Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—SDNY: ExxonMobil’s Termination of Gasoline Dealer Did Not Violate Petroleum Marketing Practices Act, (Feb 4, 2013)

By Peter Reap, J.D., LLM

ExxonMobil Oil Corporation’s termination of its franchise agreement with complaining gasoline dealer Ibrahim Issa and his company, Gun Hill Road Service Station, Inc. did not violate the Petroleum Marketing Practices Act (“PMPA”) because the plaintiffs failed to pay ExxonMobil for gasoline in a timely fashion and failed to operate their Gun Hill Road station for seven consecutive days, the federal district court in New York City has decided (Gun Hill Road Service Station, Inc. v. ExxonMobil Corp., February 1, 2013, Castel, P.). In addition to the PMPA claim, ExxonMobil was entitled to summary judgment on the plaintiffs’ claims for breach of the parties’ franchise agreement and its implied covenant of good faith and fair dealing.

Regarding the parties’ separate agreement under which the plaintiffs operated an “On the Run” or “OTR” convenience store at the site of the gas station, ExxonMobil was granted summary judgment on the plaintiffs’ claim for breach of the OTR agreement. However, there remained a triable issue of fact over ExxonMobil’s good-faith efforts to comply with its obligation under the OTR agreement to cause the construction of the OTR store “to be completed and performed in a workmanlike manner,” the court determined. Therefore, ExxonMobil was denied summary judgment as to the plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing in the OTR agreement with respect to maintenance of the Gun Hill Store’s computer system and whether the initial construction of the OTR site was performed in a workmanlike manner, but granted summary judgment on the claim in all other respects.

Finally, New York’s three-year statute of limitations barred the plaintiffs’ claim for tortious interference with prospective economic relations relating to the oil company’s alleged interference with Issa’s prospective business relationship with the landlord at another gas station.

Oral modification of franchise agreement. Much of the case turned on whether the parties made a binding oral modification to the franchise agreement that relieved plaintiffs of the obligation to pay rent at the Gun Hill station until ExxonMobil remedied the construction and equipment problems that followed construction of OTR site, the court noted.

The Franchise Agreement states that, “[e]xcept for those permitted to be made unilaterally by ExxonMobil under this Agreement, no amendment, change or variance from this Agreement is binding on either Party unless agreed in writing by the Franchise Dealer and ExxonMobil’s authorized representative.” This provision is enforceable under N.Y. Gen. Oblig. Law § 15-301(1), which provides that “[a] written agreement or other written instrument which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent.”

Thus, under the statute, when a contract prohibits oral modifications, if the only proof of an alleged agreement to deviate from a written contract is the oral exchanges between the parties, the writing controlled, according to the court. Here, there was no evidence in the record of a writing by an ExxonMobil representative agreeing to modify the Franchise Agreement.

The plaintiffs invoked two judicially recognized exceptions to the statute: the doctrines of partial performance and equitable estoppel. As discussed below, however, no reasonable jury could find that the conduct of any party was inconsistent with the Franchise Agreement as written, and plaintiffs were therefore precluded as a matter of law under N.Y. Gen. Oblig. Law § 15-301(1) from relying on any purported oral modification to the franchise agreement, the court held.

Partial performance. Under New York law, partial performance of an oral agreement to modify a written contract, if unequivocally referable to the modification, avoids the statutory requirement of a writing. The plaintiffs contended that ExxonMobil’s failure to charge plaintiffs rent constitutes partial performance of the purported oral modification because, under the orally modified contract argued for by plaintiffs, ExxonMobil was not entitled to charge any rent for these periods.

The plaintiffs’ partial performance argument failed because ExxonMobil’s actions were not unequivocally referable to the modification, and therefore did not avoid the statutory requirement of a writing, the court ruled. While ExxonMobil’s actions were consistent with an oral modification, they were just as easily explained as an attempt to improve a strained business relationship with a franchisee and help keep that franchisee selling gasoline for the parties’ mutual benefit.

Such conduct was fully consistent with the franchise agreement, under which ExxonMobil’s right to demand “strict compliance” with any of the franchisee’s obligations under the agreement is not “waived or impaired” by ExxonMobil’s failure to timely exercise a right or insist upon strict compliance, its waiver of a prior default, its forbearance, or any course of dealing between the parties. In light of this provision and the relationship among the parties, ExxonMobil’s decision to waive some of plaintiffs’ rent was hardly unintelligible or extraordinary, according to the court.

Thus, ExxonMobil’s decision to waive rent payments to which it was entitled was not inconsistent with the Franchise Agreement as written, did not constitute a waiver of ExxonMobil’s right to charge rent in the future, and was at best equivocal with regard to the existence of an oral modification.

Equitable estoppel. Under New York law, when a party’s conduct induced another’s significant and substantial reliance on the agreement to modify, albeit oral, that party could be estopped from disputing the modification notwithstanding the statute. As with the requirement that partial performance be unequivocally referable to the oral modification, so, too, conduct relied upon to establish estoppel must not otherwise be compatible with the agreement as written, the court observed.

The plaintiffs failed to identify evidence in the record of any business decision Issa took in reliance on the purported oral modification that would be incompatible with the franchise agreement as written. Thus, the plaintiffs failed to carry their burden of coming forward with any evidence of Issa’s reliance on the purported oral modification—much less evidence of conduct incompatible with the agreement as written.

Breach of franchise agreement. Because the Franchise Agreement as written required that plaintiffs pay rent and prepay for gasoline when ExxonMobil required it, and because there was no binding oral modification of the franchise agreement varying these terms, ExxonMobil was within its rights when it ceased delivering gasoline to plaintiffs in July 2007, the court determined. ExxonMobil was therefore entitled to summary judgment on the breach of franchise agreement claim.

