Claims by Two NY Audi Dealers Move Forward

By Jerry Meek

Elsewhere, I’ve written about the power of the implied covenant of good faith and fair dealing as a litigation tool.  Last week, a New York appellate court proved the point, holding that claims by two auto dealers, based both on the express language of the Dealer Agreements and the implied covenant of good faith and fair dealing, could move forward.

In Legend Autorama, Ltd. v. Audi of America, Inc., 2012 WL 5503626 (N.Y.A.D.2 Dept.), Audi appealed the lower court’s decision denying Audi’s motion for summary judgment.  The plaintiffs in the case were two franchised Audi dealers, operating pursuant to identical Dealer Agreements with Audi.  They filed suit after Audi appointed a new dealer to operate at a location within 13 miles of the plaintiffs’ location.

The plaintiff dealers asserted three claims against Audi.  First, they argued that Audi was in breach of the express terms of the Dealer Agreement.  Second, they argued that Audi’s conduct constituted a breach of the implied covenant of good faith and fair dealing implied in that agreement.  Third, they argued that Audi had breached fiduciary duties they owed to the dealers.

The appellate court rejected the plaintiffs’ breach of fiduciary duty claims, noting that “a conventional business relationship, without more, is insufficient to create a fiduciary relationship.”  But the court allowed the plaintiffs’ breach of contract claims – based both upon the express provisions and the implied covenant – to go forward.

Echoing other courts, the New York Court observed that “implicit in every contract is a covenant of good faith and fair dealing, which encompasses any promise that a reasonable promisee would understand to be included.”  Audi argued that, since the Dealer Agreement specifically provided that the plaintiffs would be nonexclusive distributors, Audi had discretion to add new dealers even within existing dealers’ territories.  The Court rejected the argument, noting that “even an explicitly discretionary contract right may not be exercised in bad faith so as to frustrate the other party’s right to the benefit under the agreement.”

The plaintiffs also argued that Audi’s conduct breached an express provision of the Dealer Agreement, under which Audi agreed to “actively assist Dealer in all aspects of Dealer’s Operations through such means as Audi considers appropriate.”  There was evidence that, when other dealers were underperforming, Audi would permit them to implement action plans prior to opening new dealers in the area.  This they did not do in the case of the plaintiff dealers.  This evidence, according to the Court, was sufficient to allow the express breach of contract claim to move forward.

In the end, the Court’s decision to deny summary judgment on the implied covenant claim reflects the fact specific inquiry that any such claim requires.  Ordinarily, questions of good faith are to be decided by the jury and thus are inappropriate issues for summary judgment.  Here, the dealer plaintiffs got a bonus – even their express breach of contract claim survived.