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6-07.VYLENE [impl. covenant to negotiate franchise renewal].doc

giving timely notice, to extend the franchise agreement "on terms and conditions to be negotiated within said sixty (60) days."   Thus, although the terms of the renewal provision did not give Vylene a guaranteed right to renew on a determinable basis, the provision obligated Naugles to negotiate in good faith concerning the terms and conditions of a renewal. See Dayton Time Lock Service, Inc. v. Silent Watchman Corp., 52 Cal.App.3d 1, 124 Cal.Rptr. 678 (1975) (holding *1477 that the implied covenant of good faith and fair dealing applies with equal vigor to franchise agreements).

The bankruptcy court held an evidentiary hearing and found that Naugles failed to conduct good faith negotiations concerning the renewal of the 1975 franchise agreement.   After Vylene notified Naugles of its intent to renew, Naugles offered Vylene a new, different franchise agreement.   The bankruptcy court held that Naugles' offer of a new and different franchise agreement did not discharge Naugles' obligation to bargain in good faith on the terms and conditions of a renewal or extension of the existing franchise.   Moreover, the court found that the proposed new franchise agreement was commercially unreasonable and that Naugles knew or should have known Vylene would reject it.   The proposed new franchise agreement was the same agreement Naugles presented to Vylene in 1983, which Vylene rejected because it found the terms to be commercially unreasonable.   Thus, the bankruptcy court found that Naugles breached its contract with Vylene in failing to negotiate in good faith concerning the extension or renewal of the Vylene franchise for an additional eight-year term.

The bankruptcy court's findings of fact are supported by the record.

Marketing Territory

[6] It is undisputed that neither the bankruptcy court nor the district court found that Vylene had exclusive territory under the franchise agreement.   In Eichman v. Fotomat Corp., 880 F.2d 149, 164 (9th Cir.1989), we held, "[W]here there is no express grant of an exclusive territory in a contract or franchise agreement, none will be impliedly read into the contract."   Notwithstanding, under California law, all contracts have an implied covenant of good faith and fair dealing.  Harm v. Frasher, 181 Cal.App.2d 405, 417, 5 Cal.Rptr. 367 (1960).

[7] In this case, the bankruptcy court determined that Naugles breached the covenant of good faith and fair dealing by constructing a competing restaurant within a mile and

Seg. 6, item 7 (2007)

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