal Power, Good Cause, and Goodwill

Abstract

The power structure of franchise agreements generally favors franchisors. This preference, in policy, practice, or both, applies, inter alia, to issues arising with respect to renewal and nonrenewal, including: (1) disclosure requirements and time periods; (2) the role of franchisees in forming associations; (3) a franchisee’s expectation of compensation for the goodwill that it has accrued; (4) the right of automatic renewal in some circumstances; (5) public policy, commercial reasonableness, and equity, including notions of estoppel and defenses to allegations of discrimination; and (6) the effect of consistently applied ideals – the benchmarks for good cause – on continuation of, or recommitment to, a franchise agreement.

In addition to case law, the primary impact on renewal arises from statutes, franchising codes of ethics, and, broadly, the concepts of good faith and fair dealing. Besides analyzing minimum performance standards and American jurisprudence, this article compares the renewal principles found in many nations. While other nations’ legal and ethical precepts may not reach or otherwise reform the American law of renewal, the collective action of franchisees may rectify, at least in part, a pro-franchisor, anti-renewal predisposition based almost exclusively on contract language and traditional common law concepts.