Automobile Dealers - Do You Really Have a Right to Refuse New Vehicles?

John Pico
 


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According to a recent article in the NY Times:

The Chrysler Group said Monday that it had not yet accounted for tens of thousands of cars in its inventory numbers, which are already considered high by industry standards. Chrysler said it had routinely excluded these vehicles, worth billions of dollars, from its tally of unsold cars and trucks because they had not yet been assigned to a specific dealer or ordered by a customer. (New York Times, October 24, 2006)

When I began learning about the automotive industry, dealers and manufacturers had a name for manufactured, but unordered vehicles. That name was: “sales bank. ” The “sales bank” is a practice that the manufacturers allege they abandoned after being ravaged by the system during the oil crises of the 1970s.

By the early 1980s, when the dust settled, Automotive News was running stories like:

Ernest D'Agostino of Rhode Island filed suit, in the U. S. District Court against Chrysler Corporation, alleging Chrysler terminated his franchise because he refused to buy “gas guzzlers" - large cars with low gas mileage. A federal court jury found against Chrysler and Chrysler, in an unreported case, appealed. Chrysler agreed to drop its appeal and paid D'Agostino a settlement (Automotive News, October 1982); and

Fred Drendall, of Drendall Lincoln-Mercury/Pontiac sued Ford Motor Company alleging that when he attempted to cancel orders he was intimidated by Ford spokesmen and when he bowed to the pressure and ordered the vehicles, the high flooring costs forced him to refinance his dealership. He was eventually was terminated and suffered a heart attack. (Automotive News, December 1982).

Those were hard times in the car business.

Today, most Sales and Service Agreements have provisions such as the following:

2. (D) STOCKS. The dealer shall maintain stocks of current models of such lines or series of VEHICLES, of an assortment and in quantities as are in accordance with Company GUIDES therefor, or adequate to meet the Dealer's share of current and anticipated demand for VEHICLES in the DEALER'S LOCALITY. The Dealer's maintenance of VEHICLE stocks shall be subject to the Company's filling the Dealer's orders therefor. (Ford Motor Company, Mercury Sales and Service Agreement, Standard Provisions. )

Most states, however, have Dealer Day in Court Acts with provisions such as:

Art. 4413(36), SUBCHAPTER E. PROHIBITIONS. Sec 5.02. Manufacturers; Distributors; Representatives. (b) It is unlawful for any manufacturer, distributor, or representative to: (1) Require or attempt to require any dealer to order, accept delivery or pay anything of value, directly or indirectly, for any motor vehicle, appliance, part, accessory or any other commodity unless voluntarily ordered or contracted for by such dealer. (Texas Motor Vehicle Commission Code)

It shall be unlawful and a violation of this code for any manufacturer, manufacturer branch, distributor, or distributor branch licensed under this code to coerce or attempt to coerce any dealer in this state: (a) To order or accept delivery of any motor vehicle, part or accessory thereof, appliance, equipment or any other commodity not required by law which shall not have been voluntarily ordered by the dealer. (Section 11713.2 California Vehicle Code)

In addition to state laws, the National Dealer Day in Court Act also proscribes manufacturer and distributors from coercing a dealer into accepting “automobile, parts, accessories, or supplies which the dealer does not need, want or feel the market is able to absorb. " 1956 U. S. Code. Cong. & Admin. News, page 4603.

But, the law is always a two-edged sword and there is generally a fine line drawn between actions that are proper and actions that are improper. For example, it has long been settled that a dealer's refusal to take all of the manufacturer's line of vehicles, choosing instead to sell a competitor's models, is grounds for termination. See, for example: Randy's Studebaker Sales, Inc. v. Nissan Motor Corporation, 533 F.2d 510 (10th Cir. 1976), at 515.

Consequently, prior to deciding whether to accept or reject delivery of vehicles, a dealer should check with a competent automotive attorney, that is familiar with the laws in the jurisdiction where the vehicles are to be delivered, with respect to his or her particular circumstances.

Note: This article is not intended to provide legal advice, nor should it be interpreted as so doing.

John Pico is the Managing Partner of Advising Automobile Dealers LLC. Mr. Pico served as a court appointed “Consultant to Debtor" in bankruptcy cases, a “Court Appointed Mediator" in automotive disputes, the “Court Appointed Arbitrator / Appraiser" in partnership disputes, a “Court Approved Consultant to Receiver" in a check-kiting case, as a “Superior Court Mediator" in dealership/lender litigation and has been recognized as an expert witness on both State and Federal levels.

He has consulted on upside-down positions of over $50 Million, out of trust position of over $4 Million and a bank overdraft of $30 Million. Since 1972, Mr. Pico has completed over 1,000 automobile dealership transactions, whose combined values exceed One Billion Dollars.

In 1986, he authored and National Legal Publishing Company published the nation's first book on Buying and Selling Automobile Dealerships. You can view his biography at http://www.advisingdealers.com

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