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Reciprocal Termination Without Cause Provision in Dealership Agreements Upheld

NAW Legal Advisory - October 2007

Several distributors sued Volvo, a construction equipment manufacturer, alleging a breach of dealership agreements the distributors had entered into with Samsung, Volvo’s predecessor. Except for one plaintiff’s claim under Maine’s franchise law, a federal appeals court upheld a grant of summary judgment in favor of the manufacturer. (Cromeen, Holloman, Sibert Inc. et al. v. AB Volvo, et. al., 7th Cir., No. 01-3770).

In 1998, Volvo purchased Samsung’s construction equipment business and assumed all of Samsung’s dealership agreements. Volvo had an existing dealership network in North America and decided to terminate some of the Samsung dealership agreements. Those agreements each stated: “This agreement may be terminated at any time by either party without cause by giving at least 60 days written notice to the other party of such decision to terminate the agreement.” It was this provision upon which Volvo relied when terminating the distributors.

The distributors argued that this termination without cause provision was “altered” by Samsung’s oral statements that as long as the distributor’s performance was adequate they would not be terminated, and the fact that historically Samsung had never terminated a distributor without cause. The court rejected this argument, finding that the termination provision was unambiguous and that the agreements also provided that the terms could not be modified by oral statements, whether made before or after contract signing. Nor did the court consider the termination without cause provision unfair, unreasonable or in bad faith, since it gave both parties the same unconditional right to terminate the relationship without cause.

The distributors also claimed that the terminations unjustly enriched Volvo because the distributors’ customer base was thereby wrongfully appropriated by Volvo. Also, the distributors asserted a claim for recoupment, alleging that the distributors were terminated before each could recoup their investment in building up business for the manufacturer. In rejecting this claim, the court again cited that plain language in the contract and said that each party had assumed the risk of a termination without cause. Finally, one distributor based in Maine claimed that Volvo’s termination violated Maine’s franchise termination law, which requires “good cause” for terminating a distributor/franchisee and which declares as void any contractual waiver or modification of this statutory protection. The court sent this claim back to the district court for a trial on whether Volvo had good cause under the Maine law to terminate this dealership agreement.