Zapatha v. Dairy Mart, Inc.

After nearly 20 years at another company, Zapatha (plaintiff) was terminated and became a Dairy Mart (defendant) franchisee in 1973. His franchise agreement let either party terminate without cause after 12 months on 90 days' notice, and required Dairy Mart, if it terminated without cause, to buy back his inventory at 80% of value. Dairy Mart made sure Zapatha read and understood the terms and told him to have a lawyer review it; he chose not to. In 1977 Dairy Mart offered a new agreement with some less favorable terms; Zapatha refused to sign, and Dairy Mart gave 90 days' notice of termination and offered to buy his inventory at 80%. Zapatha sued, claiming the termination clause was unconscionable and that Dairy Mart acted unfairly. The trial court ruled for Zapatha, and Dairy Mart appealed.

Whether a franchise termination-without-cause clause is unconscionable when, at the time of contracting, it created no unfair surprise and was not oppressive, and whether a merchant terminating such an agreement must act in good faith by observing honesty in fact and reasonable commercial standards of fair dealing.