Wilson v. Amerada Hess Corp.

• Decision Date: 14 June 2001
• Citation: 773 A.2d 1121,168 N.J. 236
• Parties: Alban WILSON, Charles A. Meyer, and Richard S. Loeber, Plaintiffs-Appellants, v. AMERADA HESS CORPORATION and Leon Hess, Defendants-Respondents, and John Does 1 through 20, and ABC Corporations 1 through 20, Defendants.
• Court: New Jersey Supreme Court

773 A.2d 1121

168 N.J. 236

Alban WILSON, Charles A. Meyer, and Richard S. Loeber, Plaintiffs-Appellants, v. AMERADA HESS CORPORATION and Leon Hess, Defendants-Respondents, and John Does , and ABC Corporations , Defendants.

Supreme Court of New Jersey.

Argued October 24, 2000.

Decided June 14, 2001.

Edward J. Nolan, Hackensack, argued the cause for appellants, (Brian N. Lokker and Edward J. Nolan, attorneys; Mr. Nolan and Mr. Lokker, of counsel and on the briefs).

Roger B. Kaplan, Woodbridge, argued the cause for respondents, (Wilentz, Goldman & Spitzer, attorneys; Mr. Kaplan and Richard J. Byrnes, on the brief). The opinion of the Court was delivered by LaVECCHIA, J.

Plaintiffs, three independent franchise dealers of Hess gasoline, maintain that defendant, Amerada Hess Corporation, violated the implied covenant of good faith and fair dealing in setting gasoline prices notwithstanding a provision in the contract giving defendant unilateral authority to set and change dealer tank wagon (DTW) prices. The trial court granted defendant summary judgment. The Appellate Division affirmed because giving plaintiffs every favorable inference, the record was devoid of evidence to suggest that Hess's "DTW prices were established with any bad faith motive to deprive plaintiffs of any profit," or that "the terms offered to other stations interfere with plaintiffs' right to earn a profit."

Plaintiffs contend that they were denied the opportunity to produce circumstantial evidence of bad faith in Hess's setting of gas prices because certain discovery was denied to them and that therefore summary judgment was premature. We granted certification, 165 N.J. 525, 760 A.2d 780 (2000), limiting our review solely to plaintiffs' claim of breach of the implied covenant of good faith and fair dealing. We now reverse and remand for additional discovery and further proceedings.

I.

We emphasize at the outset that the allegation against defendant Hess is simply that: an unproven allegation. Because this case was disposed of on a motion for summary judgment, our review is based on consideration of the evidence in the light most favorable to plaintiffs. Brill v. Guardian Life Ins. Co., 142 N.J. 520, 523, 666 A.2d 146 (1995). Further, we recite only those facts germane to plaintiffs' claim of breach of the implied covenant.

Hess is an integrated oil company that produces, refines, and distributes gasoline and other petroleum products. The company sells gasoline and other fuel products to the public at retail under its Hess brand, both through independent franchise dealers and through gasoline stations owned and operated directly by Hess. Plaintiffs Meyer, Wilson, and Loeber have been Hess independent franchise dealers since 1968, 1972, and 1977, respectively. At all times relevant to this lawsuit, each of the plaintiffs has operated his respective station under a Dealership Agreement with Hess. The Dealership Agreements serve both as franchise agreements and as station leases.

Hess's use of independent franchise dealers has changed over time. In the early 1970s, approximately 95% of all Hess gasoline stations were owned and operated by independents. The record submissions inform us that as of March 1998 the number of Hess gasoline stations had grown to 541, of which approximately 82% were Hess operated (co-op stations) and the remaining 18% were operated by independent franchise dealers.

The Hess approach to its independent franchise dealers' profitability initially was to promote high-volume gasoline sales based on low prices. Hess would sell the gasoline to its dealers, setting the retail price significantly below the price charged by major national brands and allowing a reasonable profit margin to its dealers. Its marketing emphasized clean gasoline stations and friendly servers who sold primarily gasoline and few peripheral items. The Hess dealers did not service automobiles.

In the early 1980s, Hess abandoned its practice of setting the retail price charged by its dealers. Instead, Hess sold gasoline to its dealers at a wholesale cost based on the DTW prices in the marketing area of the dealer's stations as determined by Hess. Hess sets and adjusts its DTW prices by reference to the current retail gasoline prices charged by certain other retailers selected by Hess in each dealer's local area, including retailers of major brands. The DTW prices provided to the dealers are set at a rate based on the subtraction of a certain amount per gallon from the current retail gasoline prices in each dealer's local area. Thus, Hess allows its dealers a mark-up of an amount equal to that differential. The precise amount of the differential will not be disclosed here because it is protected by a confidentiality agreement.

