Robert A. Yahn
David J. Sims
Yahn & Sims
Wheeling, West Virginia
Attorneys for the Plaintiff
John P. Bailey
Harry L. Buch
Bailey, Riley, Buch & Harman
Wheeling, West Virginia
Attorneys for the Defendant
JUSTICE WORKMAN delivered the Opinion of the Court.
JUSTICE BROTHERTON did not participate
JUDGE FOX sitting by temporary assignment.
1. "Termination provisions of an agreement involving the sale
of goods which, if applied strictly, are so one-sided as to lead to
absurd results, will be declared unconscionable." Syl. Pt. 2,
Ashland Oil, Inc. v. Donahue, 159 W. Va. 463, 223 S.E.2d 433
2. Where a franchise agreement is contingent upon the
existence of a valid underlying lease to be effective, absent any
statutory provisions regarding renewal of either the lease or
franchise agreement or any express renewal provisions contained
within either the lease or franchise agreement, a lessor/franchisor
is not required to offer a successive lease agreement to a
lessee/franchisee upon the expiration of the original lease.
3. "A lease agreement and a dealer contract between the same
parties, relating to the operation of a gasoline station at
identified premises, providing for the same initial term and
automatic extensions from year to year, providing for the sale and
delivery of gasoline, and with rental provisions directly relating
to the sale and delivery of gasoline, will be construed together
and considered as forming an agreement involving a transaction in
goods which is governed by the Uniform Commercial Code--Sales." Syl. Pt. 1, Ashland Oil, Inc. v. Donahue, 159 W. Va. 463, 223
S.E.2d 433 (1976).
4. Where a franchise and lease agreement are construed together and considered as forming an agreement governed by the Uniform Commercial Code, absent any express provisions regarding renewal contained within said agreements, a lessor/franchisor is not required by an implied obligation of good faith, fair dealing and commercial reasonableness to offer a renewal of either agreement to a lessee/franchisee.
This case is before the Court upon the March 31, 1994, order
of the Circuit Court of Ohio County certifying the following two
questions to this Court:
1. If a franchise agreement depends upon the existence of a valid underlying lease agreement to be in effect, is a lessor/franchisor required to offer a successive lease agreement to a lessee/franchise[e] upon the expiration of the original lease, absent any renewal clause in the lease or franchise agreement?
2. Alternatively, is the lessor/franchisor
required by an implied obligation of good
faith, fair dealing and commercial
reasonableness to offer a renewal of the lease
agreement to lessee/franchisee upon reasonable
terms?See footnote 1
The circuit court answered both questions in the negative. Upon a
review of the record, the parties' briefs and all other matters
submitted before this Court, we affirm the circuit court's answers.
In February 1978, Daniel A. Steiniger paid $12,000 for a 40%
interest in Barn-Chestnut, Inc. (hereinafter "BCI"), the Plaintiff
in this action. William Medovic, President of Grocers Development
Corp. (hereinafter "GDC"), paid $18,000 for the other 60% interest
in BCI. Subsequently, on August 16, 1978, BCI entered into a
franchise agreement with GDC for a Convenient Food Mart located at
287 South Chestnut Street, Barnesville, Ohio "for as long as [BCI]
. . . shall have a good and valid lease or sub-lease to, or shall
own the premises described as: Convenient Food Mart #3820[,] 287
So. Chestnut Street in the Village of Barnesville. . . ."See footnote 2 In
consideration of the grant of the Convenient Food Mart, BCI agreed
to pay $4,500 as an initial franchise fee, as well as a continuing
franchise fee equal to 4% "of the gross sales done at or from said
establishment during the prior week." Also, as part of the franchise agreement, Mr. Steiniger was made the manager of the
Convenient Food Mart.See footnote 3
On August 24, 1978, BCI entered into a fifteen-year agreement
with GDC to lease a certain parcel of land located at 287 South
Chestnut Street, Barnesville, Ohio. The beginning and expiration
dates of the term of the lease, which were confirmed by BCI and GDC
were "[b]eginning August 24, 1978 and [e]nding August 23, 1993[.]"
