Zapatha v. Dairy Mart, Inc

Brief Fact Summary. Zapatha (Plaintiff) brought an action to enjoin termination of the agreement and alleged that the contract provision purporting to authorize the termination of the franchise agreement without cause was unconscionable and that Dairy Mart, Inc.’s (Defendant) conduct was unfair and deceptive. The judge ruled that Defendant did not act in good faith, that their termination of the agreement without cause was unfair and deceptive, and the contract provision was unconscionable. Defendant made an application to this court for appellate review, which was granted.

Synopsis of Rule of Law. A termination clause to terminate without cause is not per se unconscionable as long as reasonable notice is given.

Facts. Plaintiff’s action alleged that the contract provision, which authorized the termination of the franchise agreement between Plaintiff and Defendant without cause was unconscionable and that Defendant’s termination was unfair and deceptive. Plaintiff also sought to enjoin termination of the franchise agreement. Plaintiff had a high school diploma and attended one year of college. He was an operator’s manager for a company in the business of electroplating. After being discharged from that job, he met with a representative of the defendant who told him about the opportunity to run a Dairy Mart franchise. Defendant approved Plaintiff’s application and offered him a store. The franchise agreement had a termination provision which allowed either party, after twelve months, to terminate the agreement without cause on ninety days’ written notice. If termination without cause occurred, the Defendant agreed to repurchase the saleable merchandise at retail prices. Defendant’s representa
tive read and explained the contract to the Plaintiff including the termination provision. Defendant suggested that Plaintiff take the agreement to an attorney, however the Plaintiff declined to do so. The terms of the contract were not negotiable. A few years later, the Plaintiff surrendered that store and acquired another. When Plaintiff sought to acquire the second store, Defendant presented Plaintiff with a more detailed and less favorable franchise agreement. Plaintiff refused to sigh the agreement and Defendant gave written notice to the Plaintiff that his contract was being terminated in ninety days. The judge found that Defendant terminated the agreement solely because the Plaintiff refused to sign the new agreement.

Issue. Whether the termination clause of the agreement to terminate without cause was unconscionable?

Held. Judgment reversed.
The test for unconscionability is whether in light of the general commercial background and the commercial needs of the case, the clauses involved are so one-sided as to be unconscionable under the circumstances at the time of the making of the contract. Unconscionability must be determined on a case-by-case basis. The Uniform Commercial Code authorizes termination of a sales contract without agreed cause provided that reasonable notice is given.
Here, there was no potential for unfair surprise to the Plaintiff in the provision permitting termination without cause. The provision was clearly set out to the Plaintiffs before they signed it, Plaintiff testified that he thought the provision was straightforward, and he declined the opportunity to obtain a lawyer. Therefore, there was no element of unfair surprise in the inclusion of the provision.
There was no evidence that the Defendant did not act in good faith, further there was no evidence that they failed to observe the reasonable commercial standards of fair dealing. Therefore, Defendant lawfully terminated the agreement because there was no showing that Defendant engaged in any unfair, deceptive or bad faith conduct.

Discussion. The Restatement (Second) Section 208 states that if a contract or term is unconscionable at the time the contract is made a court may refuse to enforce the contract or enforce the remainder of the contract without that specific term. Section 205 states that every contract imposes a requirement of good faith and fair dealings in its performance and enforcement.