Franchise Termination. In 1981 the Huangs entered into a franchise agreement with Holiday Inns, Inc, under which the Huangs agreed to adhere to the quality standards established by Holiday Inns and to comply in every respect with the Holiday Inns

Question

Standards Manual. In November of 1983, the district director of Holiday Inns made a courtesy inspection that revealed cracked windows, damaged and discolored walls, inoperative smoke detectors, and numerous other indications that the Huangs were not maintaining the established Holiday Inn quality standards in accordance with the franchise agreement. A formal inspection in February of 1984 revealed no significant improvement in quality standards, and the hotel was given an official rating of "unacceptable." The Huangs, who had been given detailed reports concerning the findings of both inspections, were advised that if the noted deficiencies were not remedied within sixty days, Holiday Inns would have grounds to terminate the franchise. When an inspection in April of 1984 revealed that the deficiencies had not been cured, Holiday Inns notified the Huangs that the franchise would be terminated on July 30 unless the deficiencies were remedied by June 28. The Huangs, who in May had begun renovations on the hotel costing $55,000, requested a ninety-day extension to the June 28 deadline, which Holiday Inns refused to grant. The Huangs then petitioned the court for a preliminary injunction against Holiday Inns' termination of the franchise, claiming that Holiday Inns had acted "capriciously and arbitrarily" by (1) not stating precisely the nature of the deficiencies and what was required to make repairs and improvements and (2) not giving the Huangs a reason-able time in which to remedy the deficiencies. Discuss fully whether Holiday Inns should be enjoined from terminating the franchise, given these circumstances.

Answer 1

Franchise termination
The court denied the Huangs' application for a preliminary injunction on the ground that the evidence did not indicate that Holiday Inns had acted in an "arbitrary and capricious manner" in terminating the franchise. The court held that, on the contrary, Holiday Inns' decision to terminate was based on good cause. The Huangs had been given a detailed description in November of 1983 of deficiencies that would have to be corrected in order to maintain the franchise. The court deemed that the Huangs were thus given a total of seven months to make the necessary repairs, and there was no evidence to indicate that the repairs could not have been made during this period of time. Furthermore, during each inspection, the Huangs were invited to tour the building with the inspector, and, following the notifications concerning the results of each inspection, the Huangs had been invited to challenge the findings or request assistance from Holiday Inns if the findings were insufficiently clear. The Huangs never questioned Holiday Inns about the inspection results, and the court found the description of the deficiencies in the Holiday Inn reports to be sufficiently detailed and clear. The court thus concluded that "the evidence indicates that the defendant's conduct . . . was entirely reasonable. . . . Given plaintiffs' admitted breach of the License Agreement, the ample notice provided to plaintiffs by defendant of the breach and of termination, and the absence of any evidence of bad faith on the part of the defendant, the Court concludes that there is virtually no possibility that the defendant . . . terminated plaintiffs' franchise in an arbitrary or capricious manner or without good cause."