Automobile franchise agreements frequently contain provisions allowing the franchisee to earn incentive payments that serve to increase the franchisee’s profitability. Many times, these incentive payments are conditioned upon the franchisee reaching certain performance goals and/or making specified improvements to the franchisee’s dealership facilities. As such, it is important that franchisees recognize that a violation of the franchise agreement and/or related contracts may result in the suspension or forfeiture of the incentive payments.

In Jaguar Land Rover North America, LLC v. Manhattan Imported Cars, Incorporated, 2012 WL1392656 (C.A.4(Md.)), Manhattan Imported Cars, Incorporated (“Manhattan”) entered into three agreements with Jaguar Land Rover North America (“JLRNA”); a letter of intent (“LOI”), performance agreement (“Performance Agreement”) and dealer agreement (“Dealer Agreement”). All three documents were e-mailed to Manhattan as a package on April 21, 2006. The LOI and Performance Agreement were executed by Manhattan on May 3, 2006 and the Dealer Agreement was executed by Manhattan on May 16, 2006 following Manhattan’s closing of its purchase of a Land Rover Franchise from another dealer.

After executing the Dealer Agreement, Manhattan was entitled to participate in JLRNA’s Business Builder Program, however, Manhattan’s entitlement to receive incentive payments was conditioned upon certain facility related improvements as required in both the LOI and Performance Agreement. Under the rules of the Business Builder Program, when a dealer fails to meet any given project milestone by more than 90 days, and the final “open for business” milestone is unlikely to be achieved, the project is categorized as “at risk” and an immediate suspension of incentive payments is triggered. In April 2008, JLRNA notified Manhattan that it had failed to meet its required milestones and that JLRNA was suspending Manhattan’s incentive payments.

Manhattan argued that an integration clause contained in the Dealer Agreement, which provided that the Dealer Agreement “contains the entire agreement” between the parties and “cancels, supersedes and annuls any prior contract agreement or understanding” between the parties, served to nullify the terms of the earlier executed LOI and Performance Agreement. The Court disagreed and reasoned that the LOI, Performance Agreement and Dealer Agreement were submitted as one package, that all three agreements were required to be completed before Manhattan was authorized to begin operating the Land Rover dealership and that, although the three agreements were executed during the course of a two-week period, the parties treated the agreements as being part of a single transaction.

Although Manhattan proffered two additional arguments against the suspension based on Maryland state laws, the court held that under the terms of the Business Builder Program, Manhattan’s failure to comply with the terms LOI and Performance Agreement permitted JLRNA to lawfully suspend incentive payments to Manhattan.

In summary, although federal law and the vast majority of relevant state laws favor the automobile dealer/franchisee over the manufacturer/franchisor, where the parties freely negotiate a contract that is in compliance with the applicable laws, courts will enforce the terms of the contract. As such, it is important that franchisees understand and comply with their obligations arising pursuant to the terms of the negotiated contracts with the franchisor. Otherwise, the franchisor may successfully enforce available remedies resulting in severe consequences to the franchisee.