Constructive Termination of a Franchise Agreement

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Franchise Law Attorney

Constructive termination of a franchise occasionally arises when a manufacturer discontinues a certain line of products, without cutting off complete ties with another party, in terms of their commercial relationship.  There is a popular case that is commonly used to discuss the nuances of a constructive termination of a franchise agreement that involves General Motors.  Around 1988, General Motors agreed with Volvo to manufacture a particular line of heavy duty trucks intended for construction purposes.  General Motors discontinued its heavy duty truck line.  GM had agreements with several dealers involving their own heavy duty truck line.  When GM discontinued this line, several dealerships across the U.S. brought suits in state courts stating that this sort of conduct constituted a termination of the entire franchise agreement.

Courts across the U.S. have not been in agreement with each other on this issue.  For example, in NY the appellate division ruled in favor of GM stating that a heavy duty truck addendum was a separate franchise within the meaning of the New York Franchised Motor Vehicle Dealer act.  As well, they also ruled in favor of GM when they stated that the implied covenant of good faith and fair dealing was not violated, since only a particular line of models was discontinued.  The court reasoned that although the line of heavy duty trucks constituted a significant portion of the dealership’s business, it did not negatively affect the business in the same ways that deliberate underreporting or forms of cheating/stealing would have.

However, in Maryland and Delaware the courts ruled that the there was no separate franchise – rather the covenant of fair dealing was plainly violated by GM.

Overall, constructive termination is notable concept in franchise law since the party claiming that they have suffered constructive termination, may or may not be entitled to the protections by the termination provisions of the operating agreements and even state law.  This is why constructive termination can be so troubling for the party claiming the other party constructively terminated the franchise agreement.

To discuss your NJ Franchise matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.

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