CEL Group Ltd. v Nedlloyd Lines UK Ltd. & Anor

The construction of an exclusive requirements contract determines whether the customer may voluntarily reorganise its business so that performance becomes impossible. Where the supplier has the exclusive right to meet all defined requirements arising in the ordinary course of the customer’s business for a fixed period, the customer must not, of its own motion, bring those requirements to an end or make the supplier’s right impossible to exercise.

This obligation does not guarantee any particular volume of work. A reduction caused by matters outside the customer’s control may therefore involve no breach. The obligation arises where the contract, read against its commercial context, grants a positive right to supply requirements rather than merely restraining the customer from employing another supplier.

Nedlloyd Lines UK Ltd had granted CEL Group Ltd the exclusive right to provide its defined UK road-haulage and transportation services for three years. CEL maintained a dedicated fleet and supplemented it with owner-driver and subcontractor vehicles.

After the Nedlloyd Group merged with P & O, Nedlloyd’s operations ceased to be separately identifiable. CEL continued to receive some work, but it no longer received the volume of profitable owner-driver and subcontractor work anticipated under the agreement.

Andrew Smith J gave judgment for CEL on 19 February 2003. He held that Nedlloyd was subject to an implied term that it would not voluntarily end the state of circumstances in which it required the contracted services. The defendants appealed, contending that the contract merely prevented them from placing existing requirements elsewhere and did not oblige them to maintain their business or a flow of work.

1. The appeal was dismissed unanimously. Hale LJ delivered the leading judgment. Carnwath and Waller LJJ agreed with her reasons.

2. The existence and extent of the obligation depended upon the true construction of the particular contract. If CEL had merely obtained a promise that Nedlloyd would not place whatever haulage requirements it happened to have elsewhere, Nedlloyd remained free to dispose of its business. If CEL had obtained the exclusive right to meet all defined requirements arising in the ordinary course of Nedlloyd’s business during the contractual period, Nedlloyd was obliged not to make that right impossible to exercise by its own voluntary act.

3. The agreement conferred the latter right. Its preamble granted an exclusive right to provide the services. Its operative clauses referred to the services required under the agreement and prescribed a three-part fleet for meeting them. The force majeure clause also indicated that Nedlloyd undertook positive obligations extending beyond payment and a promise not to employ other hauliers.

4. The commercial context confirmed that construction. The parties had conducted substantial business on the basis that CEL handled all Nedlloyd’s haulage. CEL made a significant investment in a dedicated fleet and accepted arrangements which reduced its access to more profitable work. Those arrangements would not have made commercial sense without a right to supply Nedlloyd’s requirements for the agreed period.

5. The contract did not oblige Nedlloyd to maintain any expected or specified volume of work. A downturn caused by circumstances outside its control would not have been a breach. Here, however, the underlying work had not disappeared. Nedlloyd voluntarily merged and reorganised its operations so that its business could no longer be separately identified, thereby making CEL’s exclusive right impossible to exercise. That conduct breached the implied obligation recognised in Stirling v Maitland (1864) 5 B & S 840 and accepted in Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701.

1. Court of Appeal (Civil Division): The defendants’ appeal was dismissed unanimously. The judgment and damages award below were left undisturbed, subject to quantum matters which were not before the court. [2003] EWCA Civ 1716

2. Queen’s Bench Division: Andrew Smith J gave judgment for CEL on 19 February 2003 for breach of contract. He awarded £725,260 on part of the claim and directed an inquiry into loss of cash flow.