Shailesh Gondhia & Ors v Esso Petroleum Company Ltd

A letter continuing contractual performance during negotiations for a replacement agreement may incorporate the terms of the earlier agreement, including an attached rider, unless the letter clearly excludes them. A reference to “any rebate” does not necessarily exclude every payment connected with fuel purchases. The payment must be construed in its contractual and commercial context. Annual support payments which differ in language, structure and function from rebates may remain incorporated. Where such payments are payable after a complete year, they are not recoverable for a shorter period and cannot be prorated unless the contract so provides.

The appellants operated a petrol station under a three-year motor-fuel supply agreement with Esso. The agreement included a rider containing several forms of financial assistance, including annual payments under Part Two of its schedule.

After the agreement expired, Esso continued supplying fuel under a letter pending negotiations for a new agreement. The letter referred to supply in accordance with the terms of the Supply Agreement, but excluded “any rebate” and credit-card support. The deputy High Court judge held that the Part Two payments were not rebates but concluded that the provision for three annual payments had been exhausted. The appeal concerned whether the rider and Part Two were incorporated, and whether any payment was due for 1998 or part of 1999.

1. Appeal allowed in part. The appellants were entitled to the Part Two payment for 1998, calculated at £67,189.89, but not to a payment for the first seven months of 1999.
2. Per Lord Justice Rix, with whom Lord Justice Chadwick agreed on the relevant reasoning, the reference to the “Supply Agreement” ordinarily included the attached rider. The contractual package had to be understood as one agreement, since the rider contained most of the financial assistance and many of the dealer’s continuing obligations.
3. The expression “any rebate” excluded the clause 2 rebate and the Part Four additional rebate, but did not exclude the Part Two annual payments. Part Two used different language, provided a lump-sum payment subject to a volume threshold, and performed a distinct commercial function. It was a central element of the remuneration for the solus arrangement, rather than merely another rebate.
4. The Part Two provision was apt to operate during the hold-over period. The reference to “THREE” annual payments reflected the original three-year term and did not prevent the provision applying to a further complete year when the parties continued their arrangement. The court was entitled, where necessary, to construe or modify incorporated language so as to give effect to the parties’ commercial arrangement.
5. Part Two payments accrued only after a complete twelve-month period and were payable after the relevant anniversary. The payment therefore arose for 1998 but not for the incomplete period ending in July 1999.
6. The October 1997 proposal was inadmissible as evidence of prior negotiations when construing the hold-over contract. The court construed the parties’ agreement, taking account of the existing contractual regime and the commercial purpose of the arrangement.

Lord Justice Kennedy dissented on the Part Two issue. He considered that the precise provision for three payments had been exhausted and that extending the agreement for negotiations did not create a further entitlement. The majority allowed the appeal to the stated extent. Costs were awarded as ordered, and permission to appeal was refused.

• Court of Appeal (Civil Division): appeal from the decision of Mr David Foskett QC, sitting as a Deputy High Court Judge in the Queen’s Bench Division. The appeal was allowed in part.