Opinion ID: 2332010
Heading Depth: 2
Heading Rank: 2

Heading: Terminating The Franchise Relationship

Text: The writing provides Arco the right to terminate the lease should Razumic abandon the premises or close them for a period of seventy-two hours. Razumic's negligence or willful misconduct causing damages to a substantial portion of the premises gives Arco the right to terminate this lease without liability. Razumic's failure to make timely payment of rent, his death or insolvency, or governmental taking also permit Arco to terminate the lease. Further, Razumic's fail[ure] to comply with any of his other obligations set forth in the writing permits Arco to terminate the agreement if Razumic fails to remedy the situation after fifteen days' notice of non-compliance. The writing does not, however, contain any provision granting Arco the right to terminate the franchise agreement at will. In view of the provisions authorizing Arco to terminate the parties' franchise agreement for limited, business reasons and an additional provision authorizing Razumic, upon giving at least sixty days advance written notice, to terminate the agreement without reason upon the anniversary of a term where the stated term exceeds one year, the absence of a similar term authorizing Arco to terminate the agreement without reason is striking. [7] The lone provision of the writing which could support Arco's termination of the comprehensive franchise agreement is that setting a three year term of occupancy. This provision does not, however, confer upon Arco the right to terminate the franchise agreement at its pleasure. When the motoring public stops at an Arco service station such as the one operated by Razumic for over twenty years, Arco hopes that the dealer will provide service that will be remembered favorably and produce continued patronage at not only that particular station but wherever motorists see the Arco sign. See generally Treece, Trademark Licensing And Vertical Restraints In Franchising Arrangements, 116 U.Pa.L.Rev. 435, 436-39 (1968). Correspondingly, Arco here has over the years sought every assurance from Razumic that he will use his best efforts in selling, displaying, promoting, and merchandising Arco products and attracting, serving, and satisfying Arco customers. An Arco dealer has his own expectations. He knows that his good service will in many instances produce regular customers. He also realizes, however, that much of his trade will be attracted because his station offers the products, services, and promotions of the well-established and well-displayed name Arco. Unlike a tenant pursuing his own interests while occupying a landlord's property, a franchisee such as Razumic builds the goodwill of both his own business and Arco. In exchange, an Arco dealer such as Razumic can justifiably expect that his time, effort, and other investments promoting the goodwill of Arco will not be destroyed as a result of Arco's arbitrary decision to terminate their franchise relationship. Consistent with these reasonable expectations, and Arco's obligation to deal with its franchisees in good faith and in a commercially reasonable manner, [7a] Arco cannot arbitrarily sever its franchise relationship with Razumic. A contrary conclusion would allow Arco to reap the benefits of its franchisees' efforts in promoting the goodwill of its name without regard for the franchisees' interests. The weight of commentary has argued in favor of judicial recognition that the nature of a franchise agreement imposes a duty upon franchisors not to act arbitrarily in terminating the franchise agreement. E.g., Gellhorn, Limitations on Contract Termination Rights  Franchise Cancellations, 1967 Duke L.J. 465; C. Hewitt, Good Faith or Unconscionability  Franchisee Remedies For Termination, 29 Bus.Law. 227 (1973). The Supreme Court of Utah has concluded that where parties to a chain-style franchise agreement do not expressly provide for termination of a franchise agreement without cause, it is reasonable to presume that the franchisor agrees not to terminate the franchisee's tenure arbitrarily. Seegmiller v. Western Men, Inc., 20 Utah 2d 352, 437 P.2d 892 (1968). The Supreme Court of New Jersey has held that the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1 et seq., proscribing a franchisor's termination of franchise agreements except for just cause, embodies policies in existence before the effective date of the Act, and therefore implied a covenant of renewal in an agreement predating the Act. Shell Oil Co. v. Marinello, 63 N.J. 402, 307 A.2d 598 (1973). See generally, 62 Am.Jur.2d, Private Franchise Contracts § 12 (1972); Friedman, Leases § 14.1 n.1 (1974 and Supp. 1977). The Supreme Court of Appeals of West Virginia has held unenforceable a provision of a writing authorizing a petroleum supplier to terminate its dealer agreement when, in the supplier's sole judgment, the dealer has engaged in practices impairing the goodwill of the supplier. Ashland Oil, Inc. v. Donahue, W.Va., 223 S.E.2d 433 (1976). [8] Our judgment is consistent with not only this current authority, but also that of the Legislature. The Act of November 26, 1975, P.L. 454, §§ 1 et seq., 73 P.S. §§ 202-1 et seq. (Supp. 1978), prohibits suppliers of petroleum products from cancelling, terminating, or failing to renew agreements with dealers except in very limited, business-related situations. Id., § 3(b), 73 P.S. § 202-3(b). [9] Section 3(d), 73 P.S. § 202-3(d), expressly proscribes cancellations based on enumerated considerations. [10] The Act further bars a dealer's relinquishment of the rights provided in the Act as a condition to formation of a supplier and dealer agreement, id., § 4(1), 73 P.S. § 202-4(1), and prohibits terms or conditions in such agreements contrary to the Act, id., § 4(5), 73 P.S. § 202-4(5). Even though the provisions of the Act are not expressly applicable to the agreement between Razumic and Arco, see id., § 5, 73 P.S. § 202-5 (Act effective February, 1976), the statute embodies sound and beneficial legislative judgments which reflect both the expectations and obligations inherent in this franchise relationship. See Shell Oil Co. v. Marinello, supra (New Jersey Franchise Practices Act embodies policies predating Act); see generally, e.g., W. Schaefer, Precedent and Policy, 34 U.Chi.L.Rev. 3 (1966). [11] For the above reasons, the writing's leasehold terminology stating a three year term of occupancy does not govern the duration of the comprehensive contractual business relationship between Razumic and Arco. Rather, the language establishes a right of occupancy which the franchisee Razumic can reasonably expect will not be abruptly halted. Consistent with Razumic's reasonable expectations, principles of good faith and commercial reasonableness, Arco may not arbitrarily recover possession of the service station and thereby summarily terminate the franchise relationship. Accordingly, the trial court erred in directing a verdict authorizing Arco to take possession of the service station property and we therefore grant Razumic a new trial. [12]