Thursday, February 19, 2009

Franchisor Could Terminate Franchise Without Providing Notice, Opportunity to Cure

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

Under Pennsylvania law, a franchisor of freight forwarding businesses was entitled to terminate its agreement with a franchisee without providing the franchisee with advance notice and an opportunity to cure its breach, despite an express contractual provision granting such rights, the Pennsylvania Supreme Court has decided.

Irreparable Damage to Relationship

Termination without notice and an opportunity to cure was permitted because the franchisee’s breach of the parties’ agreement went directly to the essence of the contract, irreparably damaging the trust between the parties. By its own admission, the franchisee had breached the agreement by deliberately diverting business to a subsidiary in order to hide profits and avoid paying royalties to the franchisor.

There was no Pennsylvania caselaw directly governing whether a party’s conduct in breaching a contract could justify its immediate termination where the contract had an express requirement of notice and an opportunity to cure, the court observed.

However, courts from other jurisdictions appeared to agree that a termination clause affording a franchisee the right to notice and cure provided merely a cumulative remedy that did not bar the non-breaching party from exercising other remedies in the event of a breach going directly to the heart of the contract and destroying the fundamental trust between the parties.

"Exclusive" Means of Termination?

The franchisee argued that the instant agreement was unique for offering an unqualified right to cure, citing the use of the term “shall” in the sentence requiring the franchisor to provide the franchisee with 90 days’ written notice and an opportunity to cure. However, a reading of the entire agreement indicated that the sentence was not the exclusive means by which the agreement could be terminated, the court held. To the contrary, another provision stated: “[Franchisor’s] election to exercise any remedy available by law or contract shall not be deemed a waiver of nor preclude exercise of any other remedy.”

That provision could be fairly read as an express reservation by the franchisor of the right to exercise all remedies available to it after a breach by the franchisee, including its inherent power under Pennsylvania law to terminate the contract without notice in the event of a vital and essential breach. The sentence requiring notice and an opportunity to cure was therefore a cumulative remedy and not an exclusive one, according to the court.

Breach Not Subject to Cure

Requiring notice and an opportunity to cure under the instant circumstances would be a useless gesture, since the franchisee’s breach could not reasonably be cured. The breach was so fundamentally destructive, it caused the trust underlying the parties’ contractual relationship to evaporate, the court reasoned.

Thus, a ruling of a Pennsylvania appellate court, upholding a trial court’s grant of summary judgment to the franchisor, was affirmed.

The decision is LJL Transportation, Inc. v. Pilot Air Freight Corp. It is reported at CCH Business Franchise Guide ¶ 14,058.

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