Zapatha v. Dairy Mart, Inc.
| Citation | 381 Mass. 284,29 UCC Rep.Serv. 1121,408 N.E.2d 1370 |
| Parties | , 29 UCC Rep.Serv. 1121 Elaine ZAPATHA et al. 1 v. DAIRY MART, INC. |
| Decision Date | 05 August 1980 |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Joseph D. Rosenbloom, Springfield, for defendant.
Edward J. Barry, Springfield, for plaintiffs.
Before HENNESSEY, C. J., and QUIRICO, BRAUCHER, WILKINS and ABRAMS, JJ.
We are concerned here with the question whether Dairy Mart, Inc. (Dairy Mart), lawfully undertook to terminate a franchise agreement under which the Zapathas operated a Dairy Mart store on Wilbraham Road in Springfield. The Zapathas brought this action seeking to enjoin the termination of the agreement, alleging that the contract provision purporting to authorize the termination of the franchise agreement without cause was unconscionable and that Dairy Mart's conduct was an unfair and deceptive act or practice in violation of G.L. c. 93A. The judge ruled that Dairy Mart did not act in good faith, that the termination provision was unconscionable, and that Dairy Mart's termination of the agreement without cause was an unfair and deceptive act. We granted Dairy Mart's application for direct appellate review of a judgment that stated that Dairy Mart could terminate the agreement only for good cause and that the attempted termination was null and void. 2 We reverse the judgments.
Mr. Zapatha is a high school graduate who had attended college for one year and had also taken college evening courses in business administration and business law. From 1952 to May, 1973, he was employed by a company engaged in the business of electroplating. He rose through the ranks to foreman and then to the position of operations manager, at one time being in charge of all metal finishing in the plant with 150 people working under him. In May, 1973, he was discharged and began looking for other opportunities, in particular a business of his own. Several months later he met with a representative of Dairy Mart. Dairy Mart operates a chain of franchised "convenience" stores. The Dairy Mart representative told Mr. Zapatha that working for Dairy Mart was being in business for one's self and that such a business was very stable and secure. Mr. Zapatha signed an application to be considered for a franchise. In addition, he was presented with a brochure entitled "Here's a Chance," which made certain representations concerning the status of a franchise holder. 3
Dairy Mart approved Mr. Zapatha's application and offered him a store in Agawam. On November 8, 1973, a representative of Dairy Mart showed him a form of franchise agreement, entitled Limited Franchise and License Agreement, asked him to read it, and explained that his wife would have to sign the agreement as well.
Under the terms of the agreement, Dairy Mart would license the Zapathas to operate a Dairy Mart store, using the Dairy Mart trademark and associated insignia, and utilizing Dairy Mart's "confidential" merchandising methods. Dairy Mart would furnish the store and the equipment and would pay rent and gas and electric bills as well as certain other costs of doing business. In return Dairy Mart would receive a franchise fee, computed as a percentage of the store's gross sales. The Zapathas would have to pay for the starting inventory, and maintain a minimum stock of saleable merchandise thereafter. They were also responsible for wages of employees, related taxes, and any sales taxes. The termination provision, which is set forth in full in the margin, 4 allowed either party, after twelve months, to terminate the agreement without cause on ninety days' written notice. In the event of termination initiated by it without cause, Dairy Mart agreed to repurchase the saleable merchandise inventory at retail prices, less 20%.
The Dairy Mart representative read and explained the termination provision to Mr. Zapatha. Mr. Zapatha later testified that, while he understood every word in the provision, he had interpreted it to mean that Dairy Mart could terminate the agreement only for cause. The Dairy Mart representative advised Mr. Zapatha to take the agreement to an attorney and said "I would prefer that you did." However, he also told Mr. Zapatha that the terms of the contract were not negotiable. The Zapathas signed the agreement without consulting an attorney. When the Zapathas took charge of the Agawam store, a representative of Dairy Mart worked with them to train them in Dairy Mart's methods of operation.
In 1974, another store became available on Wilbraham Road in Springfield, and the Zapathas elected to surrender the Agawam store. They executed a new franchise agreement, on an identical printed form, relating to the new location.
