Burger King Corp. v. Family Dining, Inc.

Brief Fact Summary.

A franchisor and a franchisee entered into a relationship whereby the franchisee would have the exclusive right to develop restaurants in a certain territory.  The parties agreement required that after a ten year period, ten restaurants must be in the area.

Synopsis of Rule of Law.

"Where words in a contract raise no duty in and of themselves, but rather modify or limit the promisees' right to enforce the promise such words are considered to be a condition."

Facts.

The Plaintiff, Burger King Corp. (the "Plaintiff") franchises their Burger King Restaurants.  The Defendant, Family Dining, Inc. (the "Defendant"), operated ten Burger King Restaurants in Bucks and Montgomery Counties, in Pennsylvania.  The parties entered into the "Burger King Territorial Agreement" (the "Territorial Agreement") on May 10, 1963.  In the Territorial agreement, the Defendant was made the Plaintiff's sole licensee and granted an "exclusive territory" in Bucks and Montgomery Counties.  The Defendant was required to open one restaurant a year for ten years and throughout the next 80 years maintain ten restaurants.  There was a set schedule in the agreement specifying when the ten restaurants had to be opened.  If they did so, the Defendant would keep its "exclusive territory", but if they did not Burger King could open restaurants in the "exclusive territory".  The Defendant opened the first restaurant on August 16, 1963, 9 months early, but the next two on July 2, 1965 and October 19, 1966, respectively two and four months late.  The fourth restaurant was over a year late.  As a result of the failure to abide by the schedule, the parties entered into a Modification of the Territorial Agreement (the "Modification").  The Plaintiff, in the Modification, agreed to waive the Defendant's compliance with the original building schedule.  There is no indication the Plaintiff received anything of value for entering into the Modification.  The fourth restaurant was finally opened on July 1, 1968, 14 months late.  The sixth restaurant was opened a month late, but the seventh ahead of schedule.  The Plaintiff began to grow at a fast rate and realized that the Defendant's territory could sustain more than ten restaurants.  On October 7, 1970, the eighth restaurant was opened ahead of schedule and the Plaintiff had approved the sites for the last two locations.  However, construction of the ninth and tenth restaurants was way behind schedule.  Due to this tardiness the Plaintiff sent the Defendant a letter informing them they were in default.  The Defendant learned that the Plaintiff thought it was in default on November 6, 1973.  Nonetheless, the Defendant informed the Plaintiff on or about May 15, 1975 that it was going to open the ninth location.  In response, the Plaintiff sued seeking a preliminary injunction enjoining the use of Burger King's trademarks.  Additionally, the Plaintiff sought declaratory relief that the exclusivity provision was no longer valid.  The Defendant moved for involuntary dis¬missal.

Issue.

Is the termination provision inoperative?

Held.

Yes, the Plaintiff is not entitled to have the condition protecting its promise strictly enforced.  The result of the termination provision would be forfeiture for the Defendant.  The court treated the parties agreed upon development rate as a "condition subsequent, not a promise, which operates to divest [the Defendant] of exclusivity."  The court reached this conclusion by observing "[w]here words in a contract raise no duty in and of themselves but rather modify or limit the promisees' right to enforce the promise such words are considered to be a condition."  Further, "[w]hether words constitute a condition or a promise is a matter of the intention of the parties to be ascertained from a reasonable construction of the language used, considered in light of the surrounding circumstances."  The court determined that the true purpose of the Territorial Agreement was to "act as an inducement to Family Dining to develop Bucks and Montgomery Counties within a certain time frame."  This agreement was not set in stone.  Also, the fact the Defendant's performance was to take place in installments does not mean the contract is definitely divisible.  This also is a question of intention and the court concluded this contract "was intended to be entire rather than severable." The court next concerned itself with the effect of the Plaintiff's failure to literally adhere to the development rate for the first decade of the contract.  As the court in [Dempsey v. Stauffer] observed, "after one party by conduct indicates that literal performance will not be required, he cannot without notice and a reasonable time begin demanding literal performance."  Here, the Plaintiff early on did not require the Defendant to strictly adhere to the contract.  Additionally, there is no evidence the Plaintiff communicated to the Defendant at any time that they wished for strict adherence throughout the rest of the contract.
•    Further, "the termination provision involves divesting Family Dining of exclusivity, which, in the Court's view, would amount to a forfeiture."  Due to this inevitable result, the court decided to apply equitable principles.  According to §302 of the Restatement, a condition can be treated as excused if (i) it involves extreme forfeiture or penalty or (ii) if "its existence or occurrence forms no essential part of the exchange for the promisor's performance."  As to the (ii), the court reiterated how the Plaintiff did not provide any evidence that literal compliance with the development schedule was necessary.  Further, that the Defendant was not worried about precise performance, but an overall general development of the territory.  As to (i), the court observed the Defendant "would lose something of incalculable value based on its investment of time and money developing the area, the significant risks assumed and the fact that there remains some 76 years of exclusivity under the Territorial Agreement."  Further, " [s]uch a loss would be without any commensurate breach on its part since the injury caused to Burger King by the delay is relatively modest and within definable limits."

Discussion.

This case concerns the differences between a condition and a promise.