In a recent 4-3 opinion, the Court of Appeals of Maryland in John Deere Construction and Forestry Co. v. Reliable Tractor, Inc., used a unique interpretation of the termination provisions of a Dealer Agreement to hold that a new contract was created after each 120-day notice period expired. Based on this finding, the Court avoided any determination as to whether a statute requiring "good cause" for termination, enacted after the initial contract between the parties was signed, could be retroactively applied.
In 1984, Reliable Tractor signed dealer agreements with John Deere, which was at the time located in Maryland, to sell forestry and utility equipment. These contracts were terminable at will by the manufacturer upon 120 days notice. The contracts had no set termination date. In 1987, Maryland enacted legislation by which such contracts could be terminated only upon a showing of "good cause." In the present litigation, Reliable sought partial summary judgment on the basis that its agreements could not be terminated without a finding of good cause, based upon this statute. John Deere challenged the application of the "good cause" statute on the grounds that it post-dated the contracts between the parties and could not be applied retroactively under Maryland law.
In answering a certified question from a federal court in Georgia, the highest court in Maryland found that because the dealer agreements between the parties provided a 120-day notice period for termination, these perpetual agreements were converted into a series of contracts with a term equal to the notice provision period. In other words, each time that 120 days passed, the Court found, a new contract was created. At the creation of each new contract, the parties were presumed to know the law then in effect and that such law would become part of this new contract. Because the statute requiring good cause was enacted before the last 120-day period during which the parties were doing business, the court found that the good cause statute was being applied prospectively, not retroactively.
Three judges dissented in a strongly-worded opinion. The dissent argued that the majority decision was not consistent with prior Maryland law, or with law from other jurisdictions regarding the formation of new contracts. As the dissent describes, most courts in considering similar issues have adopted a "fresh decision" test in determining whether a new contract was formed. In other words, most other courts have looked to whether an intervening change in an existing contract was sufficient to cause the parties to seriously reconsider the relationship (e.g., a change in majority ownership of the franchisee) before determining that a new contract was formed. The dissent found that formation of a new contract at the expiration of each notice period was a legal fiction that had no support in the law and that should not be recognized.
The dissent's view is consistent with a decision Baker Hostetler obtained for a client in Ohio, Bob Tatone v. Ford Motor Company, 197 F.3d 787 (6th Cir. 1999), which involved a contract with a substantially similar 120-day notice period for termination without cause. In Tatone, the Sixth Circuit found that an at-will termination, consistent with the terms of the Dealer Agreement was proper, as a later enacted "good cause" statute could not be retroactively applied.
This Maryland decision, however, will give franchisees another approach in their efforts to avoid retroactive application arguments. Moreover, this decision should give a manufacturer an incentive to review contracts for dealerships in states where the legislature enacts laws that would purport to change what would otherwise be a vested contractual right. Although this case appears to be one of the more extreme efforts by a court to avoid retroactive application problems, manufacturers may want to take a hard look at poorly performing or merely inadequate franchisees and consider termination under an "at will" provision, as later efforts to terminate under a "good cause" standard may prove more difficult, if not impossible.