Facility Agreements Not Always Enforceable

A New York state court held that written agreements to renovate dealership facilities are not necessarily enforceable.  In Compass Motors, Inc. v. Volkswagen Group of America, 36 Misc.3d 283, 944 N.Y.S.2d 845 (Sup. Ct. Orange Co. 2012), Volkwagen and Compass Motors had entered into a Facility Renovation Agreement, which contained a clause stating:

"If Dealer shall...fail to comply timely with any provisions of this Addendum, or if Dealer shall fail to comply with any  of [Volkwagen's] requirements at the Dealer's Premises, then Dealer agrees that regardless of the weight or magnitude of, or reason for, such failure, [Volkswagen] may, at its option, terminate the Dealer Agreement..., and shall be under no obligation to offer to enter into any subsequent Dealer Agreement with Dealer.  Dealer acknowledges that, in that event, [Volkswagen] would have good cause for terminating or failing to renew the Dealer Agreement"

After failing to renovate the facility in accordance with the Agreement, Volkwagen issued Compass a 90-day notice of termination.  The dealer sued claiming, inter alia, that Volkswagen did not have good cause to terminate its franchise under New York's Dealer Act.  Volkswagen moved to dismiss that claim but the Court denied that motion, despite its being undisputed that the dealer had failed to comply with the Agreement.

The dealer argued, among other things, that "the termination was invalid because the requirement that the dealership be renovated was neither reasonable nor necessary and, in any event, was impossible to perform..."  In denying Volkwagen's motion, the Court found that Volkswagen failed to offer any evidence on this issue.  The Court noted that the Dealer Act places the burden of proof on the franchisor to prove that both due cause and good faith exist to terminate a franchise, and Volkswagen failed to do so. 

This holding comes as no surprise.  By its terms, the protections of the Dealer Act govern notwithstanding the terms of the franchise.   A manufacturer cannot, by contract, force a dealer to waive its statutory rights.  Here, despite the rather remarkable clause in the Agreement quoted above, the Court held that Volkswagen failed to meet its burden by relying merely on the terms of the Agreement and the undisputed fact that Compass had failed to comply with those terms.  Rather, Volkswagen still needed to establish due cause and good faith.