Burger King v Family Dining
U.S. D. Ct. 566 F 2d 1168 [1977]
Author: Sam Biers

Forfeiture as an Excuse

Relevant Facts: PL, BK, a Fl corp was founded by McLamore, who was a college friend of Carl Ferris, owner of Df PA corp, Family Dining.  The parties entered into a franchise agreement whereby BK licensed Df to operate under BK’s name.  The period of 90 years and territorial exclusivity was conditioned upon Df opening, building 10 franchises in as many years, and maintaining all ten for the 90 year period.  The first three went ahead on schedule, but the fourth did not.  The parties entered into a Modification, where BK waived Df’s failure to comply w/ the development rate. If the 4^th and 5^th were nearly in compliance BK agreed to overlook the year in default.  Then the opening of the 6^th was given a one month extension.  The 7^th opened, and after BK’s exercise in discretion related to site location the 8^th  went ahead, but the 9^th and 10^th had not been opened or were under construction. Pl and Df corresponded several times in an attempt to negotiate, but BK wouldn’t budge on the exclusivity and BK then terminated their agreement.

Legal Issue(s): Whether BK was entitled to have the condition protecting its promise strictly enforced; Whether giving strict effect to the termination provision which would involve divesting the Family Dining of territorial exclusivity, would amount to a forfeiture?

Court’s Holding: No, Yes.

Procedure: BK  filed suit seeking declaration that a territorial exclusivity agreement between it and a franchisee, by its own terms, was no longer of any force and effect. TRO was granted to BK. Bench trial, on the Df's motion for involuntary dismissal; Granted.

Law or Rule(s): Where the words of a K raise no duty in and of themselves, but rather modify or limit the promisees’ right to enforce the promise, such words are considered a condition. A condition may be excused w/o other reason if its requirement - a) will involve extreme forfeiture, or penalty, AND b) its existence or occurrence forms no essential part of the exchange for the promisor’s performance.

Court Rationale: A careful reading of the K indicates that it raises no duties in Family Dining. Failure to comply w/ the development rate operates to defeat liability on BK’s promise of exclusivity.  The hiatus in development is not fully chargeable to Df.  BK is not entitled to have the condition protecting its promise strictly enforced.  Early on BK was concerned w/ development of a territory than exact compliance.  There was no evidence it considered literal performance to be critical.  After realizing the territory could support more than 10 franchises BK’s attitude changed. If the right of exclusivity were to be extinguished by termination it would constitute a forfeiture. IF Family Dining were forced to forfeit the right of exclusivity it would lose something of incalculable value based on its investment of time and money developing the area, the significant risks assumed and the fact that there remains 76 years of exclusivity.   The termination of the Territorial Agreement would result in an extreme forfeiture to Df.

Plaintiff’s Argument: Since Family Dining failed to perform its promises to construct and open 10 franchises w/i 10 years the contract should be legally terminated. DF did not earn exclusivity past the 9^th year and should forfeit anything in which it has an interest.

Defendant’s Argument: The Territorial Agreement should not be terminated because it would result in a forfeiture to Family Dining.  Pl has not asserted any relief other than termination.

Issues as presented to the court:

The requirement that the Family open ten new restaurants during the first ten years of the agreement was a condition subsequent rather than a promise on the part of the Family Dining.

The contract was intended to be entire rather than severable.

The BK was not entitled to have the condition protecting its promise strictly enforced.

Giving strict effect to the termination provision which would involve divesting the Family Dining of territorial exclusivity, would amount to a forfeiture.

Development rate imposed by agreement was not promise by Family but was, rather, condition subsequent, failure of which operated to defeat liability on BK's promise of exclusivity, or to divest Family Dining of its right to enforce promise.

Provision terminating agreement which granted restaurant franchisee 90 years' territorial exclusivity upon failure of condition subsequent that franchisee develop and operate ten new restaurants in first ten years of agreement would not be given strict effect where, throughout early duration of contract, franchisor was more concerned with general development of territory than with exact compliance with terms of development rate, where there was no evidence that failure to fulfill time feature of provision was result of intentional or negligent conduct on part of franchisee and where if franchisee were forced to forfeit right of exclusivity it would lose something of incalculable value in that it had developed area to point where ten restaurants were in operation; considerations of fairness and equitable principles would not permit termination of agreement which would result in extreme forfeiture to franchisee. Agreement entered May 1963

1^st — Aug 1963

2^nd — July 1965

3^rd ----Oct 1966

4^th ----July 1968

5^th ----Oct 1968

6^th ----Oct 1969

7^th ----Feb 1970

8^th ----Oct 1970

9^th —Sept 1974

10^th ---- Proposed Feb 1975 opened March 1975