Under the lease, GDC agreed to pay a basic rental in the amount of
$1,200 per month, and 2% of the gross sales in excess of $720,000
annually. Neither the franchise agreement nor the lease agreement
contained any provisions regarding the renewal of either agreement.
As a result of Mr. Medovic's desire to retire, he sold GDC's
60% interest in BCI to Mr. Steiniger for $170,325,See footnote 4 on July 1,
1988. Mr. Steiniger asserts that Mr. Medovic advised him that if he did not buy out Mr. Medovic's interest, he would lose the
franchise and be removed as the franchise manager. At the same
time, Mr. Steiniger was also given the opportunity and first right
of refusal to purchase the building which housed GDC's Convenient
Food Mart store in Barnsville, Ohio for $220,000, but he was unable
to do so.
Subsequently, by deed dated July 26, 1988, GDC conveyed the
parcel leased to BCI to the Defendant, CFM Development Corporation
(hereinafter "CFM") subject to the terms of the GDC/BCI lease.See footnote 5
This conveyance was upon the same terms and for the same price for
which it was originally offered to Mr. Steiniger. CFM was a
separate corporation founded and operated by Charlie Swart, a
former employee of GDC, together with several other partners
unrelated to GDC.See footnote 6
The Plaintiff never attempted to renegotiate the lease and franchise agreement in light of the ownership changes despite its knowledge that the existing lease and franchise agreements would expire by their terms in August of 1993. According to the Plaintiff, on September 17, 1992, the Defendant advised the Plaintiff that it did not intend to renew the lease which expired on August 23, 1993. Without the lease, the franchise agreement would also terminate.
The Defendant did inform the Plaintiff that it would enter
into a new lease for said location with the Plaintiff, but that the
rent would be increased from $1,200 per month, plus 2% of gross
sales over $720,000, to $2,850 per month for the first two years of
the new lease, eventually escalating to $3,000 per month in the
seventh and eighth years of the new lease. The Defendant later
offered a lower rent of $2,650 per month for the first four years
of the new lease, escalating to $2,850 per month in the eighth
year. It is significant to note that the Plaintiff had the
property appraised and that the appraiser determined a rental value
of $2,166 per month.See footnote 7
In addition to the new lease, the Defendant offered the
Plaintiff a new franchise agreement. Under the terms of the new
agreement, the franchise fee increased from 4% of gross sales to
4.75% of gross sales. The 4.75% franchise fee is the nonnegotiable
franchise fee charged to all of the Defendant's new or renewed
The first certified question concerns whether a franchise agreement which is dependent upon the existence of a valid underlying lease requires a lessor/franchisor to offer a successive lease agreement to a lessee/franchisee upon the expiration of the original lease, absent any renewal clause in either the lease or franchise agreement. The Plaintiff, relying on this Court's decision in Ashland Oil, Inc. v. Donahue, 159 W. Va. 463, 223 S.E.2d 433 (1976), maintains that non-renewal of the lease and franchise agreement was the direct result of the disparity in bargaining power between the parties and, therefore, is unconscionable and void as against public policy.See footnote 8 In contrast, the Defendant maintains that the Plaintiff's assertion that the absence of a non-renewal provision in the lease and franchise agreement is unconscionable and void as against public policy is wholly without merit.