A provision of the Dealership Agreement concerning price of gasoline reads:

Prices to the Dealer will be: (a) for motor fuel and kerosene, Hess's dealer tank wagon [DTW] prices in the marketing area of the Station, as determined by Hess, for the grades and quantities delivered, in effect at the time of delivery.... All prices are subject to change at any time without notice....

Further, the Dealership Agreement provides the following disclaimer on the part of Hess:

Dealer acknowledged that Hess had made no representations and provided no estimates as to the following:

a. Potential income to the Dealer from the Station's business.

b. Prospects for success of the Station's business.

c. Possible training and management assistance by Hess to Dealer.

d. Volume of HESS Fuel or other products which Dealer will be able to sell at the Station.

Plaintiffs contend that through its DTW pricing practices, Hess controls the revenue available to dealers to cover operating expenses and provide profit. However, plaintiffs complain that after the gasoline is marked up by the dealer to cover operating costs and provide profit, the resulting posted prices are comparable to the major brands and substantially higher than unbranded gasoline stations. Thus, they allege that Hess's DTW pricing practices have reduced the ability of its dealers to generate high-volume sales of gasoline through low prices. The dealers maintain that they cannot compete with the major brands when posting comparable retail prices. The major brands have longstanding advantages that can offset high retail prices, such as nationwide credit card acceptance, national advertising programs, sales of tires, batteries, accessories, and in many instances, repair bays and convenience stores. The dealers, on the other hand, are severely limited through the Dealership Agreements in their ability to provide those services.

As a result of Hess's DTW pricing practices, the dealers have lost their traditional market, and plaintiffs contend that they have been unable to operate profitable businesses. The plaintiffs have either lost business due to unprofitability or maintained their businesses only by investing substantial personal funds. Wilson left the business in October 1995.

Importantly, plaintiffs assert that Hess operates its co-op stations with pricing policies that permit higher operating expenses than its dealers can sustain under its DTW pricing practices. Thus, plaintiffs contend that Hess knowingly sets its DTW prices at a level that will not allow the dealers to cover operating expenses and achieve profit. Further, Hess has provided cash subsidies and sold gasoline at reduced prices to certain franchise dealers other than plaintiffs through its dealer assistance program. Plaintiffs claim that that preferential pricing practice bolsters its assertion that Hess knows that its DTW pricing prevents plaintiffs from operating their franchises profitably.

Prior to the trial court's grant of summary judgment to Hess on plaintiffs' claim for breach of the implied covenant of good faith and fair dealing, the court denied plaintiffs' motion to compel the production of documents examining the performance of both Hess co-op stations and stations in Hess's dealer assistance program located in the marketing areas of plaintiffs' stations. Specifically, plaintiffs requested any reports that Hess prepared to evaluate, analyze, and review plaintiffs' stations, the dealer assistance program stations, and the co-op stations in plaintiffs' marketing area related to performance, costs, volume, margins, and profits. Plaintiffs contend that that information would have shown that Hess knew that based on certain costs involved with operating their own stations, the dealer franchise could not be sustained under the new DTW pricing practices and the resultant reduced volume of sales that Hess's pricing caused. That is especially true, plaintiffs claim, in light of the indisputable fact that since the early 1980s Hess stations have gone from being predominantly run by independent franchisees, to being Hess run. That is information, plaintiffs assert, that should have been examined before the court ruled on defendant's motion for summary judgment on the good faith and fair dealing claim.

II.

A covenant of good faith and fair dealing is implied in every contract in New Jersey. Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 420, 690 A.2d 575 (1997) (citing numerous cases of this Court holding covenant implied in every contract). That covenant is among the few terms that "[c]ourts have been called upon to supply." E. Allan Farnsworth, Contracts § 1.5, at 12-14 (1990).

Implied covenants are as effective components of an agreement as those covenants that are express. Aronsohn v. Mandara, 98 N.J. 92, 100, 484 A.2d 675 (1984). Although the implied covenant of good faith and fair dealing cannot override an express term in a contract, a party's performance under a contract may breach that implied covenant even though that performance does not violate a pertinent express term. Sons of Thunder, Inc., supra, 148 N.J. at 419, 690 A.2d 575. Unlike many other states, in New Jersey "a party to a...