Emory Corporate Governance and Accountability Review
The Doctrine of Implied Honesty in Contract: Is Neither a Slippery Slope nor a "New Vista" of Contract Nullification That Should Concern Businesses or Franchisors
In the fourteen years since the New York Law Journal published Franchising: LJL Transportation, Contract Nullification by Franchisor, the sky has not fallen nor has the concept of honesty in contract slipped down any slope that threatens contract law generally or franchise systems, specifically. Time has proven the critic, the criticism, and any consternation for the franchise termination opinion in LJL Transportation, Inc. v. Pilot Air Freight Corp. and the implied honesty in contract doctrine to be wrong. One franchise contracts treatise embraces and cites the LJL case for the proposition that “[h]iding revenue from the franchisor in order to avoid paying royalties, which conduct is in breach of the franchise agreement, does not entitle a franchisee to an absolute right to cure its breach prior to termination of the agreement.” In other words, franchisors are permitted to immediately terminate—and are not otherwise required to adhere to cure periods in franchise agreements—when the franchisee commits acts of dishonesty that go to the heart of the business relationship, like paying royalties. Conceptually, there is no reason that this implied honesty in contract concept cannot be applied to permit immediate termination of non-franchise contracts containing cure periods where the breaches arise from severe acts of dishonesty by the breaching party. In LJL, an intermediate Pennsylvania appellate court held that “there are circumstances where the nature of the breach permits the aggrieved party to immediately terminate the contract despite a ‘cure’ provision” and affirmed a franchisor’s immediate termination of a franchise agreement for breach of an implied honesty obligation, even though the franchisor failed to abide by the franchise agreement’s cure provision. Thus, LJL and the decisions it cited imposed an implied honesty obligation in contract performance that superseded any “cure” right. Analyzing the LJL decision’s impact, this author suggested that the implied honesty obligation would be beneficial to franchisors, while a critic suggested that it represented a “new vista” of contract nullification that would be neither beneficial to contract law, generally, nor franchise systems, specifically.
John J. Jacko III,
The Doctrine of Implied Honesty in Contract: Is Neither a Slippery Slope nor a "New Vista" of Contract Nullification That Should Concern Businesses or Franchisors,
Emory Corp. Governance & Accountability Rev.
Available at: https://scholarlycommons.law.emory.edu/ecgar/vol8/iss1/3