Mazda Motors of America, Inc. v. Southwestern Motors, Inc.

• Decision Date: 18 April 1978
• Docket Number: No. 7710SC299,7710SC299
• Parties: , 24 UCC Rep.Serv. 423 MAZDA MOTORS OF AMERICA, INC. v. SOUTHWESTERN MOTORS, INC., d/b/a Mazda of Raleigh.
• Court: North Carolina Court of Appeals

Page 793

243 S.E.2d 793

36 N.C.App. 1, 24 UCC Rep.Serv. 423

MAZDA MOTORS OF AMERICA, INC. v. SOUTHWESTERN MOTORS, INC., d/b/a Mazda of Raleigh.

No. 7710SC299.

Court of Appeals of North Carolina.

April 18, 1978.

Poyner, Geraghty, Hartsfield & Townsend by John J. Geraghty, David W. Long and Cecil W. Harrison, Jr., Raleigh, for plaintiff-appellee.

Newsom, Graham, Strayhorn, Hedrick, Murray, Bryson & Kennon by Josiah S. Murray, III, and Lewis A. Cheek, Durham, for defendant-appellant.

MITCHELL, Judge.

The defendant first assigns as error the failure of the trial court to rule that, as a matter of law, the franchise agreement between the parties was wrongfully terminated, canceled or not renewed. For reasons which will be discussed hereinafter, we find this assignment to be meritorious and hold that the trial court committed error in failing to so rule.

By the enactment of Article 12 of Chapter 20 of the General Statutes, the Motor Vehicle Dealers and Manufacturers Licensing Law, the General Assembly sought to regulate and license motor vehicle manufacturers, distributors, dealers and salesmen in the conduct of their business in North Carolina. We are here concerned with G.S. 20-305(6) which became effective upon ratification on 16 March 1973. By enactment of that section, the General Assembly declared:

It shall be unlawful for any manufacturer, factory branch, distributor, or distributor branch, or any field representative, officer, agent, or any representative whatsoever of any of them:

(6) Notwithstanding the terms of any franchise agreement to terminate, cancel, or refuse to renew the franchise of any dealer, without good cause, and unless (i) the dealer and the Commissioner have received written notice of the franchisor's intentions at least 60 days prior to the effective date of such termination, cancellation, or the expiration date of the franchise, setting forth the specific grounds for such action . . . except in the event of fraud, insolvency, closed doors, or failure to function in the ordinary course of business, 15 days' notice shall suffice; provided that in any case where a petition is made to the Commissioner for a determination as to good cause for the termination, cancellation, or nonrenewal of a franchise, the franchise in question shall continue in effect pending the Commissioner's Decision . . . .

The trial court found and concluded that the franchise agreement between the parties to this action was terminated both by its own terms calling for its expiration on 31 December 1973 and by the "mutual agreement" effective on 10 July 1974. In arriving at these findings and conclusions, the trial court found the requirements of G.S. 20-305(6) to be unconstitutional as impairing the obligations of contracts. We hold these findings and conclusions by the trial court to be erroneous. We further hold that G.S. 20-305(6) is not a state "law impairing the obligations of contracts" in the constitutional sense.

The authority of the courts of this State to declare an act of the General Assembly unconstitutional was established in Bayard v. Singleton, 1 N.C. 5 (1787). In that case the courts of North Carolina adopted the doctrine of judicial review, which was recognized sixteen years later by the Supreme Court of the United States in Marbury v. Madison, 1 Cranch 137, 5 U.S. 137, 2 L.Ed. 60 (1803).

In order to determine the rights and the liabilities or duties of the parties, our courts must often determine which of two conflicting rules of law is superior. Should there be a conflict between a statute and the Constitution, courts must determine the rights and the liabilities or duties of the parties before them in accordance with the Constitution, as it is the superior rule of law in such situations. In these situations, however, courts will not anticipate other questions of constitutional law not necessary to the determination of issues presented by the litigation before them. Nicholson v. Education Assistance Authority, 275 N.C. 439, 168 S.E.2d 401 (1969). With these rules for our guidance, we undertake an analysis of the constitutional issue here presented.

The Constitution of the United States specifically forbids any state law impairing the obligations of contracts. U.S.Const. art. I, § 10, cl. 1. It has long been recognized, however, that the "contracts clause" grants a qualified and not an absolute right. Clearly, the right to make contracts is subject to the power of the General Assembly to impose restrictions for the benefit of the general public in areas of public interest and to prevent business practices deemed harmful. Morris v. Holshouser, 220 N.C. 293, 17 S.E.2d 115 (1941).