Breach of the implied covenant in the franchise agreement. The express, unmodified terms of the franchise agreement allowed ExxonMobil to stop delivering gas if plaintiffs did not pay for it in advance and required that plaintiffs begin paying the full monthly rent seven months after completion of the construction in December 2005, i.e. starting in July 2006. The implied covenant of good faith and fair dealing did not modify these express terms of the contract, the court noted. Moreover, the plaintiffs failed to point to any evidence in the record suggesting that ExxonMobil exercised its rights to charge rent or require prepayment arbitrarily, irrationally or in bad faith. Thus, ExxonMobil was entitled to summary judgment on this claim.

Violation of the PMPA. The PMPA permits termination of a franchise agreement, inter alia, upon “[t]he occurrence of an event which is relevant to the franchise relationship and as a result of which termination of the franchise . . . is reasonable,” provided “such event occurs during the period the franchise is in effect and the franchisor first acquired actual or constructive knowledge of such occurrence” within the time specified by the statute. 15 U.S.C. § 2802(b)(2)(C). Section 2802(c) elaborates on this basis for termination by providing 12 examples of such events.

ExxonMobil raised two of these 12 events as justification for its termination of the Gun Hill franchise agreement: first, a “failure by the franchisee to pay to the franchisor in a timely manner when due all sums to which the franchisor is legally entitled,” and second, a “failure by the franchisee to operate the marketing premises for … 7 consecutive days …” 15 U.S.C. §§ 2802(c)(8), (9)(A). The term “failure,” which appears in both events raised by ExxonMobil, is defined in the PMPA to exclude inter alia, “any failure for a cause beyond the reasonable control of the franchisee …” 15 U.S.C. § 2801(13)(B).

The plaintiffs conceded that they did not purchase or sell any additional gasoline at the Gun Hill Station after July 2007 and that they did not pay any rent from August through December 2007. The unmodified terms of the franchise agreement required that they do these things. The plaintiffs argued, however, that these failures were beyond their reasonable control, and therefore did not constitute valid grounds for termination under the PMPA.

Nevertheless, the plaintiffs expressly conceded at oral argument that the existence of an enforceable oral modification of the franchise agreement and a claim for termination of the franchise agreement go “hand in hand,” such that, should the court conclude that there was no binding oral modification of the franchise agreement, their PMPA claim necessarily failed—“like a domino effect.” Thus, the plaintiffs conceded that, in the absence of a binding oral modification of the franchise agreement, their “beyond the reasonable control of the franchisee” argument failed. Because no reasonable jury could conclude that plaintiffs did not fail to pay defendants in a timely fashion and did not fail to operate the station for seven consecutive days, ExxonMobil was entitled to summary judgment on the PMPA claim, the court held.

Breach of the OTR contract. Having concluded that the Franchise Agreement was validly terminated, it sufficed to observe that the OTR Agreement contained provisions that either terminate or permit termination of the OTR Agreement in the event that the franchise agreement was terminated, according to the court. Thus, ExxonMobil was granted summary judgment on this claim.

Breach of the implied covenant in the OTR agreement. ExxonMobil was entitled to summary judgment on this claim as it relates to events predating the parties’ entry into the OTR Agreement, the court held. ExxonMobil could not have breached an implied covenant of an agreement that did not yet exist. The oil company was also entitled to summary judgment on this claim insofar as it was premised on delayed construction. The plaintiffs conceded at oral argument that any delay in beginning and completing construction of the OTR site was not material.

However, a reasonable jury could find that, after reopening in December 2005, the OTR site encountered significant problems caused in part by ExxonMobil, according to the court. Specifically, Issa’s affidavit stated that the site encountered problems with its computer system, refrigeration equipment, heating and cooling system, circuit breakers, and cooler gauges. Moreover, a reasonable jury could conclude, based on the fact that such problems persisted in the face of Issa’s constant requests for assistance from ExxonMobil, that ExxonMobil did not make a good-faith effort to address the post-construction problems encountered at the Gun Hill Station.

The OTR Agreement states that ExxonMobil will “cause the Work to be performed and completed in a workmanlike manner…” However, In light of disclaimers in the OTR agreement, which disclaimed any representations or warranties concerning the equipment, ExxonMobil could not be held liable for the initial quality of the equipment installed in the OTR site. The one exception related to the store’s computer system, for which “ExxonMobil…shall provide…reasonable maintenance services…all at Franchise Dealer’s expense.” Thus, insofar as the claim related to malfunctioning equipment, it survived summary judgment only to the extent that it related to ExxonMobil’s failure to maintain the Gun Hill Station’s computer system in working order.

Aside from malfunctioning Equipment, some of the problems encountered at the OTR site could give rise to an inference that the initial construction of the OTR site was not performed in a workmanlike manner, in the court’s view. Thus, there remained a triable issue of fact concerning ExxonMobil’s good-faith efforts to comply with its obligation under the OTR Agreement to “cause the Work to be performed and completed in a workmanlike manner…”

The case is 08 Civ. 7956 (PKC).

Attorneys: Leonard Steven Salis (The Richard L. Rosen, Law Firm PLLC) for Gunhill Road Service Station, Inc. Paul Dewitt Sanson (Shipman & Goodwin, LLP) for ExxonMobil Oil Corporation.

Companies: ExxonMobil Oil Corporation; Gun Hill Road Service Station, Inc.

Cases: FranchisingDistribution NewYorkNews