The U.S. Court of Appeals for the Second Circuit has summarily rejected a prospective purchaser’s attempt to impose contractual liability against a manufacturer who denied its application prior to final approval and execution of the dealer agreement. In so holding, the Second Circuit relied on the manufacturer’s consistent and express statements during the negotiations that it would not be bound prior to the approval and execution of such an agreement. In Tri-County Motors, Inc. v. American Suzuki Motor Corp., No. 07-3275-cv (Nov. 24, 2008), the Second Circuit rejected all claims brought by the prospective purchaser, including claims for breach of contract, promissory estoppel, and tortious interference with contract. Additionally, the U.S. District Court for the Eastern District of New York rejected the prospective purchaser’s claim under the New York State Franchised Motor Vehicle Dealer Act, a finding that was not appealed. For the decision, please click here.
Tri-County involved an attempt by prospective purchaser Tri-County Motors to force American Suzuki Motor Corporation, Sutherland’s client in this matter, to award it a Suzuki dealership after negotiations between the parties fell through. In 2003, Tri-County and Suzuki commenced negotiations regarding the prospect of Tri-County operating a Suzuki dealership. While early discussions were promising, once Tri-County changed its proposal and decided to house Suzuki in an undesirable showroom location, Suzuki turned down the dealer application. During the negotiations, Suzuki repeatedly informed Tri-County in writing that a contract would be created only upon the approval and execution of the dealer agreement by Suzuki officers in Brea, California, and that any expenses undertaken by Tri-County prior to formal approval would be at its own risk. After the dealer application was denied, Tri-County filed suit against Suzuki.
Tri-County asserted four claims against Suzuki. First, it alleged that Suzuki had breached a contract between the parties by denying its dealer application. Second, Tri-County alleged under a promissory estoppel theory that Suzuki had represented that it would not unreasonably deny Tri-County’s application and that Tri-County had relied on that representation to its detriment. Third, Tri-County asserted that by denying its application, Suzuki tortiously interfered with a contract between Tri-County and the selling dealer. Fourth, Tri-County claimed that Suzuki’s denial of the application was an unreasonable withholding of consent to the transfer in violation of the New York State Franchised Motor Vehicle Dealer Act. N.Y. Veh. & Traf. § 460 et seq.
All of Tri-County’s claims were rejected by the district court on summary judgment. 04-cv-0835-ENV-KAM (E.D.N.Y. July 05, 2007). The district court provided a thorough and well-reasoned opinion in support of its decision to grant summary judgment in favor of Suzuki on all claims. On appeal, the Second Circuit stated that it affirmed for substantially the same reasons as the district court and added a few additional comments.
First, the Second Circuit and district court agreed with Suzuki that its negotiations with Tri-County had not created a binding contract. Suzuki relied on the Second Circuit’s opinion in R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 74 (2d Cir. 1984), for the proposition that a party who expressly communicates its intent not to be contractually bound absent a written contract will not be bound without such a writing. Suzuki contended that its repeated, consistent warnings to Tri-County that no contract would be created absent a written agreement effectively expressed its intent not to be bound. The district court found R.G. Group applicable to the case and held that Suzuki had used “unequivocal language” to communicate that it would not be bound without a written contract. The Second Circuit affirmed the district court’s finding and further rejected Tri-County’s argument that the parties had created an unwritten contract pursuant to the customs and practices of the automobile industry. The court stated that “Tri-County’s reliance on industry custom and practice [was] misplaced because custom cannot create an intent to be bound.”
Second, the district court and Second Circuit found that summary judgment was appropriate on Tri-County’s promissory estoppel claim. Tri-County asserted that Suzuki’s representation that it would not unreasonably deny a candidate constituted a clear and unambiguous promise to award a dealership, and that Tri-County had relied on such representation to its detriment. Tri-County further argued that Suzuki’s behavior constituted a promise under the customs and practices of the industry. Suzuki maintained that its repeated declarations that it would not be bound absent a writing precluded a finding of a clear and unambiguous promise. The district court agreed with Suzuki. The court stated that a “non-specific pledge of reasonableness simply cannot be construed as a clear and unambiguous promise.” The court also found that Tri-County took all actions at its own risk and could not have reasonably relied on Suzuki’s pledge of reasonableness in light of Suzuki’s express declaration of its intent not to be bound. The Second Circuit affirmed, finding that the district court had properly considered and disposed of the promissory estoppel claim.
Third, the courts rejected Tri-County’s claim for tortious interference with contract. Tri-County contended that Suzuki tortiously interfered with its contract to purchase the dealership by denying the dealer application. In order to prevail on this claim, Tri-County had to demonstrate that it had entered into a valid contract with a third party, that Suzuki knew of the contract, that Suzuki had interfered with this contract without justification, and that the interference damaged Tri-County. Suzuki argued that because the buy/sell was contingent on Suzuki’s approval of the transfer, Suzuki’s decision to reject the dealer application was privileged and did not constitute tortious interference with contract. The district court agreed. In affirming, the Second Circuit emphasized that no separate contract existed and that Suzuki’s denial of the dealer application was not the type of behavior that could be considered tortious.
Fourth, Tri-County asserted that Suzuki had violated the New York State Franchised Motor Vehicle Dealer Act by unreasonably withholding consent to the transfer. Suzuki maintained that Tri-County lacked standing because as a prospective purchaser of a dealership, it was not a “franchised motor vehicle dealer” under the Act. The district court agreed and found that because Tri-County was never granted a dealership, it had no standing to sue. The district court’s finding in favor of Suzuki on this issue was not appealed.
This case confirms the principle that a party participating in negotiations may take affirmative steps to limit its contractual liability if the negotiations collapse. The Second Circuit found that Suzuki’s consistent express and written declarations of its intent not to be bound were sufficient to insulate it from a breach of contract claim. Further, the court found that these declarations precluded a promissory estoppel claim by negating the existence of a clear and unambiguous promise.
Additionally, this case marks the first time that the Second Circuit has directly addressed the effect of industry custom and practice on the formation of a contract. While the court did not identify situations in which such evidence might be useful, it clarified that “custom cannot create an intent to be bound.” These holdings by the Second Circuit provide some guidance to parties that express, written declarations of intent not to be bound during negotiations will go a long way to limit contractual liability when negotiations do not come to fruition.