In the midst of the constant threats to dealers’ franchise investment, including new OEM facility requirements, OEM vehicle subscription programs, OEM warranty and incentive audits and chargebacks, attorneys general and FTC advertising penalties, consumer lawsuits, etc., it is easy to lose sight of an area of the manufacturer-dealer relationship which can have a huge impact on your franchise investment – the various agreements and paperwork that the manufacturer sends to the dealership. Despite the common understanding that the manufacturer won’t negotiate the terms of these agreements, this is an area ripe for preventive maintenance.
There are many agreements and program details/manuals sent to dealerships on a periodic basis that dealers simply accept at face value. The most impactful of these is the Sales and Service Agreement itself. Although it is true that the manufacturer will generally not change the “standard provisions” within the agreement, there is typically a number of addenda attached to those standard provisions that are specific to the dealership. In many cases, these addenda include sales performance or facility requirements that go well beyond those contained in the standard provisions.
These more specific requirements are in fact negotiable, and dealers who accept those requirements at face value will find it very difficult to avoid them in the future even with the assistance of state franchise protections. The leverage a dealer has in negotiating the terms of the Sales and Service Agreement addenda is that the Sales and Service Agreement does not expire until a new Sales and Service Agreement is agreed upon notwithstanding the expiration date contained in the agreement. Dealers receiving proposed sales, facility or other performance requirements should not agree to any term with which they do not expect to be able to comply. Instead, dealers should negotiate those terms down to a performance level that can practically be met under the dealership’s specific market circumstances.
If the negotiations are unsuccessful, the dealer has the option of continuing to operate under the terms of the prior Sales and Service Agreement. However, if the objectionable terms are ultimately agreed to those terms are much more likely to be enforced by an arbitrator, hearing officer or judge. This is true even if the provisions of your state motor vehicle franchise laws prohibit a manufacturer from requiring the very thing contained in the addendum.
This is because third-party decision makers who are not familiar with the automotive industry have difficulty getting past the fact that an experienced business person like a dealer could agree to certain terms in writing but then ultimately be freed from performance under those terms. In their mind, a contract is a binding agreement. These arbitrators and judges do not understand the economic power the OEMs wield over their dealer networks.
Apart from the Sales and Service Agreement addenda, manufacturers regularly send dealers the terms of new manufacturer initiatives in the form of a separate agreement. These include new facility image programs, data sharing agreements, exclusive use/site control agreements, a new vehicle model agreement (think Genesis participation agreement), new vehicle loaner/customer concierge program, etc.
Dealers should always have these agreements reviewed by experienced motor vehicle franchise counsel to determine if any of the terms are a concern to the dealership. If so, dealers should not hesitate to engage the factory in negotiations over the most concerning portions of these agreements/programs. Dealers who have done so have been surprised at the ability to obtain favorable changes to provisions within those agreements/programs.
Even if no changes are ultimately agreed upon if the dealer chooses to proceed he or she is going in with full knowledge of the pitfalls and can prepare accordingly. Likewise, an attempt to negotiate the terms of these ancillary agreements/programs, which should always be done in writing, will serve to create a record of the dealership’s objection to certain terms, which may be very useful in any future dispute over those terms.
Dealers are encouraged to pay close attention to agreements and program terms sent to the dealership in the normal course of business. Those agreements should be reviewed and, if appropriate, changes negotiated to make them acceptable to the dealership. Look at it as an oil change for your engine. Those who avoid this preventive maintenance will find themselves standing on the side of the road faced with the prospect of a very expensive engine replacement.
Author: Richard Sox
Richard Sox is a lawyer with the firm of Bass Sox Mercer PA (formerly known as Myers & Fuller PA).