Tuesday, November 25, 2008

Failure to Meet Construction Deadlines Was Cause for Termination of Dealership

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A motor vehicle manufacturer had "good cause" under the meaning of the Massachusetts motor vehicle dealership law to terminate a dealership for its failure to meet the interim facility construction deadlines in their letter of intent, the U.S. Court of Appeals in Boston has held. An earlier ruling by a federal district court (CCH Business Franchise Guide ¶13,867), was affirmed.

Under the parties' letter of intent, if the dealer met certain benchmarks, it would receive a temporary dealership agreement that would terminate if the dealer did not timely construct a new facility.

The dealer met the first of the benchmarks in the letter of intent and received a temporary dealership agreement. However, it failed to meet subsequent deadlines and never constructed the new facility. Based on this failure, the manufacturer subsequently terminated the dealership. The dealer brought suit, contesting the validity of the termination and seeking damages and injunctive relief.

Statutory Cause for Termination

The manufacturer demonstrated good cause for termination under two sections of the Massachusetts motor vehicle dealership law—Mass. Gen. Laws ch. 93B §5(h) and (j): (1) a section specifying that good cause existed for material breach of a facility requirement; and (2) a section listing six specific factors to be considered in a determination of good cause, including the amount of business transacted by the dealer and the public welfare, the court decided.

The dealer's argument that its failure to perform was excused by the manufacturer's failure to approve the dealer's preliminary construction plans in writing was without merit. The owner of the dealer admitted at a deposition that the plans did come back approved by the manufacturer and that the dealer's failure to perform was due to the owner's "lost focus" rather than the manufacturer's failure to approve the plans.

Bad Faith

The dealer’s claim that the manufacturer terminated the agreement in bad faith—in violation of the dealership law, Mass. Gen. Laws ch. 93B§5(m)—was without merit. The dealer failed to demonstrate any bad faith, the court held. The manufacturer merely enforced the terms of the parties’ letter of intent.

Although the dealer might have wished to change the terms of that agreement due to changed market conditions, the parties did not do so. The dealer law was not meant to insulate dealers “from the ordinary flux of pressure and striving that is part of a free economy,” according to the court.

Opportunity to Cure

A further claim that the manufacturer failed to offer the dealer an opportunity to cure its breaches of the letter of intent prior to termination—as required by the dealer law, Mass. Gen. Laws ch. 93B§5(h)—was rejected by the court. The undisputed facts showed that the manufacturer repeatedly offer the dealer reasonable opportunities to cure. Indeed, the evidence demonstrated that the dealer never complained of a lack of opportunity to cure at the time of the termination.

The November 7 decision is Wagner and Wagner Auto Sales, Inc. v. Land Rover North America, Inc., CCH Business Franchise Guide ¶14,014.

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