Good Faith and Fair Dealing Under Georgia Franchise Law

During a recent franchise agreement negotiation, I revisited one of my favorite legal nerd topics: the obligation of “good faith and fair dealing”. The prospective franchisee requested that the franchise agreement expressly state that the franchisor would treat the franchisee in good faith and with fair dealing.

Under the law in nearly all states, including Georgia, a party to a contract has an implied obligation of good faith and fair dealing. (Texas is one of the exceptions; in most situations, Texas common law does not impose any obligation of good faith and fair dealing on parties to a contract. If that’s not written in the contract, the Texas courts won’t insert it for you.)

So why not include this in a Georgia franchise agreement?

The answer is that if the parties make the duty of “good faith and fair dealing” an express obligation in the contract, rather than one implied by law, it changes the effect of the duty.

In the Georgia franchise dispute case of American Casual Dining, L.P. v. Moe’s Southwest Grill (426 F.Supp.2d 1356 (N.D.Ga.2006)), the court stated:

 [T]he common law imposes a duty to seek diligently and in good faith to comply with all terms of a contract. But, as with the UCC, the common law requirement of good faith and fair dealing is not an independent source of duties for the parties to a contract. Alan’s of Atlanta, Inc. v. Minolta Corp., 903 F.2d 1414, 1429 (11th Cir. 1990). Rather, the covenant to perform in good faith “modifies the meaning of all explicit terms in a contract, preventing a breach of those explicit terms de facto when performance is maintained de jure.” Stuart Enters. Int’l, Inc., 252 Ga. App. at 234 (quoting Alan’s of Atlanta, Inc., 903 F.2d at 1429). Thus, in order to state a claim for breach of the implied duty of good faith and fair dealing, a plaintiff must set forth facts showing a breach of an actual term of an agreement. General allegations of breach of the implied duty of good faith and fair dealing not tied to a specific contract provision are not actionable. Alan’s of Atlanta, Inc., 903 F.2d at 1429; Tart v. IMV Energy Sys. of Am., Inc., 374 F. Supp. 2d 1172, 1182 (N.D. Ga. 2005).

When franchise agreements contain very few obligations on the franchisor, as they typically do, it’s difficult for an aggrieved franchisee to allege a breach of contract. In Georgia, at least, a smart way for a franchisee to expand their potential remedies in the future is to negotiate an express obligation in the franchise agreement for both parties to act in good faith and deal fairly.

 

 

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