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Dealership Agreements: They’re Not For As Long As You Think – Franchising



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When a dealer enters into an agreement with an automaker, it may
be contemplating a forever, “till death do us part” kind
of relationship. In the early stages of the relationship, both
parties are inevitably optimistic and likely expect that they will
carry on happily ever after. The end of the relationship is
understandably not one of the first things on either party’s
mind. But it should be. As we all know, things do not always play
out as expected.

Before entering into a dealership or retailer agreement, both
dealers and automakers should carefully consider the terms
governing the duration of their relationship as well as the
circumstances which could lead to the termination of the agreement.
Often, dealer agreements will automatically renew after a set
period of time, so long as certain conditions are met. In those
instances, if neither party breaches the agreement, the
relationship may continue indefinitely.

This brings us to a discussion of indefinite term contracts
containing what are commonly referred to as “evergreen”
clauses. An indefinite term contract is an agreement that does not
have an “expiry date”. An “evergreen” clause
entails the automatic renewal of the agreement year after year.
What does this mean in practice? Well, in most cases, if both
parties are acting in accordance with the terms of the agreement,
the relationship may continue indefinitely. However, what if one
party wants out in circumstances where there have been no events of
default entitling the innocent party to terminate the
agreement?

In some instances, indefinite term contracts may be terminated
on reasonable notice in the absence of any clause permitting such
right. Courts have been willing, in some cases, to find an implied
term which permits the termination of a contract without cause.
The Ontario Court of Appeal has stated that when the term
of a contract is not fixed and there is no provision for the
termination of the contract on reasonable notice, a court may treat
a contract as either perpetual in nature or as an indefinite term
contract with an implied unilateral termination right on reasonable
notice. In the latter instance, either party to the agreement can
terminate the contract if they give the other party reasonable
notice. How the court determines what is ‘reasonable’ is
largely dependent on the facts of each particular situation. In
order to make this determination, the court must consider the
following:

  1. the relationship between the parties;

  2. the specific terms of the contract; and

  3. all surrounding circumstances.

Type of Relationship: Some types of
contracts which depend upon mutual trust between the parties
naturally give rise to an implied right to terminate upon
reasonable notice. For example, distributorship agreements are
generally of a class of agreements that can be terminated upon
reasonable notice without cause. This is because
distributorship agreements are the type of contract that involve
mutual trust, and each party should have the right to terminate the
contract unilaterally on notice in the event there is a breakdown
of that trust. In other words, trust between the parties is so
important in this type of relationship that the absence of it is
sufficient grounds for either party to end the contract. Similarly,
franchise relationships depend upon mutual trust between the
contracting parties. Accordingly, franchise agreements will
generally be found to contain an implied right to terminate upon
reasonable notice in situations where the agreement does not
contain terms related to termination.

Given that dealers and automakers are in a franchise
relationship with each other, there is a strong likelihood that an
implied right to terminate upon reasonable notice would be found to
exist, although final determination must be balanced against other
factors, as described below.

Specific Terms: There may be specific
terms within the dealer contract which either point towards or away
from an implied right to terminate without cause on reasonable
notice. For example, if an agreement stipulates that it can
only be terminated by mutual agreement or for a material
breach of contract, then likely only in those two circumstances
mentioned could the parties actually terminate the agreement. When
an agreement contains specific terms which set out when termination
may occur, it is more difficult to establish an implied right to
terminate on reasonable notice without cause. In the context of an
agreement with numerous termination provisions, an additional
implied right to terminate would arguably be inconsistent with the
intention of the parties.

Surrounding Circumstances: In
addition to the nature of the relationship and specific terms in
the contract, the surrounding circumstances help determine whether
there is an implied right to terminate on reasonable notice. These
factors include:

  • the level of sophistication of the parties;

  • whether the parties were strangers at the time they entered
    into the agreement;

  • whether the parties had done prior business together;

  • whether the relationship involved the need for trust,
    confidence, and satisfaction; and

  • the amounts invested by each party pursuant to the
    agreement.

Maybe Not Forever

What appears to be a long-term, an endless relationship may not
be forever.

Before moving forward with a dealer agreement, think about the
kind of relationship you want to have with your dealers or your
automaker. Are you prepared to offer your dealers automatic
renewals year after year? Are you prepared to enter into an
agreement that allows your automaker to terminate you without any
cause on 60 days’ notice? What will happen to the dealer’s
investment if the agreement is terminated? No one expects a
relationship to end on unhappy terms, but it happens, and it is
better to contemplate termination scenarios at the beginning of the
relationship, rather than at the end.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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