In November, 1977, Dairy Mart presented a new and more detailed form of "Independent Operator's Agreement" to the Zapathas for execution. Some of the terms were less favorable to the store operator than those of the earlier form of agreement. 5 Mr. Zapatha told representatives of Dairy Mart that he was content with the existing contract and had decided not to sign the new agreement. On January 20, 1978, Dairy Mart gave written notice to the Zapathas that their contract was being terminated effective in ninety days. The termination notice stated that Dairy Mart "remains available to enter into discussions with you with respect to entering into a new Independent Operator's Agreement; however, there is no assurance that Dairy Mart will enter into a new Agreement with you, or even if entered into, what terms such Agreement will contain." The notice also indicated that Dairy Mart was prepared to purchase the Zapathas' saleable inventory.
The judge found that Dairy Mart terminated the agreement solely because the Zapathas refused to sign the new agreement. He further found that, but for this one act, Dairy Mart did not behave in an unconscionable manner, in bad faith, or in disregard of its representations. There is no evidence that the Zapathas undertook to discuss a compromise of the differences that led to the notice of termination.
On these basic facts, the judge ruled that the franchise agreement was subject to the sales article of the Uniform Commercial Code (G.L. c. 106, art. 2) and, even if it were not, the principles of unconscionability and good faith expressed in that article applied to the franchise agreement by analogy. He further ruled that (1) the termination provision of the agreement was unconscionable because it authorized termination without cause, (2) the termination without cause violated Dairy Mart's obligation of good faith, and (3) the termination constituted "an unfair method of competition and unfair and deceptive act within the meaning of G.L. c. 93A, § 2."
1. We consider first the question whether the franchise agreement involves a "transaction in goods" within the meaning of those words in article two of the Uniform Commercial Code (), and that consequently the provisions of the sales articles of the Uniform Commercial Code govern the relationship between the parties. The Zapathas point specifically to the authority of a court to refuse to enforce "any clause of the contract" that the court finds "to have been unconscionable at the time it was made." G.L. c. 106, § 2-302, as appearing in St.1957, c. 765, § 1. 6 They point additionally to the obligation of good faith in the performance and enforcement of a contract imposed by G.L. c. 106, § 1-203, and to the specialized definition of "good faith" in the sales article as meaning "in the case of a merchant . . . honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." G.L. c. 106, § 2-103(1)(b), as appearing in St.1957, c. 765, § 1. 7
We need not pause long over the question whether the franchise agreement and the relationship of the parties involved a transaction in goods. Certainly, the agreement required the plaintiffs to purchase goods from Dairy Mart. "Goods" for the purpose of the sales article means generally "all things . . . which are movable." G.L. c. 106, § 2-105(1), as appearing in St.1957, c. 765, § 1. However, the franchise agreement dealt with many subjects unrelated to the sale of goods by Dairy Mart. 8 About 70% of the goods the plaintiffs sold were not purchased from Dairy Mart. Dairy Mart's profit was intended to come from the franchise fee and not from the sale of items to its franchisees. Thus, the sale of goods by Dairy Mart to the Zapathas was, in a commercial sense, a minor aspect of the entire relationship. 9 We would be disinclined to import automatically all the provisions of the sales article into a relationship involving a variety of subjects other than the sale of goods, merely because the contract dealt in part with the sale of goods. Similarly, we would not be inclined to apply the sales article only to aspects of the agreement that concerned goods. Different principles of law might then govern separate portions of the same agreement with possibly inconsistent and unsatisfactory consequences.
We view the legislative statements of policy concerning good faith and unconscionability as fairly applicable to all aspects of the franchise agreement, not by subjecting the franchise relationship to the provisions of the sales article but rather by applying the stated principles by analogy. See Commonwealth v. DeCotis, 366 Mass. 234, 242, 316 N.E.2d 748 (1974), quoted in note 12 infra. This basic common law approach, applied to statutory statements of policy, permits a selective application of those principles expressed in a statute that reasonably should govern situations to which the statute does not apply explicitly. See Note, Article Two of the Uniform Commercial Code and Franchise Distribution Agreements, 1969 Duke L.J. 959, 980-985.
2. We consider first the plaintiffs' argument that the termination clause of the franchise agreement, authorizing...
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