It is important to note at the outset that our decision in
Ashland Oil does not concern either the presence of renewal
provisions or the lack thereof; rather, it dealt solely with
termination provisions.See footnote 9 See id. at 470, 223 S.E.2d at 438. Undeniably, in that case, we found as unconscionable on its face,
a ten-day cancellation clause contained only in the dealer's
agreement,See footnote 10 and available only to the dealer, holding that
"[t]ermination provisions of an agreement involving the sale of
goods which, if applied strictly, are so one-sided as to lead to
absurd results, will be declared unconscionable." Id. at 463, 223
S.E.2d at 435, Syl. Pt. 2. However, the Plaintiff in the present
case misguidedly relies upon Ashland Oil to support his disparity
in bargaining power argument since we specifically rejected that
argument in Ashland Oil, stating that
we do not find it necessary to base our holding upon a disparity in bargaining power between Ashland and Donahue. In most commercial transactions it may be assumed that there is some inequality of bargaining power, and this Court cannot undertake to write a special rule of such general application as to remove bargaining advantages or disadvantages in the commercial area, nor do we think it necessary that we undertake to do so.
Id. at 474, 223 S.E.2d at 440; but cf. Shell Oil Co. v. Marinello,
63 N.J. 402, 307 A.2d 598 (1973), cert. denied, 415 U. S. 920
Additionally, under common law, "[a]bsent contrary statutory
provisions, manufacturers are free to enter into franchise
agreements for the distribution of their products as they see fit."
Syl. Pt. 2, in part, McDonald's Corp. v. Markim, Inc., 209 Neb. 49,
___, 306 N.W.2d 158, 159 (1981). It is undisputed that West
Virginia has only one statute specifically governing the contents
of franchise agreements, and it is inapplicable to this case. See
W. Va. Code §§ 47-11C-1 to -8 (1992) ("West Virginia Petroleum
Products Franchise Act"). As the Supreme Court of Oregon noted in
William C. Cornitius, Inc. v. Wheeler, 276 Or. 747, 556 P.2d 666
(1976), "[w]e do not believe that the failure of a lessor to
include a renewal provision in a lease is per se unconscionable
and, without legislative guidance, we have no basis for declaring
that public policy requires such a provision in some leases and not
in others." Id. at 755, 556 P.2d at 670 (emphasis added).
Having concluded that there are no applicable statutory
provisions regarding renewal clauses in this case, we follow the
Wheeler decision in declaring that there is no concomitant public policy which has been violated due to the absence of said clauses
from the agreements. See id. Moreover, under the standard
enunciated in Ashland Oil, we cannot declare that the lack of any
renewal clause is unconscionable since the absence of said
provision is not "so one-sided as to lead to absurd results." 159
W. Va. at 463, 223 S.E.2d at 435, Syl. Pt. 2, in part. Thus, where
a franchise agreement is contingent upon the existence of a valid
underlying lease to be effective, absent any statutory provisions
regarding renewal of either the lease or franchise agreement or any
express renewal provisions contained within either the lease or
franchise agreement, a lessor/franchisor is not required to offer
a successive lease agreement to a lessee/franchisee upon the
expiration of the original lease.
In the present case, the Plaintiff having full knowledge that
the lease agreement was for a fixed term of fifteen years, that
neither agreement contained a provision for renewal, and that the
franchise agreement he entered into with the Defendant was
contingent upon the lease agreement, still voluntarily chose to
enter into this business relationship with the Defendant. Further,
even though the Defendant was not required to offer the Plaintiff
a successive agreement, the Defendant did so, giving the Plaintiff
the opportunity to engage in new negotiations. The Plaintiff,
rather than responding to the Defendant's invitation to enter into
these negotiations for the new agreements, chose to seek judicially imposed terms. The lower court correctly refused to require the
Defendant to offer the Plaintiff a renewal of the lease and
The next certified question concerns whether an implied
obligation of good faith, fair dealing and commercial
reasonableness requires a lessor/franchisor to offer a renewal of
a lease agreement to a lessee/franchisee upon reasonable terms at
the expiration of the original lease, where said lease lacked a
renewal clause. The Plaintiff argues that the obligation of good
faith, fair dealing and commercial reasonableness is implicit in
every contract executed in West Virginia and requires the Defendant
to renew the Plaintiff's lease and franchise agreement under
reasonable terms and conditions. In contrast, the Defendant
contends that the Plaintiff's claimed existence of an implied
covenant of good faith and fair dealing is not applicable to an
agreement which expired by its terms.
