381 Mass. 284

Supreme Judicial Court of Massachusetts, Hampden.

Elaine ZAPATHA et al.¹

v.

DAIRY MART, INC.

Argued April 10, 1980. | Decided Aug. 5, 1980.

 

Opinion

WILKINS, Justice.

 

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 [trial] 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,…

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. […]  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.

We consider first the plaintiffs’ argument that the termination clause of the franchise agreement, authorizing Dairy Mart to terminate the agreement without cause, on ninety days’ notice, was unconscionable by the standards expressed in G.L. c. 106, s 2-302.¹⁰ The same standards are set forth in Restatement (Second) of Contracts s 234 (Tent. Drafts Nos. 1-7, 1973). The issue is one of law for the court, and the test is to be made as of the time the contract was made. […] In measuring the unconscionability of the termination provision, the fact that the law imposes an obligation of good faith on Dairy Mart in its performance under the agreement should be weighed..

The official comment to s 2-302 states that “(t)he basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. . . . The principle is one of prevention of oppression and unfair surprise . . . and not of disturbance of allocation of risks because of superior bargaining power.” […] This court has not had occasion to consider in any detail the meaning of the word “unconscionable” in s 2-302.¹² Because there is no clear, all-purpose definition of “unconscionable,” nor could there be, unconscionability must be determined on a case by case basis, […]  giving particular attention to whether, at the time of the execution of the agreement, the contract provision could result in unfair surprise and was oppressive to the allegedly disadvantaged party.

We start with a recognition that the Uniform Commercial Code itself implies that a contract provision allowing termination without cause is not per se unconscionable. See Corenswet, Inc. v. Amana Refrigeration, Inc., 594 F.2d 129, 138 (5th Cir. 1979) (“We seriously doubt, however, that public policy frowns on any and all contract clauses permitting termination without cause.”); […] Section 2-309(3) provides that “(t)ermination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.” G.L. c. 106, s 2-309, as appearing in St.1957, c. 765, s 1. This language implies that termination of a sales contract without agreed “cause” is authorized by the Code, provided reasonable notice is given. […] There is no suggestion that the ninety days’ notice provided in the Dairy Mart franchise agreement was unreasonable.

We find no potential for unfair surprise to the Zapathas in the provision allowing termination without cause. We view the question of unfair surprise as focused on the circumstances under which the agreement was entered into. The termination provision was neither obscurely worded, nor buried in fine print in the contract. […] The provision was specifically pointed out to Mr. Zapatha before it was signed; Mr. Zapatha testified that he thought the provision was “straightforward,” and he declined the opportunity to take the agreement to a lawyer for advice. The Zapathas had ample opportunity to consider the agreement before they signed it.¹⁴ Significantly, the subject of loss of employment was paramount in Mr. Zapatha’s mind. He testified that he had held responsible jobs in one company from 1952 to 1973, that he had lost his employment, and that he “was looking for something that had a certain amount of security; something that was stable and something I could call my own.” We conclude that a person of Mr. Zapatha’s business experience and education should not have been surprised by the termination provision and, if in fact he was, there was no element of unfairness in the inclusion of that provision in the agreement. […]

We further conclude that there was no oppression in the inclusion of a termination clause in the franchise agreement. We view the question of oppression as directed to the substantive fairness to the parties of permitting the termination provisions to operate as written. The Zapathas took over a going business on premises provided by Dairy Mart, using equipment furnished by Dairy Mart. As an investment, the Zapathas had only to purchase the inventory of goods to be sold but, as Dairy Mart concedes, on termination by it without cause Dairy Mart was obliged to repurchase all the Zapathas’ saleable merchandise inventory, including items not purchased from Dairy Mart, at 80% of its retail value. There was no potential for forfeiture or loss of investment. There is no question here of a need for a reasonable time to recoup the franchisees’ initial investment. […] The Zapathas were entitled to their net profits through the entire term of the agreement. They failed to sustain their burden of showing that the agreement allocated the risks and benefits connected with termination in an unreasonably disproportionate way and that the termination provision was not reasonably related to legitimate commercial needs of Dairy Mart. […] To find the termination clause oppressive merely because it did not require cause for termination would be to establish an unwarranted barrier to the use of termination at will clauses in contracts in this Commonwealth, where each party received the anticipated and bargained for consideration during the full term of the agreement.

[…]

Judgments reversed.