Limits On Termination Rights

• Pages: 35-58

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CHAPTER III

LIMITS ON TERMINATION RIGHTS

When a party seeks to terminate a franchise or dealer relationship, or

even to let it expire by its own terms, the parties’ written contract, the

Uniform Commercial Code (UCC), and federal and state laws addressing

franchise or dealer relationships impose limits on both the process and

the justification for termination. As discussed in detail below, the most

common termination restrictions are notice and “good cause”

requirements. In some cases, the nonterminating party is also entitled to

an opportunity to cure defaults or deficiencies that would otherwise

justify termination. A franchisor or supplier that fails to comply with

applicable substantive and procedural termination requirements will find

itself unable to terminate and, in many cases, vulnerable to substantial

claims for economic damages.

A. Contractual Termination Restrictions

1. Written Contracts Restricting Termination

The written franchise or distributorship agreement between the

parties is the obvious place to start when determining the limitations on a

party’s right to end the relationship. More often than one might expect,

however, companies send termination notices that are not in compliance

with the terms of their own standard contracts. The contract may provide

termination limits that are procedural (e.g., requiring notice of

termination) and substantive (e.g., requiring good cause for termination).

Both substantively and procedurally, the franchise or dealer agreement

usually sets forth the minimum level of protection against termination to

which a party is entitled, augmented by the protections found in franchise

and dealer relationship laws and also by common law and UCC contract

doctrines like good faith, unconscionability, and recoupment.

Franchise and Dealership Termination Handbook

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2. Oral, Implied, and Incomplete Contracts

Claims based on oral contracts often are difficult to sustain in the

franchise and dealership context due primarily to the statute of frauds.

Agreements under which the dealer resells goods provided by the

supplier generally are held to constitute contracts for the sale of goods

(or at least transactions in goods) governed by Article 2 of the UCC.1

The UCC statute of frauds, Section 2-201, provides, subject to certain

exceptions, that a “contract for the sale of goods for the price of $500 or

more” must be in writing and signed by the party against whom

enforcement is sought, or it will be unenforceable. Moreover, the writing

must state a quantity term for the contract to be enforceable.2 Thus, the

absence of a sufficient written contract may defeat a claim of wrongful

termination of a franchise or dealership contract.3

When drafting contracts and preparing for or participating in

termination litigation, counsel needs to consider the impact of the

relevant statute of frauds and the presence or absence of any quantity or

1. Am. Suzuki Motor Corp. v. Bill Kummer, Inc., 65 F.3d 1381, 1386 (7th

Cir. 1995); Corenswet, Inc. v. Amana Refrigeration, 594 F.2d 129, 134

(5th Cir. 1979); Agrizap, Inc. v. Woodstream Corp., 450 F. Supp. 2d 562,

570 n.6 (E.D. Pa. 2006); Artman v. Int’l Harvester Co., 355 F. Supp. 482,

486 (W.D. Pa. 1973); Cavalier Mobile Homes v. Liberty Homes, 454

A.2d 367, 376 (Md. Ct. Spec. App. 1983); East Hill Marine v. Rinker

Boat Co., 229 S.W.3d 813, 819 n.3 (Tex. Ct. App. 2007). But see Vigano

v. Wylain, Inc., 633 F.2d 522, 525 (8th Cir. 1980) (dealership contracts

held not to be transactions in goods subject to UCC § 2-201 under

Missouri state law, but court opined that applying UCC Article 2 to

dealership contracts was the better view); Lorenz Supply Co. v. Am.

Standard, 358 N.W.2d 845, 847 (Mich. 1984) (not a contract for the sale

of goods, but not deciding whether it may be a transaction in goods under

UCC § 2-102).

2. E. Dental Corp. v. Isaac Masel Co., 502 F. Supp. 1354, 1364-65 (E.D. Pa.

1980); Cavalier Mobile Homes v. Liberty Homes, 454 A.2d 367, 376-77

(Md. Ct. Spec. App. 1983). But see Fisherman Surgical Instruments,

LLC v. Tri-Anim Health Servs., 502 F. Supp. 2d 1170, 1173-74 (D. Kan.

2007) (exclusive dealing agreement satisfied quantity term requirement of

UCC Statute of Frauds).

3. East Hill Marine v. Rinker Boat Co., 229 S.W.3d 813, 820 (Tex. Ct. App.

2007) (breach of alleged distributorship contract claim barred by statute

of frauds); Sanyo Elec. v. Pinros & Gar Corp., 571 N.Y.S.2d 237 (N.Y.

App. Div. 1991) (alleged oral distributorship agreement barred by UCC

Article 2 statute of frauds).