Opinion ID: 2332010
Heading Depth: 1
Heading Rank: 2

Heading: the service station franchise

Text: In his pleadings, at trial, and on appeal to this Court, Razumic has urged that he and Arco were parties to a franchise agreement Arco could not terminate at will. Arco, on the other hand, has contended throughout that the dealership agreement could be terminated for any reason. We agree with Razumic.
The 1970 printed form signed by Arco and Razumic, captioned a DEALER LEASE, identifies Arco as lessor and Razumic lessee, and uses those terms to define the parties' rights and obligations. The instrument sets the term of the lease at three years, requires lessee to pay taxes and various utilities and maintain and keep in good order the leased premises. The printed form provides that lessee's right of possession shall not extend beyond the period of LESSOR'S right thereto. The form also recites that [t]his lease contains the entire agreement of the parties and its execution has not been induced by any representation, understanding, or agreement of any kind other than those herein expressed and cannot be amended except by written instrument duly executed by both parties. Nothing in the writing sets forth the parties' rights and obligations concerning renewal of the agreement. Arco contends the above provisions, coupled with the absence of an express provision governing renewal, demonstrate that the parties contemplated a landlord and tenant relationship, terminable by either party upon expiration of the term of occupancy. See Sterle v. Galiardi Coal & Coke Co., 168 Pa.Super. 254, 77 A.2d 669 (1951) (covenants for continued renewal of leasehold interest will not be inferred); 51C C.J.S. Landlord and Tenant §§ 54 et seq. (1968). To determine an agreement, a writing must be interpreted as a whole, giving effect to all its provisions. Shehadi v. Northeastern Nat. Bk. of Pa., 474 Pa. 232, 378 A.2d 304 (1977); Buchanan v. Brentwood Federal Savings & Loan Ass'n, 457 Pa. 135, 320 A.2d 117 (1974); Restatement (Second) of Contracts § 228(2) (Tent.Draft No. 5, 1970); 4 Williston, Contracts § 618 (3d ed. Jaeger 1961); 3 Corbin, Contracts § 549 (1960). An examination of all the provisions of the writing signed by Razumic and Arco reveals that the parties contemplated an agreement imposing obligations, and conferring rights, beyond those of a lessor-lessee agreement. The writing authorizes Razumic to operate an Atlantic Richfield Service Station. The instrument further provides: [T]he sole purpose and use of the leased premises shall be the lawful, diligent and businesslike operation of a first-class automotive service station retailing petroleum products and TBA merchandise [tires, batteries, and accessories] normally handled at competitive service station outlets. Recognizing that compliance with such authorized purpose and use is essential for the accomplishment of LESSOR'S desire to obtain a fair rental consistent with the reasonable value of the service station business potential of the leased premises, LESSEE agrees that he will use the leased premises only for the purpose and in the manner above designated. Thus, the agreement required Razumic to live up to highest business standards while he served as an Arco dealer. Various provisions of the writing outline the scope of Razumic's and Arco's business venture. The writing fixes rent on the basis of total gallons of fuel sold per month, using LESSOR'S then current FRANCHISE RENT SCHEDULE. The writing requires Razumic to submit a certified, itemized statement showing all information necessary for the proper calculation of the rental and authorizes Arco to audit at all reasonable times Razumic's books and records concerning sale of fuel. The writing prohibits absentee operation and subletting and does not allow Razumic to make any additions, alterations, or improvement to the leased premises nor place, alter, remove, deface, or obliterate any signs, trademarks or color arrangements appearing thereon without first obtaining Arco's consent. The writing also contemplates Razumic's retail sale of fuel to Arco credit customers. Arco in return agreed to accept Razumic's assignment of these accounts. Arco reserves the right to enter the premises at all reasonable times for the purpose of ascertaining LESSEE'S compliance with the agreements [therein] contained and for making necessary repairs and replacements. Standardized riders accompanying the DEALER LEASE further spell out the nature of Razumic's and Arco's business relationship. One rider allows Arco to enter the premises in its exclusive judgment, to establish a change in its trade name or other business identification and in the trademark of trade name designations of its products, including, but not limited to, painting of the service station improvements, equipment and facilities, or any part or portion thereof, and installation or replacement of signs and signboards. Another rider sets forth Razumic's agreement to operate the Service Station in such a manner as to reflect favorably on ATLANTIC'S goodwill, trademarks and trade names and take no action that will tend to discredit ATLANTIC in any way, operate the service station twenty-four hours a day, seven days a week, maintain inventory sufficient to fulfill customer needs, arrange and display inventory, advertisements, and sales promotions in a lawful, orderly and attractive manner, illuminate the station in the evening and early morning hours and other times as required for safety and to attract the motoring public, and maintain adequate and efficient attendants to properly serve LESSEE'S customers during all hours of operation. We believe that the 1970 writing and its riders embody a franchise agreement. In its simplest terms, a franchise is a license from the owner of a trademark or trade name permitting another to sell a product or service under the name or mark. More broadly stated, the franchise has evolved into an elaborate agreement by which the franchise undertakes to conduct a business or sell a product or service in accordance with methods and procedures prescribed by the franchisor, and the franchisor undertakes to assist the franchisee through advertising, promotion and other advisory services. Piercing Pagoda, Inc. v. Hoffner, 465 Pa. 500, 508-09, 351 A.2d 207, 211 (1976). [T]he cornerstone of a franchise system must be the trademark or trade name of a product. It is this uniformity of product and control of its quality and distribution which causes the public to turn to franchise stores for the product. Susser v. Carvel Corp., 206 F.Supp. 636, 640 (S.D.N.Y. 1962), aff'd, 332 F.2d 505 (2d Cir. 1964). [5] Given the comprehensive terms of the writing obligating Razumic to operate the Arco service station in a manner Arco determined would reflect favorably upon the public image of the Arco trademark, report and share gross receipts with Arco pursuant to a FRANCHISE RENT SCHEDULE, and allow Arco to inspect the station to assure Razumic's continued compliance with the many provisions of the form writing, it is clear that Razumic was not pursuing solely his own business interests. Rather, Razumic conducted his business and sold his products in accordance with methods prescribed by Arco, see Piercing Pagoda, Inc. v. Hoffner, supra, to cause the public to turn to the Arco sign, see Susser v. Carvel Corp., supra. Razumic's undisputed testimony concerning performance pursuant to the parties' agreement sheds light on the writing. Razumic stated that he regularly spent his own funds to participate in Arco promotions which offered gifts to the public, purchased fuel and other products from Arco, and had no choice but to operate his station twenty-four hours a day. He further testified Arco requested that his employees wear uniforms with Arco insignias, which he rented and maintained at his own expense. Arco and Razumic co-sponsored a party open to the public celebrating opening of the new station in 1970. All this uncontradicted evidence of performance demonstrates Arco's control over the quality of products and services Razumic offered to the public. Moreover, this evidence, perhaps the strongest indication of what the writing means, Restatement (Second) of Contracts, supra at § 228(4) (course of performance always relevant in interpreting writing); cf. Uniform Commercial Code, Act of April 6, 1953, P.L. 3, §§ 2-202(a) & 2-208, 12A P.S. §§ 2-202(a) & 2-208 (1970) (same rule applies to writings evidencing sale of goods), confirms our conclusion that the Razumic-Arco service station operation was a franchise enterprise. [6]
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]