The Appellant again relies upon this Court's decision in
Ashland Oil for the proposition that an implied covenant of good
faith, fair dealing and commercial reasonableness requires the
Defendant to renew the lease and franchise agreement in the present
case. In Ashland Oil, the parties entered into a lease agreement and a dealer contract, both of which provided for a term of one
year from and after November 1, 1968, and thereafter from year to
year, subject to certain termination provisions. Id. at 465, 223
S.E.2d at 435. Both agreements related to premises which were to
be used for and operated as a gas station. Id.
We held in syllabus point one of Ashland Oil that:
A lease agreement and a dealer contract between the same parties, relating to the operation of a gasoline station at identified premises, providing for the same initial term and automatic extensions from year to year, providing for the sale and delivery of gasoline, and with rental provisions directly relating to the sale and delivery of gasoline, will be construed together and considered as forming an agreement involving a transaction in goods which is governed by the Uniform Commercial Code--Sales.
Id. at 463, 223 S.E.2d at 434-35. Consequently, we found that even
though the lease agreement and dealer agreement were separate
documents, "[a] fair reading of the documents discloses that they
are so interrelated on their face that either, standing alone would
be meaningless without the other. . . ." Id. at 469, 223 S.E.2d at
Similarly, in the present case, it is clear that the lease and
franchise agreement must be viewed together as forming an
integrated business relationship, since both agreements pertain to
the operation of a food mart which involves the sale of goods, and the existence of the franchise is expressly contingent upon the
Plaintiff having "a good and valid lease or sub-lease to, or shall
own the premises described as: Convenient Food Mart #3820[,] 287
So. Chestnut Street in the Village of Barnesville. . . ." Further,
according to the lease provisions, the amount of rent the Plaintiff
had to pay to the Defendant was based, in part, on the amount of
gross sales. Accordingly, we conclude, as we did in Ashland Oil,
that the lease and franchise agreements will be considered as
together forming an agreement involving a transaction in goods
which is governed by the Uniform Commercial Code--Sales. See id.
at 463, 223 S.E.2d at 434-35, Syl. Pt. 1; see also W. Va. Code §§
46-1-101 to -208 (1993).
Since the lease and franchise agreements are governed by the
Uniform Commercial Code, "[t]here is imposed upon both parties to
a business transaction an obligation of good faith in its
performance or enforcement. . . . The test of 'good faith' in a
commercial setting is '. . . honesty in fact and the observance of
reasonable commercial standards of fair dealing in the trade.'"
Ashland Oil, 159 W. Va. at 474, 223 S.E.2d at 440 (citing W. Va.
Code § 46-1-203 and quoting W. Va. Code § 46-2-103(1)(b)) (citation
Neither the Plaintiff nor the Defendant dispute that if a
contract provision should require a party to negotiate a renewal of that contract, then those negotiations must be made in good faith
by both parties. However, as we indicated in Ashland Oil, the
obligation of good faith extends only to the "performance or
enforcement" of the business transaction. See 159 W. Va. at 474,
223 S.E.2d at 440. Similarly, other courts have held that "'the
duty of good faith and commercial reasonableness is used to define
the franchisor's power to terminate the franchise only when it is
not explicitly described in the parties' written agreements.'"
Witmer v. Exxon Corp. 495 Pa. 540, ___, 434 A.2d 1222, 1227
(1981)(quoting Amoco Oil Co. v. Burns, 496 Pa. 336, ___, 437 A.2d
381, 384 (1981) (emphasis not in original); see 62B Am. Jur. 2d
Private Franchise Contracts § 510 at 425 (1990) ("[T]he good faith
requirement applies only in the context of an attempt on the part
of the franchisor to terminate its relationship with the franchisee
and is inapplicable to negotiations for renewal.").
