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Shell Oil Co. v. Marinello

Decided: July 21, 1972.


Gelman, J.J. & D.r. Ct. (temporarily assigned).


This controversy concerns the relationship between a major oil company and one of its service station dealers. Plaintiff ("Shell") is a major producer of petroleum products, including automotive gasoline, oils and lubricants. Its products are sold to the public under the trademark "Shell" through hundreds of service stations throughout the State. In many instances Shell controls the properties on which its stations are located through long-term leases, and its practice as reflected by the record here has been to enter into sub-leases with individuals who operate the stations.*fn1 Coincidentally with the execution of a station lease Shell enters into a dealer agreement with the tenant-operator which in substance provides that the latter will purchase gasoline from Shell and Shell licenses him to use its trademarks in the operation of his dealership.

Prior to July 24, 1959 defendant Frank Marinello was approached by a representative of Shell to become a Shell dealer at an existing Shell station at the intersection of Route 5 and Anderson Avenue in Fort Lee. At the time he was told that the station was "run-down," that it needed

a "good operator," and that if he could "build it up" he would have a good business with a "future."

[The court reviewed the evidence and background of dealings between the parties for the period from 1959 to April 1969.]

Almost all contact between Shell and Marinello was carried on through Shell's dealer representatives. Dealer representatives are at the first level in Shell's marketing organization and it is their function to call regularly on dealers in their assigned territories and to sell to the dealers Shell products such as tires, batteries and accessories ("TBA"). The dealer representatives are also supposed to assist their dealers in any problems the dealers might have and to suggest improvements in the dealers' methods of operating their stations. The dealer representatives also make surveys of their territories to see what the competition is doing as to prices and volume of gas being pumped and they report this information back to their superiors in the Shell marketing organization.

Marinello has had 11 different dealer representatives in his 13 years as a Shell dealer. He testified that it was their practice to call on him about once a month and solicit orders for Shell TBA. They would urge him to buy more, and some would mention that they had a sales "quota" to meet. On occasion the representatives would also register complaints about conditions at the station, such as lack of inventory, dirty rest-rooms, a dirty window, the presence of a wrecked or unlicensed car in the rear of the station, excess garbage, uncut grass and the like.

Throughout the period prior to June 1, 1969 Marinello's leases required that he keep the station open from 6 A.M. to 12 P.M. For at least the past three years he employed between three and four full-time employees for the day shift, and part-time employees covered the station during the evening hours. In addition, in 1967 he engaged a service company which does the heavy cleaning of and supplies the rest-rooms once every two weeks, a window washer who cleans the office windows twice a month, and a private scavenger service which collects refuse and garbage twice weekly.

In April 1969 new lease and dealer agreements were prepared by Shell on its forms and submitted to Marinello by his dealer representative. As originally submitted the agreements called for the standard one-year term but contained a significant change in that Shell required him to be open 24 hours a day or the maximum number of hours permitted by local zoning ordinances. The rent was fixed at one and three-fourths cents (1.75 cents) per gallon delivered to the station if open on a 24-hour basis, or if this requirement was not adhered to, the rent was fixed at two cents (2.0 cents) per gallon. The minimum monthly rent was set at $1000, as against $850 per month under the prior lease.

Marinello told his dealer representative, James Bishop, that he was unhappy with the rent provisions and a meeting was arranged between Marinello and Wayne Rigg. Rigg at the time was the sales supervisor for the Newark District and had been transferred to this position in November 1968. The meeting took place on May 23, 1969, and it resulted in no change in the lease provisions except that the term was increased from one year to three years, for both the lease and the dealer agreement. According to Rigg, between the time the agreements had been prepared by Shell and the date of the meeting Shell's policy had changed so that dealer leases were granted for a three-year term rather than one year. The lease and the dealer agreement were signed by Marinello and Shell at the conclusion of the meeting.

Article 2 of the 1969 lease provided that:

The term of this Lease shall be a primary period beginning on June 1, 1969, and ending on May 31, 1972, and from year to year thereafter, but may be terminated by Lessee at any time by giving Shell 90 days' notice and by Shell at the end of the primary period or of any such subsequent year by giving Lessee at least 30 days' notice.

The corresponding provision of the dealer agreement states:

This Agreement shall be in effect for a primary period beginning on June 1, 1969, and ending on May 31, 1972, and from year to

year thereafter, but may be terminated by either Dealer or Shell at any time by giving the other at least 10 days' notice.

The remaining pertinent provisions of the lease are Articles 5, 7, 9, 11 and 12. Article 5 provides with respect to hours of operation that:

Article 7 states that:

Lessee shall at all times maintain the premises (including adjacent sidewalks and ways) in good condition and repair, and keep the same, as well as Lessee's own property thereon, neat, clean and orderly.

