The implied covenant of good faith and fair dealing "in and of itself" does not require "good cause" for termination of a franchise contract.
The supplier had terminated its agreement with the distributor by giving the proper notice as provided for in their master distribution agreement but without stating any reason for termination. The distributor argued that the implied covenant of good faith and fair dealing inherent in every contract mandated that early termination of a distribution agreement be restricted to reasons constituting "good cause." The distributor also argued because it was a small distributor and the supplier a large supplier, the contractual relationship between them had to be viewed as an unequal one. The trial court dismissed the action on summary judgment.
Does the implied covenant of good faith and fair dealing inherent in every contract require that a termination-at-will clause in a distribution agreement be interpreted to require "good cause?"
The court declined to declare a public policy absent some prior legislative or judicial expression on the subject. Based on Arizona common law as well as the reasoning of the jurisdictions in other states, and absent any evidence of bad faith or violation of public policy in enforcing the termination clause, the court concluded that the supplier was entitled to summary judgment in its favor on the wrongful termination claim. Bad faith could not be evidenced in their distribution agreement simply from a "no cause" termination in accordance with the explicit terms of the contract.