Zapatha v. Dairy Mart, Inc.

Supreme Judicial Court of Massachusetts · 1980 · Contracts

408 N.E.2d 1370 (1980)

Updated July 26, 2026

Contractsfranchise agreementtermination without causeunconscionabilitygood faithG.L. c. 93AUCC by analogyunfair surprise

Facts

The parties' franchise agreement allowed either party, after twelve months, to terminate without cause on ninety days' written notice, and required Dairy Mart, if it terminated without cause, to repurchase the franchisees' saleable inventory at retail less 20%. Before signing, Dairy Mart's representative read and explained the termination clause to Mr. Zapatha, advised him to take the agreement to a lawyer, and told him the terms were nonnegotiable; the Zapathas signed without consulting counsel and later signed an identical agreement for a different store. After the Zapathas refused to sign a new, less favorable franchise form, Dairy Mart gave ninety days' written notice terminating the existing agreement and offered to purchase their saleable inventory. The trial judge found Dairy Mart terminated solely because the Zapathas refused the new agreement, but also found no unconscionable behavior, bad faith, or disregard of representations apart from that act.

Issue

Was the franchise agreement's provision permitting Dairy Mart to terminate without cause on ninety days' notice unconscionable or otherwise unenforceable, and did Dairy Mart's use of that clause to terminate after the Zapathas refused a new agreement constitute bad faith or an unfair or deceptive act under G. L. c. 93A?

Rule

A franchise agreement that is not predominantly a transaction in goods is not governed by UCC Article 2, but the statutory policies of unconscionability and good faith may be applied by analogy. Unconscionability is a question of law determined as of the time the contract was made, with particular attention to whether the clause created unfair surprise and was oppressive to the disadvantaged party; a termination-without-cause clause is not per se unconscionable if reasonable notice is given. Good faith, as used by analogy from the sales article, requires honesty in fact and observance of reasonable commercial standards of fair dealing in the trade, and a plainly disclosed exercise of an express termination right for an openly stated reason is not bad faith absent dishonesty or proof of unfair trade standards.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Columbus, Ohio, Nora Patel signs an agreement with Riverbend Market Systems to operate a branded neighborhood store. The company licenses its trademark and operating methods, provides the premises and equipment, and earns money mainly from a percentage franchise fee, while Nora buys only a small portion of store inventory from the company.

If Nora challenges a termination clause, which is the best characterization of how a court should treat Article 2 of the UCC under the majority's approach?

Explanation. The majority held that where the essential thrust of the agreement is an exchange of intangible rights, obligations, and services rather than the sale of goods, Article 2 does not directly apply. But the court may selectively apply the Code's policies on unconscionability and good faith by analogy.