The Franchise Memorandum

A federal court in Michigan stuck to the explicit contractual requirements in deciding whether purchase order agreements were formed between a boat manufacturer and its dealer. S2 Yachts, Inc. v. ERH Marine Corp., No. 1:18-CV-389 (W.D. Mich. Nov. 16, 2021). Manufacturer S2 Yachts and dealer ERH Marine recently concluded litigation that approved S2 Yachts’ decision not to renew ERH Marine’s dealer agreements, as summarized in Issue 268. After the court resolved the non-renewal claims in favor of S2 Yachts, the only remaining issues in the case concerned contract claims related to existing purchase orders that ERH Marine had placed with S2 Yachts prior to the end of the parties’ relationship. ERH complained that S2 Yachts had failed to deliver two of the boats that were ordered before the end of the contract, and a third was ultimately manufactured with the wrong engine color. When ERH Marine indicated that it would not accept the boat, S2 Yachts sold it to another purchaser and failed to refund ERH its deposit.

The court found no breach as to the first two boats, because ERH Marine did not fulfill the dealer agreement’s requirements of an order verification form and deposit. The court rejected ERH Marine’s argument that the parties’ course of performance had established a valid contract because this would have required ignoring express requirements in the agreement for placing an order. The same express requirements were fulfilled, however, with respect to the third boat. In spite of the production delays and communications problems that surrounded that transaction, the court found that ERH Marine clearly indicated its intention to honor the purchase agreement. The court rejected S2 Yacht’s contention that ERH Marine had abandoned the purchase agreement, holding that ERH Marine was not required to pay the full price until S2 Yachts completed the boat to the correct specifications—which never occurred. Because S2 Yachts failed to deliver the boat, the court held it liable for breach and awarded ERH Marine damages equal to the deposit it paid, its lost profit, and the year of service fees it lost when it was not able to resell the boat to its buyer.