A substantial number of dealers operate under supply contracts which require specified minimum purchases of motor fuel. But the recent wholesale price jump may render it difficult or impossible to fulfill these requirements. This will be particularly true if the public really does start cutting back on driving.

Many retailers are concerned that refiners might seize the opportunity to evict disfavored dealers or to take back sites slated for company operation. A review of the applicable law is therefore warranted.

Applicable law: The federal Petroleum Marketing Practices Act permits an oil company to terminate or refuse to renew a dealer's franchise if:

(a) The dealer violates a reasonable and material provision of the franchise; or

(b) The dealer fails to exert good faith efforts to comply with any provision of the franchise.

Court rulings to date: So far, courts have tended to uphold minimum volume provisions and to permit franchise termination or nonrenewal based on the dealer's non-compliance. The court upheld the termination, ruling that the dealer had failed to exert good faith efforts to comply with a reasonable and material provision of the franchise. Malone v. Crown Central(D.Md. 1979) 474 F.Supp. 306; W&S, Inc. v. Atlantic Richfield Co., No. 83 C-83-3066-JPV, ND Cal.; Mobil Oil Corp. v. Shah, No. 86 C 3010, ND Ill., 3/11/87; Civillico v. Sun Refining and Marketing Co., No. 85-1118, CA 3, (9-26-85). Darrah v. Crown Central Petroleum Corp., Civ. No. 89-47-COL, (DC MGa, 5/30/90).

We are aware of only one reported case in which a court refused to permit termination for failure to meet minimums, Serianni v. Gulf Oil Corp. (No. 84-2945, E.D. Pa. 5/21/86). In that case, the court took into account the possibility that the franchisor's rebate program might have discriminated against the dealer.

Analysis: The present situation is unique in that never before have prices been this high in the absence of a shortage of supply. Courts might be more willing to consider the prices charged by the supplier in deciding whether to enforce minimum volume clauses. (See the article above on a supplier's obligation to price in good faith).

Recommended procedures: If you are concerned about problems with minimum volume clauses, we suggest that the following:

1. Review your contracts: Make sure that you know what your minimum is. If you receive repeated default notices from your supplier or if you anticipate future problems, see your lawyer.

2. Renewal: If the franchisor raises your minimum, you may want to send the company a letter before you sign. Whether to sign under protest is a question you should carefully analyze with your lawyer.

But we think that it is appropriate to request disclosure of how the minimum was calculated. While such a letter might have no immediate effect, it could strengthen your negotiating and legal position later on.

3. Mutual termination agreements: If you refuse to sign a renewal agreement with increased volumes and you plan to sue, do not sign a mutual termination agreement or release.

4. Keep a record of any circumstances beyond your control that affect volume: The PMPA relieves the dealer of responsibility for events that are due to circumstances beyond his control. Admittedly the courts have refused in some cases to consider general marketing conditions or franchisor policies as factors that fall into this category. However, certain types of circumstances are truly beyond the dealer's control, e.g., road closures, fires, layoffs at nearby plants, etc.

Furthermore, these past cases involved situations in which the supplier may have priced 5 to 10 cents above other refiners. The current situation involves a 30 to 40 cent price increase in a matter of weeks. It may go higher. There is no telling how courts will view such cases now.

You may want to conduct regular price surveys of your competition. Make a detailed record. You may need the information at a later date to defend your failure to purchase the required minimums.

5. Diary statements that you need not meet the minimum: Keep a record of any statements by company personnel that you need not meet the minimums. Some courts have refused to allow franchise cancellation where the supplier misleads the dealer about the need for compliance.

Keep a diary of any such representations, indicating the date and time, the identity and position of the employee, what he said, and the identity of any witnesses. But realize that just because the supplier temporarily excuses compliance does not mean that it cannot later insist on it at a later time. Some dealers have gotten involved in lawsuits because they refused to take formally announced changes in company policy seriously.

6. Diary special efforts to meet minimum: In the some of the cases cited above, the courts emphasized the dealer's failure to make a reasonable effort to raise volume. We therefore recommend that you keep a record of anything you do to promote sales, e.g., promotions, longer hours, etc.

There is no guarantee that anything you do will induce a court to keep the supplier from terminating you if you do not meet specified contract minimums. However, in some cases, the fact that the dealer exhausted every alternative may work in his favor.

7. Keep a record of any oil company attempts to coerce you into price cutting: In one case, a court stated that it might have held for the dealer if he had proved that the oil company was using the clause as a price fixing tool. Therefore, you should keep a record of any threats made by oil company personnel related to pricing.

© 2000 Automotive Trade Organizations of California and Carroll, Gilbert & Bachor