The Franchise Memorandum

The District of New Jersey recently dismissed a franchisee’s claim for breach of the implied covenant of good faith and fair dealing against BP, a large oil producer and gas station franchisor. Alboyacian v. BP Products North America, Inc., et. al., 2011 U.S. Dist. LEXIS 134453 (D.N.J. Nov. 22, 2011). BP was a party to several commission agreements for the sale of gasoline by BP through third-party gas station operators. Those agreements had previously been found subject to the relationship protections of the New Jersey Franchise Practices Act (NJFPA). Upon expiration of the commission agreements (including renewal options), BP chose not to offer renewal of the commission agreement relationship, but instead to offer its expiring dealers the chance to enter into one of two types of owner/operator agreements, neither of which would have created a “franchise” relationship for purposes of the NJFPA. This plan did not appeal to the existing dealers with commission agreements, and BP filed suit seeking a declaratory judgment that its plan to offer owner/operator agreements (instead of renewing commission agreements) would not violate the NJFPA or subject BP to future damages for wrongful termination. The defendant gas station operators countersued, seeking a declaration that BP’s non-renewal plan did violate the NJFPA and would constitute a breach of the implied covenant of good faith and fair dealing.

The court dismissed the good faith claim, noting that a breach of the covenant requires that the defendant’s action would deprive the other party of the “fruits” of the contract. Here, the court noted, “the contracts at issue implicitly contemplate the franchise relationship would end after a set date, and only the NJFPA prevents that termination. The [dealers’] expected continuation of the franchise is not a fruit of the contract but a fruit of the NJFPA.” Thus, while the NJFPA claim was permitted to continue to trial, the dealers’ claim for breach of the good faith covenant was dismissed.