Article 9 deals with remedies available to Shell and states in pertinent part:

In the event * * * (b) Lessee defaults in performance or observance of any covenant or condition of this lease (other than the payment of rent) * * *, and fails to remedy same within 15 days after Shell gives Lessee notice thereof * * * Shell may, as its option and without notice, terminate this lease and re-enter and repossess the Premises. * * * At any termination of this lease, Lessee shall peaceably surrender possession of the Premises to Shell.

Article 11 is captioned "LESSEE'S BUSINESS" and states that:

Nothing in this Lease shall be construed as reserving to Shell any right to exercise any control over, or to direct in any respect the conduct or management of, the business or operations of Lessee on the Premises; but the entire control and direction of such business and operations shall be and remain in Lessee, subject only to Lessee's performance of the obligations of this Lease. Neither Lessee nor any person performing any duties or engaged in any work on the Premises at the request of Lessee Shall be deemed an employee or agent of Shell.

Finally, Article 12 requires that all notices given under the lease be in writing.

Insofar as the 1969 dealer agreement is concerned it extends to Marinello no rights or privileges except to the extent that Shell agrees to sell him "Shell gasoline and products" (subject to certain limitations) and a license to use Shell's trademarks, brand names and identifications to advertise at the station. The agreement otherwise is a reservation to Shell of complete discretion with respect to the manner in which business will be transacted between the two parties.

The new lease and dealer agreement went into effect on June 1, 1969, for a term expiring on May 31, 1972. During this interval Marinello had two new dealer representatives, Joseph Hogan from July 1969 to February 1971, and Wade Ogg who took over the territory from Hogan and still has it. On February 2, 1972 Marinello met with Rigg and Ogg at the Shell district office in Clifton. He was informed by Rigg that Shell would not renew his lease. A discussion ensued, following which Marinello met with the District Manager, J. E. Gerlock, who confirmed Shell's decision not to renew the lease. Under date of April 14, 1972 Shell sent formal written notice to the above effect to Marinello and demanded that he surrender the premises on May 31, 1972. On June 1 representatives of Shell went to the Marinello station but he refused to quit the premises.

Shell instituted suit in the county district court pursuant to N.J.S.A. 2A:18-53 for possession of the premises. Marinello filed an answer in that proceeding asserting various legal and equitable defenses. He also commenced an action in the Superior Court, Chancery Division, seeking, among other things, injunctive relief against his eviction by Shell. By order of the assignment judge the county district court dispossess action was transferred to the Superior Court for trial. See N.J.S.A. 2A:18-60; Morrocco v. Felton , 112 N.J. Super. 226 (Law Div. 1970).

At the commencement of the trial and on the court's own motion the statutory dispossess and the Chancery Division

actions were consolidated for the purposes of trial as to all issues except damages. As the result of rulings made by the court during the trial as well as concessions of counsel the following issues remain for decision based upon the pleadings of the parties, as amended:

(1) Does the Franchise Practices Act, N.J.S.A. 56:10-1 et seq. , apply to the lease and dealer agreement in this action?

(2) Is there any limitation on Shell's statutory and contractual right to possession of the premises by reason of the relationship that existed between the parties as reflected in the written agreements and the course of dealings between them?

(3) Assuming Shell's right to possession is not unrestricted, has the defendant, Marinello, substantially performed his obligations under the terms of the lease and dealer agreement?

(4) Is Shell barred from seeking relief in this proceeding by reason of its unclean hands?


The Franchise Practices Act, N.J.S.A. 56:10-1 et seq. (L. 1971, c. 356) was approved and became effective on December 21, 1971. As stated in section 1, the act seeks to define the relationship and responsibilities between parties to franchise arrangements. Under section 3 a franchise is defined as any:

The principal regulatory feature of the act is found in section 5 which prohibits a franchisor ("a person who grants a franchise to another person") from terminating, canceling or failing to renew a franchise "without good cause." Section

7 further prohibits a franchisor from imposing "unreasonable standards of performance upon a franchisee" (subsection (e)) or attempting to circumvent the provisions of the act by inserting "any term or condition in any lease or other agreement ancillary or collateral to a franchise" (subsection (f)).

There can be no question but that the franchise arrangements set forth in the dealer and lease agreements in this case were intended by the Legislature to be subject to the act, and if otherwise applicable the act limits Shell from terminating its lease with Marinello except for "good cause" and upon at least 60 days' written notice setting forth "all the reasons" which constitute good cause for such action. The act by its own terms applies to a lease agreement which is part of the franchise -- and that is clearly the case in the relationship between an oil company and its dealer-lessee -- or which is ancillary to the franchise arrangement.

The argument here is focused upon the provisions of section 8 of the act which states:

This act shall not apply to a franchise granted prior to the effective date of this act, provided, however, that a renewal of a franchise or an amendment to an existing franchise shall not be excluded from the application of this act.

It is urged by defendant that while the franchise agreements themselves are not subject to the act since they were in existence prior to its effective date, nevertheless the failure to renew the franchise agreements -- since it involved conduct subsequent to the act's effective date -- is regulated by the act. In support of this interpretation reference is made to the provision of section 8 dealing with a renewal of an existing ...

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