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Alabama Court Affirms Franchisor's Termination of Franchisee For Ongoing Breach
Posted in Terminations

In Smith’s Sports Cycles, Inc. v. American Suzuki Motor Corporation, 2011 Ala. LEXIS 181 (Ala. Oct. 14, 2011), the Supreme Court of Alabama denied the franchisee’s claim that franchisor Suzuki wrongfully terminated its franchise agreement. After Suzuki terminated the franchisee for failing to adhere to its standards regarding the neatness and appearance of the dealership facility, the franchisee sued, claiming that Suzuki violated Alabama’s Motor Vehicle Franchise Act. The Alabama statute allows a franchisor to terminate a franchisee for “good cause,” which includes a failure to comply with a reasonable and material provision of the franchise agreement. The statute states that the franchisor must notify the franchisee within 180 days of acquiring actual or constructive notice of the franchisee’s breach. The franchisee claimed that Suzuki did not adhere to that limitations period because it first obtained notice of the breaches more than 180 days prior to issuing the termination notice. However, the breaches were ongoing and even continued after Suzuki issued a notice of default and notice to cure.

The Alabama Supreme Court followed other courts in deciding that an ongoing breach that occurs both prior to and within the limitation period is not time-barred. To hold otherwise would allow a franchisee to continue operating in violation of the franchise agreement. In this case, although the franchisee’s failure to adhere to Suzuki’s standards began several years before Suzuki issued a notice of its intent to terminate, the court found that “[b]ecause the appearance problems with Smith’s dealership were both evolving and continuous, Suzuki is not precluded from terminating the franchise relationship based on the fact that it had knowledge of those problems 180 days before giving actual notice of termination.” The court also noted that the provision requiring Smith to keep the dealership facility neat and clean was both reasonable and material to the relationship.

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