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
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).

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