Course of Performance: Modification of the Franchise Agreement

When Actions Speak Louder Than Written Words — A Look at Franchise Agreement Modifications because of “Course of Performance”

Course of Performance and Franchise Agreement ModificationsSometimes, when the relationship between a franchisor and a franchisee has evolved in a fashion that differs from the obligations of the parties as described in the franchise agreement, the written agreement may be said to have been modified by the parties’ course of performance. This is true even if the agreement states that all modifications must be in writing and signed by the parties.

Despite often used express provisions in franchise agreements stating that the agreement can only be modified in writing, it is generally accepted that, unless a contract is one required by law to be in writing, the contract can be modified orally or through course of performance.   Where an agreement that has been orally modified has been acted upon, most courts hold that the rights of the parties are to be determined by the modified agreement.

For example, in Ralph’s Distributing Company v. AMF, Inc., an Eighth Circuit Court of Appeals case involving a snowmobile distributor, the distributor was successfully able to argue that even though the franchise agreement did not specifically grant the distributor an exclusive territory, the franchise agreement had been subsequently modified to provide for an exclusive territory. Evidence that indicated a modification through course of performance included the fact that the distributor expended substantial funds on racing and other promotional activities with the expectation that neither the manufacturer nor other distributors would sell snowmobiles in its exclusive territory. Additionally, three manufacturer employees testified that once the manufacturer designated a distributor for a territory, the company would not assign other distributors to the same area; in such circumstance, the designated distributor was entitled to proceed in reliance that the manufacturer would not assign other distributors to his sales market.

In another case, Maintainco, Inc. v. Mitsubishi Caterpillar Forklift Am., Inc., a New Jersey court held that the course of dealing between a dealer and distributor had established an exclusive territory, despite the fact that language in the franchise agreement failed to explicitly grant the distributor an exclusive territory. The court held that because Mitsubishi’s universal practice nationwide was to grant exclusive territories, the distributor was entitled to an exclusive territory.

In a 2002 Tenth Circuit case, Haynes Trane Service Agency, Inc. v. American Standard, Inc., the court found that an at will termination provision in the parties’ franchise agreement had been modified to require good cause for termination because the stated policy of the franchisor was to terminate franchisees only when good cause existed. In that case, a franchisor official testified that he had interpreted franchise agreements to require good cause for termination and that he was unaware of any occasion in the past where the company had terminated a franchise agreement without cause.

A strict interpretation of the written franchise agreement often favors the franchisor when disputes arise in a franchise relationship. However, as demonstrated by the above examples, legal protections available to franchisees will often balance the scale—or even tip it in the franchisee’s favor. If, as sometimes occurs, the ongoing relationship between the franchisor and franchisee deviates from the obligations of the parties set forth in the written franchise agreement, and the franchisor then attempts to repudiate its historical pattern of conduct and points to language in the contract, a franchisee who understands the protections available may be able to obtain an edge in the dispute, thus retaining the modified terms.

If you feel that you may have rights to assert due to your franchisor’s modification of the franchise agreement by course of performance, or have any other franchise related law issue, please contact Dady & Gardner.