Amoco Oil Co. v. Ervin
| Decision Date | 04 December 1995 |
| Docket Number | No. 94SC452,94SC452 |
| Citation | 908 P.2d 493 |
| Parties | 28 UCC Rep.Serv.2d 452 AMOCO OIL COMPANY, a Maryland Corporation, Petitioner, v. Dale A. ERVIN, Mike Wallen, Don R. Plummer, Richard B. Rush, Rodger D. Kruger, Norman Smith, and the Estate of Norman Smith (Daniel T. Smith, Personal Representative), Gregory S. Hearing, Leslie R. Koehnen, Edward J. Cook, Stephen D. Cameron, Richard D. Oneslager, Rodney O. Marshall, John Galli, John L. Weibel, Herbert Hawley, William J. ("Bill") Mattedi, Gerald W. Human, Roger ("Rodger") Scott, Robert H. Schroeder, and the Estate of Robert H. Schroeder (Jeanne Schroeder, Personal Representative), and Samuel W. Geist, Respondents. |
| Court | Colorado Supreme Court |
Kirkland & Ellis, Frank Cicero, Jr., John A. DeSisto, Denver, Krendl, Horowitz & Krendl, E. Lee Reichert, Denver, Amoco Corporation, William J. Noble, Chicago, Illinois, Kirkland & Ellis, Richard C. Godfrey, Chicago, Illinois, for Petitioner.
Hubert M. Safran, Denver, Farrell & La Mantia, Mark A. La Mantia, Rosemont, Illinois, for Respondents.
Breit, Bosch, Levin and Coppola, P.C., Bradley A. Levin, Denver, for Amicus Curiae Colorado Trial Lawyers Association.
We granted certiorari to review Ervin v. Amoco Oil Co., 885 P.2d 246 (Colo.App.1994). 1 Petitioner Amoco Oil Company (Amoco) appeals the court of appeals' decision to affirm a judgment entered on a jury verdict in favor of respondents, sixteen current or former Amoco brand retail service station dealers doing business in Colorado (collectively referred to as "dealers"). The court of appeals held that Amoco breached an implied covenant of good faith and fair dealing and tortiously interfered with prospective business relationships. We affirm in part, reverse in part, and remand to the court of appeals with directions that it return the case to the trial court with instructions that damages be recalculated.
Amoco, a Maryland corporation, is a nationwide manufacturer, transporter, and marketer of petroleum products. Amoco distributes its products through a dual distribution system. As a landlord, Amoco leases service station facilities to independent service station dealers in various states, including Colorado. Amoco sells its products to these independent dealers who then resell the same to the public. Amoco also sells its products directly to the public through its own company operated stations.
Amoco entered into written lease and dealer supply agreements (agreements) with various dealers in the state of Colorado. The lease agreements provided that "[l]essee shall pay to Lessor as rent for the Premises, the sum of [a designated amount] per month during the term of this Lease unless a variable monthly rental is indicated below...." Under these agreements, Amoco leased both service station facilities and real property to each dealer. Both the lease and supply agreements had terms of one to three years; contained integration, cancellation, and merger clauses; and included specific dollar amounts of rent. Pursuant to the agreements, Amoco internally calculated the amount of rent it would collect from each dealer for its service station properties. Since 1985, Amoco has used its Investment Value Report program (IVR) to determine its Colorado rental goals. Using the IVR program, Amoco calculates the amount of rent based on the asset value of each service station.
Prior to adopting asset based rental valuations, Amoco calculated the rent amount based on the sale of gasoline at a particular station (gallonage rent program). Under the gallonage rent program, dealers paid a specific rental amount for every gallon of gasoline sold. However, Amoco decided the gallonage rent program provided a disincentive to sell more gasoline because a dealer's rent would increase with higher sales. In part to correct this disincentive, Amoco instituted an asset based calculation to determine rent payments under the agreements. In essence, Amoco sought to move fixed costs from the gasoline operation to the value of the real estate for each dealership. Following this philosophy, Amoco eventually promulgated the IVR program.
Under the IVR program, Amoco first determines the market value of the land, which is appraised at its highest and best use. Second, Amoco establishes a value for capital improvements. Capital improvements include buildings, machinery, equipment, furniture, and fixtures. Amoco adds together the original dollar amounts (i.e., investment value) paid for the improvements, regardless of when the money was spent. Next, the market value of the land and the value attributed to capital improvements are added together to determine the investment base. Amoco charges eight percent of the investment base to calculate a dealer's capital charge. Finally, Amoco adds other fees to the eight percent capital charge.
