Question

Spotlight on McDonald’s—Franchise Termination. J.C., Inc., had a franchise agreement with McDonald’s Corp. to operate McDonald’s restaurants in Lancaster, Ohio. The agreement required J.C. to make monthly payments of certain percentages of gross sales to McDonald’s. If any payment was more than thirty days late, McDonald’s had the right to terminate the franchise. The agreement also stated that even if McDonald’s accepted a late payment, that would not “constitute a waiver of any subsequent breach.” From time to time, McDonald’s accepted J.C.’s late payments, but when J.C. defaulted on one particular payment, McDonald’s gave notice of thirty days to comply or surrender possession of the restaurants. J.C. missed the deadline. McDonald’s demanded that J.C. vacate the restaurants, but J.C. refused. McDonald’s alleged that J.C. had violated the franchise agreement. J.C. claimed that McDonald’s had breached the implied covenant of good faith and fair dealing. Which party should prevail, and why?

Answer 1

A Franchise is an established business that has a working business model and is generating a profit.

This owner of this business then wants to grow, but is unable or unwilling to manage another physical location or manage someone they hire to do so for them.

Instead, they offer to sell the rights to the new locations to a Franchisee.
These agreements are more than a little complex usually, but usually they will go something like this:

1. The Franchisee will be granted the right to sell the franchise products and goods in exchange for a set amount of money paid to the franchise each year. This payment is regardless to whether or not they actually making a profit or to whether they are making an extraordinary profit - just a set fixed amount each year.

2. The Franchise will have control over marketing materials, brand and shop design and anything else that is related to the brand and reputation

3. The Franchise will usually be in charge of central purchasing of goods and materials for all franchisee

4. The Franchisee will be in charge of local shop management, the hiring and management of local employees and the day to day operation of the shop.
They will also be in charge of any marketing initiatives in their area that would have been approved by the franchisor beforehand.

A franchise agreement is a legal, binding contract between a franchisor and franchisee. A franchise agreement contents can vary significantly in content depending upon the franchise system, the state jurisdiction of the franchisor, franchisee, and arbitrator.

It overall provides the investor with a product, a branded name and recognition, and a support system.

In a franchise relationship, the Franchisee is economically dependent on the franchisor's business system. The franchise relationship is defined by the contract between the franchisor and the franchisee.

Here the Franchisor McDonald and Franchisee JC Inc. entered into contract that enabled McDonald's the right to terminate the contract when a payment was due more than thirty days.

JC Inc.'s failure to make a payment due more than thirty days constitutes a breach of the franchise contract.

In contract law, the implied covenant of good faith and fair dealing is a general presumption that the parties to a contract will deal with each other honestly, fairly, and in good faith, so as to not destroy the right of the other party or parties to receive the benefits of the contract.

An implied covenant of good faith and fair dealing require that the parties act reasonably and in good faith in fulfilling their contractual duties. The contract does not provide that the acceptance of a late payment give up McDonald's right to terminate for late payments. The acceptance of late payments didn't affect their contract rights. And hence McDonalds will prevail.