What Is Implied Covenant
An implied covenant of good faith and fair dealing is an unwritten legal obligation embedded in every franchise agreement, regardless of what the written contract says. In franchise law, this means the franchisor cannot deliberately act in ways that deprive you of the core benefits of the franchise relationship, even if the written agreement technically allows it.
For example, a franchisor cannot arbitrarily refuse to renew your agreement, sabotage your territory rights, or withhold essential support systems solely to force you out. Courts have consistently ruled that franchisees have recourse against franchisors who violate this duty, even when the franchise agreement itself appears silent on the issue.
How It Applies to Franchise Agreements
When you review the Franchise Disclosure Document (FDD), particularly Item 19 which covers financial performance representations, implied covenant shapes how that data can be used. If a franchisor provided Item 19 earnings claims to support your purchase decision, the implied covenant prevents them from later denying territory support or enforcing fees in ways that make those earnings impossible to achieve.
The covenant also protects your territory rights. If your agreement grants you exclusive territory, the franchisor cannot flood that territory with company-owned locations or online sales channels without violating the implied duty to deal fairly. Similarly, regarding renewal terms, a franchisor must provide reasonable notice and cannot impose dramatically different fee structures at renewal as punishment for prior complaints.
Practical Implications During Due Diligence
- Territory enforcement: Check whether the FDD discloses how the franchisor has handled territory disputes in the past. Implied covenant gives you grounds to challenge boundary violations even if the agreement allows some flexibility.
- Franchise fee structure: Review Item 5 (initial franchise fee) and Item 6 (other recurring fees) for consistency across franchisees in similar markets. Material differences that disadvantage certain franchisees suggest the franchisor may not be dealing fairly.
- Support obligations: If the agreement requires the franchisor to provide training, marketing, or operational support, the implied covenant enforces that promise. Document any failures in writing.
- Renewal negotiations: Request copies of renewal agreements from existing franchisees. If franchisors routinely demand 50% to 100% increases in royalty rates at renewal, this may violate the implied duty to deal fairly, especially if your business performance depends on the original fee structure.
- Dispute resolution preparation: Keep records of how the franchisor treats franchisees differently. Inconsistent enforcement of rules or selective support demonstrates a lack of good faith.
Common Questions
- Can I rely on implied covenant instead of a written contract? No. Implied covenant supplements the written Franchise Agreement, but it cannot override clear contractual terms. You need both a solid written agreement and the protection of implied covenant. If you find gaps or unfavorable terms in the written contract, assume they will be enforced as written.
- What happens if I discover the franchisor violated the implied covenant? You have grounds for a breach of contract claim. Damages can include lost profits, costs of remediation, and sometimes legal fees. However, litigation is expensive and time-consuming. During due diligence, speak with existing franchisees about how the franchisor responds to disputes, and ask a franchise attorney to flag high-risk clauses before you sign.
- Does implied covenant protect me from my own business failures? No. The covenant protects you from franchisor misconduct, not from your own operational mistakes or market conditions beyond anyone's control. The franchisor can enforce performance standards and royalty obligations even if your sales decline.
Related Concepts
- Good Faith - The foundation of implied covenant; the requirement that both franchisor and franchisee act honestly and fairly in contract performance.
- Franchise Agreement - The written contract where implied covenant operates; understanding both the written terms and the unwritten protections is essential to franchisee success.