Franchise Owners and The Covenant of Good Faith


Franchises pose unique business opportunities. While the relationship between franchisees and their franchisors is usually a beneficial one, like any relationship there can be bumps in the road. Disagreements often arise when applying the implied covenant of good faith and fair dealing, especially because the covenant of good faith has not been applied uniformly by the courts, as seen in several recent cases.

Khorchid v. 7-Eleven, Inc.

In Khorchid v. 7-Eleven, Inc., the franchisee, Khorchid, claimed the franchisor, 7-Eleven, was violating its covenant of good faith by devising a plan to terminate the franchise agreement as part of a larger company-wide plan to decrease the number of franchisees in the Philadelphia and South New Jersey markets. The court first determined that under New Jersey law, the alleged wrongful conduct by 7-Eleven could not support simultaneously both an explicit breach of contract claim and a breach of the implied covenant of good faith and fair dealing. The court then deferred to the franchise agreement. Under the franchise agreement, 7-Eleven did not breach the contract, and therefore did not operate in bad faith.

GWO Litig. Tr. v. Sprint Sols., Inc.

Unlike Khorchid v. 7-Eleven, a Connecticut Supreme Court found in favor of the covenant of good faith in GWO Litig. Tr. v. Sprint Sols., Inc. General Wireless Operations, Inc. entered into a series of contracts with Sprint Solutions, Inc. in 2015 to revitalize the bankrupt RadioShack Corporation through unified Sprint/RadioShack store locations, referred to in the agreements as the “Store-Within-A-Store” (SWAS) model. The General Wireless Organization Litigation Trust (GWO Trust), the successor-in-interest to General Wireless, filed a lawsuit against Sprint for violating the covenant of good faith.

GWO Trust alleged Sprint violated the covenant of good faith by engaging in several activities, including: opening competing Sprint stores in close proximity, diverting customers away from co-branded stores to Sprint stores, and failing to train its employees working in the co-branded stores. These alleged breaches resulted in less customer traffic, sales, and revenue. The court determined General Wireless could reasonably expect Sprint to refrain from opening competing Sprint stores carrying the exact same products in close proximity to the co-branded stores. In this action, the court determined Sprint violated the covenant of good faith.

Texas Franchise Lawyers

The covenant of good faith is often cited by both franchisees and franchisors in franchise litigation. Determining whether or not this covenant will be applied requires an experienced franchise lawyers. At MehaffyWeber, our experienced franchise lawyers can analyze documents and agreements and form strategic methods for resolution. Contact us today to schedule an appointment with one of our business litigation attorneys.