Burger King Corp. v. Family Dining, Inc.
426 F.Supp. 485 (1977)
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Rule of Law:
A party that has repeatedly waived a contract's time-sensitive condition cannot suddenly enforce that condition to terminate the agreement if the condition is not an essential part of the bargain and termination would result in an extreme forfeiture for the other party.
Facts:
- On May 10, 1963, Burger King and Family Dining entered into a 90-year Territorial Agreement granting Family Dining exclusive rights to open restaurants in Bucks and Montgomery Counties, Pennsylvania.
- The agreement required Family Dining to open one new restaurant each year for the first ten years to maintain exclusivity.
- By April 1968, Family Dining had failed to meet the development schedule for its fourth and fifth restaurants.
- On May 1, 1968, Burger King formally agreed to waive Family Dining's failure to comply with the development rate.
- In April 1969, Burger King granted another extension for the sixth restaurant, with Burger King's founder noting he would not 'call a default of this agreement on a technicality.'
- In April 1972, with Family Dining again behind schedule for its ninth restaurant, Burger King's founder indicated that because Family Dining was developing other sites, it had 'substantially' met the requirements.
- As of May 10, 1973, the deadline for the tenth restaurant, neither the ninth nor the tenth restaurant had been opened or was under active construction.
- In November 1973, after a period of ambiguous communications and a change in Burger King's corporate leadership, Burger King for the first time clearly communicated to Family Dining that it considered the Territorial Agreement terminated.
Procedural Posture:
- Burger King Corporation filed a complaint against Family Dining, Inc. in the U.S. District Court for the Eastern District of Pennsylvania.
- Burger King initially sought to enjoin Family Dining's use of its trademarks at a new restaurant.
- The parties reached an agreement allowing the restaurant to use the trademarks, and Burger King filed an amended complaint.
- Burger King's amended complaint sought a declaratory judgment from the court that the Territorial Agreement was terminated.
- The case was tried before the court sitting without a jury.
- At the close of the plaintiff's (Burger King's) case, the defendant (Family Dining) moved for an involuntary dismissal under Rule 41(b).
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Issue:
Does a franchisee's failure to strictly comply with a development schedule terminate a long-term exclusive territorial agreement when the franchisor has previously waived similar delays and termination would cause the franchisee to suffer a significant forfeiture?
Opinions:
Majority - Hannum, District Judge
No. A failure to strictly comply with the development schedule does not terminate the agreement under these circumstances. The court will not enforce a termination clause where a party has established a course of conduct of waiving strict compliance and where enforcement would result in an extreme forfeiture to the other party. The court reasoned that the development schedule was a condition subsequent, not a core promise, and Burger King's repeated waivers indicated that literal performance was not required. After establishing this pattern, Burger King could not suddenly demand strict compliance without providing reasonable notice. Furthermore, enforcing the termination would cause Family Dining to forfeit its 90-year right of exclusivity—a loss of incalculable value—which would be an extreme penalty for a non-essential delay that caused relatively minor, definable harm to Burger King. Applying the Restatement of Contracts § 302, the court excused the condition because its enforcement would cause an extreme forfeiture and the condition itself was not an essential part of the exchange.
Analysis:
This case is a classic example of how courts apply equitable principles, such as waiver and avoidance of forfeiture, to prevent an unjust outcome from the strict enforcement of contract terms. The decision establishes that a party's course of performance can override the express language of a condition, especially in long-term relational contracts like franchises. It puts parties on notice that they cannot acquiesce to non-compliance for years and then seize upon a later, similar breach to terminate a valuable agreement, particularly when the breach is not material and the resulting penalty would be disproportionately severe. This precedent reinforces the idea that fairness and the parties' actual conduct can be as important as the written words of their contract.
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