Each year the previous three years worth of maintenance costs are totalled and averaged. The annual average becomes the maintenance portion of the rent for the next fiscal year. Amoco also adds a charge for real estate and personal property taxes paid on a particular location. In addition to these figures, on full facility operations, Amoco applies a uniform charge for each automotive service bay despite the inclusion of buildings, equipment, machinery, and fixtures in the capital improvements portion of rent calculations. The dealers contend they are being double charged on the service bays because the capital improvement component covered that cost. Amoco adds the capital charge, average maintenance cost, taxes, and service bay charges to calculate the rent for a particular location. 2
On June 20, 1988, the dealers initiated suit against Amoco, alleging breach of the agreements and tortious interference with prospective business relations. The dealers' complaint contained seven claims, four of which were dismissed prior to trial. The remaining three counts were submitted to the jury. The jury returned a verdict in favor of the dealers for over $2.5 million in damages, prejudgment interest, and costs for breach of an implied covenant of good faith and fair dealing and tortious interference with prospective business relations. Amoco appealed the judgment entered on the jury verdict. 3
The court of appeals affirmed the judgment of the trial court. Ervin v. Amoco Oil Co., 885 P.2d 246 (Colo.App.1994). It concluded that the record supported a finding that the covenant of good faith and fair dealing was breached. Id. at 250. The court of appeals also held that the dealers established a prima facie case of tortious interference, and the trial court properly submitted that claim to the jury. Id. at 253. Amoco appealed.
The dealers claimed that Amoco breached its contractual obligations under the implied covenant of good faith and fair dealing by abusing its power, acting outside the scope of its discretion, and usurping the benefits of the agreements. Specifically, the complaint alleged that Amoco reserved discretion to make certain decisions, including establishing the purchase price for motor fuel, station rentals, station hours, and credit arrangements. The dealers asserted that Amoco's use of the IVR Program for the internal calculation of rents resulted in redundant service bay charges. They claimed that, by charging twice for service bays, Amoco abused its discretion. This abuse resulted in a breach of Amoco's implied duty of good faith and fair dealing.
Although the agreements were fully integrated, the trial court admitted parol evidence on the issue of breach of duty of good faith and fair dealing. The jury was instructed to enforce the agreements according to the reasonable expectations of the parties and determine rental overcharges for service bays based on the IVR method employed by Amoco. The jury found that Amoco breached its implied duty of good faith and fair dealing, rendered a verdict in favor of the dealers, and awarded the dealers a total of $987,125 in "rental damages."
On appeal, Amoco contended that the trial court's introduction of parol evidence in this case was improper because the lease agreements were unambiguous and fully integrated. See Radiology Professional Corp. v. Trinidad Area Health Ass'n, Inc., 195 Colo. 253, 256, 577 P.2d 748, 750 (1978). Amoco argued that the trial court improperly allowed the jury to rewrite unambiguous and fully integrated lease agreements in three respects: (1) dealers were relieved of their obligation to pay rents and Amoco was precluded from collecting rents; (2) the rental amount was rewritten entirely; 4 and (3) the paragraph barring both implied covenants and modifications absent written agreement of both parties was deleted. 5 The court of appeals rejected Amoco's arguments, holding that although "payment [by the dealers] of the actual fixed monthly rental amount is non-discretionary," Amoco retained discretionary authority to modify the rent charges. Ervin, 885 P.2d at 251. This authority, granted by contract, is circumscribed by the duty of good faith and fair dealing. See id. at 250-51. The court of appeals concluded that the dealers were being charged twice for service bay charges in the rental calculation, and a jury could conclude that the covenant of good faith and fair dealing was breached. Id. at 251.
Colorado, like the majority of jurisdictions, recognizes that every contract contains an implied duty of good faith and fair dealing. § 4-1-203, 2 C.R.S. (1992) (); see, e.g., Wells Fargo Realty Advisors Funding, Inc. v. Uioli, Inc., 872 P.2d 1359, 1362 (Colo.App.1994); Friedman v. Colorado Nat'l Bank, 825 P.2d 1033, 1042 (Colo.App.1991), rev'd on other grounds, 846 P.2d 159 (Colo.1993); Ruff v. Yuma...
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