Further, "where the express intention of contracting parties
is clear, a contrary intent will not be created by implication.
The implied covenant of good faith and fair dealing cannot give
contracting parties rights which are inconsistent with those set
out in the contract." Bonanza Int'l, Inc. v. Restaurant Management
Consultants, Inc., 625 F.Supp. 1431, 1448 (E.D.La. 1986). The
Supreme Court of Oregon recognized in Wheeler, "the principle that
every contract contains an implied condition of good faith and fair
dealing in its performance . . . does not require that a lease or contractual relationship which is, by its terms, limited to a
specific period be converted into a permanent relationship
terminable only at the option of the lessee." 276 Or. at 754, 556
P.2d at 670.
This case does not involve either the performance or
enforcement of either agreement, because the agreements have
expired. See Ashland Oil, 159 W. Va. at 474, 223 S.E.2d at 440.
Since the implied covenant of good faith and fair dealing does not
give contracting parties rights which are contrary to those set out
in the contract, and since the parties did not incorporate express
renewal provisions in the original agreements, we hold that where
a franchise and lease agreement are construed together and
considered as forming an agreement governed by the Uniform
Commercial Code, absent any express provisions regarding renewal
contained within said agreements, a lessor/franchisor is not
required by an implied obligation of good faith, fair dealing and
commercial reasonableness to offer a renewal of either agreement to
a lessee/franchisee. See id. at 463, 223 S.E.2d at 434-35.
Having answered the certified questions posed by the Circuit
Court of Ohio County, we dismiss this case from the docket of this
Footnote: 1 The original certification order was entered on January 27, 1994, and posed two different questions. That order was amended by the March 31, 1994, order and contained the two questions quoted supra in the text of this opinion. While the amended order states that "the Court Certified Question Order, entered January 27, 1994, shall otherwise remain in effect[,]" this Court, as previously indicated, will "'retain some flexibility in determining how and to what extent [a certified question from a circuit court to us] will be answered.'" Hayes v. Roberts & Schaefer Co., ___ W. Va. ___, ___, 452 S.E.2d 459, 463 n.6 (1994) (quoting City of Fairmont v. Retail, Wholesale, and Dep't Store Union, AFL-CIO, 166 W. Va. 1, 3-4, 283 S.E.2d 589, 590 (1980)) (bracketed material not in original). Accordingly, we find it necessary to answer only the two questions presented in the March 31, 1994, order.
Footnote: 2 Both parties are West Virginia corporations, while the leased premises and the franchise at issue are located in Ohio. Also, both the franchise and lease agreements were executed in West Virginia. While the terms of the franchise agreement provide that "[t]his Agreement shall be interpreted and construed in accordance with, and shall be governed by the laws of the State of Ohio[,]" no similar provision exists in the lease agreement. We need not interpret either agreement, since we conclude that both have expired by their express terms. Rather, we determine only whether under any of the theories propounded by the Plaintiff, the Defendant must offer the Plaintiff new agreements. Finally, neither party raises as error the application of West Virginia law in answering the certified questions at issue by either the circuit court or this Court.
Footnote: 3 As manager, Mr. Steiniger received a gross weekly salary of $270 for the first six months. Thereafter, his salary was adjusted quarterly, either upward or downward, depending upon the preceding six weeks' sales, exclusive of gasoline, of the prior quarter. According to a schedule attached to the franchise agreement, his salary would range from $200 to $380 per week. In addition to the weekly salary, Mr. Steiniger received a bonus ranging from 25% to 50% of the "income from grocery operations for the year after the deduction for the manager's salary, provided that the percentage requirement of income from grocery operations before the manager's salary is met."
Footnote: 4 According to the record, Mr. Steiniger purchased 100 shares of stock in BCI from GDC for $94,625 and BCI purchased the remaining 80 shares of stock in BCI from GDC for $75,700, for a total acquisition cost of $170,325.
