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Westfield Centre Service, Inc. v. Cities Service Oil Co

    Brief Fact Summary. A franchisor of a gas station ended a lease with a franchisee in order to sell the property.

    Synopsis of Rule of Law. A franchisor who in good faith and for a bona fide reason terminates, cancels, or fails to renew a franchise for any reason other than the franchisee’s substantial breach of its obligations has violated the law and is liable to the franchisee for the reasonable value of the business less the amount realizable on liquidation.

    Facts. Cities Service Oil Co. (Defendant) owned land on which a gas station was located. James Galligan, who had worked as an attendant at the station for 20 years, organized Westfield Centre Service, Inc. (Plaintiff) to purchase the business. The seller was a lessee-franchisee of Defendant, marketing the gasoline under the name of Citgo. In conjunction with the purchase, Plaintiff entered into several agreements with Defendant, including a station lease of the property and improvements. Defendant decided to sell the station property and notified Plaintiff that the lease would not be renewed. Plaintiffs seek an order enjoining Defendant from proceeding with the sale and from interfering with Plaintiff’s use of the property.

    Issue. Can a franchisor sever the relationship with its franchisee only with good cause?

    Held. Yes.
    In a franchise relationship, the franchisee acquires the right to market products or services under the franchisor’s name and trademark. The franchiser obtains a distribution system without the burden of day-to-day operations of retail establishments and an opportunity to expand with less capital expenditure than would otherwise be required. The franchisee gains its own business with access to an established brand, tested marketing techniques and advertising. Both are interested in the financial success of the venture. But, there is disparity in the bargaining power of the parties.
    Under New Jersey law, a franchisor cannot sever the relationship with its franchisee without good cause. Good cause is the failure of the franchisee to substantially comply with the requirements placed upon him by the franchise agreement. The plain meaning of the language curtails a franchisor’s right to end the franchise in the absence of a breach by the franchisee.
    A franchisor must generally give the franchisee at least sixty days advance written notice of termination, cancellation, or intent not to renew.
    Despite the terms of the agreement, the franchisor may not refuse, at least under some circumstances, to continue the franchise unless it reimbursed the franchisee for its loss. In a situation where the franchisor acts in good faith for a bona fide reason, the damages should be measured by the actual or reasonable value of the franchisee’s business when the franchisor cuts off the franchise.
    A franchisor who in good faith and for a bona fide reason terminates, cancels, or fails to renew a franchise for any reason other than the franchisee’s substantial breach of its obligations has violated the law and is liable to the franchisee for the reasonable value of the business less the amount realizable on liquidation.

    Discussion. A franchisee has the right to an injunction to prevent the termination of his lease if there is no good reason to end it.”


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