The General Assembly, within Article 12 of Chapter 20 (G.S. 20-285), made specific legislative findings of fact as follows:

The General Assembly finds and declares that the distribution of motor vehicles in the State of North Carolina vitally affects the general economy of the State and the public interest and public welfare, and in the exercise of its police power, it is necessary to regulate and license motor vehicle manufacturers, distributors, dealers, salesmen, and their representatives doing business in North Carolina, in order to prevent frauds, impositions and other abuses upon its citizens.

By these legislative findings of fact, the General Assembly specifically based its action on the police power and declared the requirements of the statute here in question to promote the vital interests of the public and the public welfare. The initial responsibility for determining the public welfare unquestionably rests with the legislature, and its findings with reference thereto are entitled to great weight. Additionally, the presumption is that the judgment of the General Assembly is correct and constitutional, and a statute will not be declared unconstitutional unless this conclusion is so clear that no reasonable doubt can arise. Mitchell v. Financing Authority, 273 N.C. 137, 159 S.E.2d 745 (1968).

It has been recognized for at least two decades that automobile franchises are in reality unilateral contracts, as the terms are dictated by the manufacturers and distributors with the avowed purpose of protecting themselves to the utmost and granting as little protection as possible to the dealer. Buggs v. Ford Motor Co., 113 F.2d 618 (7th Cir. 1940), cert. denied, 311 U.S. 688, 61 S.Ct. 65, 85 L.Ed. 444 (1940); Annot., 7 A.L.R.3d 1173 (1966). The disparity of bargaining power between a manufacturer or distributor on the one hand and a local dealer on the other has caused automobile franchise agreements to be referred to as "contracts of adhesion." Local dealers entering into automobile franchise arrangements were so systematically denied redress in cases of arbitrary termination or nonrenewal, that the franchise agreements were sometimes referred to as an "economic death sentence." Kessler, Automobile Dealer Franchises: Vertical Integration by Contract, 66 Yale L.J. 1135, 1156 (1957). It would be safe to say that there was near unanimity in the view that, due to the tremendous disparity in the bargaining powers of the parties, automobile franchise agreements uniformly worked to the detriment of the local dealers and, thereby, the general public. See Kessler, Automobile Dealer Franchises: Vertical Integration by Contract, 66 Yale L.J. 1135 (1957); Brown and Conwill, Automobile-Dealer Legislation, 57 Columbia L.Rev. 217 (1957); Weiss, The Automobile Dealer Franchise Act of 1956 An Evaluation, 48 Cornell L.Q. 711 (1963).

Agreement that automobile franchise contracts had been used to the public detriment was not limited to legal scholars. As early as 1939, the Federal Trade Commission had indicated its feeling that these franchises were being used to the detriment of smaller economic entities. 1939 FTC Rep. 139-46. In 1956 these concerns were reiterated by the United States Senate. S.Rep. No. 3791, 84th Cong., 2d Sess. 3-4 (1956); See, e. g., Kessler, Automobile Dealer Franchises: Vertical Integration by Contract, 66 Yale L.J. 1135, 1139-40 (1957).

The intricacies of the economic and legal problems raised by the national trends in automobile franchising agreements led courts quickly to recognize that they, unlike commissions and legislative bodies, were unable to weigh the various subtle and conflicting factors involved. As was expressly stated by the court in Bushwick-Decatur Motors, Inc. v. Ford Motor Co., 116 F.2d 675, 677 (2d Cir. 1940):

To attempt to redress this balance by judicial action without legislative authority appears to us a doubtful policy. We have not proper facilities to weigh economic factors, nor have we before us a showing of the supposed needs which may lead the manufacturers to require these seemingly harsh bargains.

Faced with this background, the General Assembly determined that Article 12 of Chapter 20 of the General Statutes, seeking to regulate such automobile franchises and the parties thereto, was vital to the general economy of the State and to the public welfare. G.S. 20-285. Acting pursuant to its police powers, the General Assembly passed Article 12 in 1955. After almost two decades of additional experience with the economic and social factors involved in automobile franchises, the General Assembly amended Article 12 to include G.S. 20-305(6).

During the New Deal era, the Supreme Court of the United States, speaking through Chief Justice Hughes, emphasized that the states had clear authority under their police powers to regulate contract rights in the interest of insuring the public's economic well-being. Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 54 S.Ct. 231, 78 L.Ed. 413 (1934). Judicial scrutiny of economic legislation has been consistently relaxed since that time, as reflected in the more recent cases concerning the contract clause. City of El Paso v. Simmons, 379 U.S. 497, 85 S.Ct. 577, 13 L.Ed.2d 446 (1965), reh. denied, 380 U.S. 926, 85 S.Ct. 879...