Footnote: 5 According to the Defendant's brief, GDC sold all its physical assets and real property to CFM in July of 1988. In addition to the purchase of GDC's assets, CFM assumed the position of franchisor under the franchise agreements executed by GDC. The record does not contain the amount of money CFM paid to GDC for the acquisitions. Subsequently, GDC was voluntarily dissolved as a corporation on March 7, 1989.
Footnote: 6 In March 1992, CFM was experiencing difficulties in its operation of the franchise business and Charlie Swart sold all the stock in CFM to Gregg DeSantis together with several other partners. Mr. DeSantis was also a former GDC employee.
Footnote: 7 The Plaintiff contends that this figure includes taxes and insurance and that the Defendant's rental figure of $2,650 excludes taxes and insurance. However, there is no evidence in the record which supports the Plaintiff's contention.
Footnote: 8 The Plaintiff also asserts that the Defendant is equitably estopped from refusing to renew BCI's lease and franchise agreement under reasonable terms and conditions. The doctrine of equitable estoppel requires a showing by a plaintiff that the defendant undertook some affirmative action upon which the plaintiff relied to his detriment. See Humble Oil & Ref. Co. v. Lane, 152 W. Va. 578, 585-86, 165 S.E.2d 379, 384 (1969) (discussing Martin v. City of Spokane, 55 Wash.2d 52, 345 P.2d
1113 (1959)). Further, "[t]he doctrine of estoppel should be applied cautiously and only when equity clearly requires it to be done." Syl. Pt. 3, Humble Oil and Ref. Co., 152 W. Va. at 579, 165 S.E.2d at 381. Since the Plaintiff in this case not only failed to offer any authority supporting the application of the doctrine of equitable estoppel to this case, but also failed to direct this Court's attention to any facts indicating that the Plaintiff detrimentally relied on the affirmative acts of the Defendant, we conclude that the Plaintiff's argument on the issue of equitable estoppel is without merit.
Footnote: 9 Interestingly, even though the present case does not involve the termination of either agreement, the Plaintiff repeatedly directs this Court to cases regarding termination of franchise and lease agreements, and attempts to couch the Defendant's conduct as a termination. See Highway Equip. Co. v. Caterpillar, Inc., 707 F.Supp. 954 (S.D. Ohio 1989), reh'g denied, 908 F.2d 60 (6th Cir. 1990); Dayan V. McDonald's Corp., 125 Ill. App. 3d 972, 989-94, 466 N.E.2d 958, 971-74 (1984);
Bak-a-Lum Corp. of America v. Alcoa Bldg. Prods., Inc., 69 N.J. 123, 129-30, 351 A.2d 349, 351-52 (1976); Atlantic Richfield Co. v. Razumic, 480 Pa. 366, ___, 390 A.2d 736, 741-44 (1978). However, the circuit court correctly indicated in its memorandum opinion and order dated December 16, 1993:
this case does not concern the issues of
unilateral termination or terminations at
will. As well, the original 15-year lease
made no reference to a renewal option.
Indeed, the agreements between Barn-Chestnut and CFM would be new agreements. In that regard, the Court agrees with the defendant that the plaintiff seeks to have the defendant offer a new lease and franchise agreement upon judicially imposed terms.
Both parties assumed certain business risks when they entered a 15-year lease with no renewal clauses or options contained for either party.
Footnote: 10 That clause provided that the dealer could terminate the dealer agreement with ten days written notice if the plaintiff either defaulted in his agreement to "maintain the quality, good name and reputation of the products of . . . [Ashland Oil]" or should "indulge in practices, which, in the opinion of . . . [Ashland Oil] w[ould] tend to impair the quality, good name or reputation of the products, or the good will which ha[d] been built up by . . .[Ashland Oil]." Ashland Oil, 159 W. Va. at 466, 223 S.E.2d at 436.