On Contracts and the Court of Public Opinion.

by Rick Lowe

Recent events reported in the press regarding the right of a supplier to exercise its option not to renew a contract resulted in my examining several contracts with which I am familiar. Guess what? All three contracts give either party the right to terminate the agreement on due notice.

Local wholesalers and retailers sell products (often) under a contractual arrangement. In an increasingly competitive world, pressures for improvement apply to all parties and judgement of performance is based on a suppliers world-wide policy. If one party is continually at odds with the other, sooner or later the tough decision can and will be taken to sever the relationship.

The oil companies.

Local oil companies are no different and are also obliged to meet market demand. In fact, they have a larger stake than most international firms selling into the Bahamas, because they have investments in physical plant in most of the countries in which they operate. As I understand it, the franchisee owns the stock in the gas station and little else. In other words, a franchisee is in essence a manager of the station with some of the fringe benefits of owning a business.

In past years many of the service stations were owned by the local businessman who simply contracted to purchase product from one supplier or the other. He owned the premises, therefore he held the trump card. These business owners must have derived some benefit in selling their premises or changing the structure of their agreements with the oil companies, as there are only two or three gas station operators left who actually own the station.

Admittedly, the way the oil industry is going it would be very difficult for any businessman to invest the kind of money in physical plant and expertise that the oil companies do, reportedly $1.5 million per station, not to mention the support infrastructure needed. Because of these huge investments contracts have changed even more dramatically in recent years, and gas stations have diversified far beyond their core business of gasoline and lubricants.

This diversification is a world-wide trend that is being resisted tenaciously in the Bahamas because of perceived unfair competition with small business. This may be a valid point in some respects, but oil prices and profits are regulated by government fiat, not the free market, so if they are to stay in business they have to find ways to make a reasonable return on investment. No different than any other businessman.

Owners have Alternatives.

Wholesalers and retailers in industries other than gas stations own their premises for the most part, therefore, they have more of a stake in the partnership. Even so, the arrangement can be legally severed if it is felt the product is not being represented as the supplier would prefer, or visa-versa. The difference here is that the business owner locates another similar product to represent. Finding another supplier is easier said than done in the case of the oil companies however.

Lowe Sound, Andros & The Moratorium.

In Lowe Sound, Andros there is an interesting debate unfolding where an enterprising company has recently set up shop and has subsequently created a “gas war” with a long established gas station. The oil company has advanced the argument that the new company is not meeting the rigid standards they have with physical plant and their concern for the environment, so their price can be undercut. The newcomer, on the other hand, has indicated they are operating within the law.

I understand that government is not granting any more licenses for gas stations here in Nassau, as requested by the Bahamas Petroleum Retailers Association. While I believe that the major oil companies may have an advantage, anyone (or group of people) that can afford to build a gas station should be allowed to do so.

Competition has brought this debate to the table, coincidentally in the Family Islands – not Nassau. It will be interesting to watch this matter unfold. It is important to note how restricting licenses reduces consumer choice and competition. If the moratorium is lifted there may be a proliferation of these businesses at first, but eventually there will be a thinning out, much like the used car lots in recent years, so lets increase the competition. In the case of gas stations, government may set (but more importantly enforce) rules to prevent environmental damage and other safety issues.

The “court of public opinion.”

The so called “court of public opinion” is being manipulated in some very peculiar ways in recent months. Some people have taken the view that their position should be taken to the public for a decision. Unfortunately, we usually do not get opinions when this is done, we get public reaction – as manifested on Bay Street recently. So the reports in the papers may not necessarily reflect public opinion – these reports may be the opinion of very few people – usually the loudest or most aggressive.

I think the courts are the correct place to adjudicate contracts. Or is there a fear that the court will decide on the legal rather than emotional aspects of the evidence? I certainly have no problem with taking any debate public, but if a compromise cannot be hammered out in this instance, the Courts should be the ultimate arbiter, not you and I.