Esso Petroleum Company Ltd. v Addison & Ors

A contractual obligation to participate in a sales promotion may include the associated costs, including the cost of promotional goods, where that is the proper construction of the agreement. A separate contract may also arise by conduct where existing contractual obligations do not regulate the parties’ dealings and the essential terms, intention to create legal relations, and acceptance by conduct are sufficiently clear.

A contractual discretion to vary remuneration must be exercised honestly and rationally, not arbitrarily, capriciously or irrationally. It is also subject to an implied limit against making operation of the business commercially impossible. In a contract for the sale of motor fuel by volume, “litres” meant observed litres measured at the loading terminal, not standard-temperature litres.

Esso supplied motor fuel to retailers operating service stations under standard-form licence agreements. The group litigation concerned three categories of dispute: liability for costs arising from the Esso Collection trading-stamp promotion; changes to fuel margins, shop fees and operating cost allowances; and alleged under-delivery caused by fuel being loaded at temperatures above ambient.

The court determined generic issues concerning construction of the licence agreements, the possible existence of a scheme contract, the effect of repayment agreements, Esso’s contractual discretions, and the measurement of fuel. Individual issues, including particular assurances and whether adjustments made operation of a particular station commercially impossible, were left for separate proceedings.

1. Esso Collection. The three forms of licence agreement required licensees to join in promotional schemes. The obligation extended to operating a promotion at their own expense, including the cost of gifts and the value of tokens issued at their stations but redeemed elsewhere. The wording “should” in the Premier A agreement did not convert an otherwise operative obligation into a mere exhortation, and the agreement as a whole required participation in schemes reasonably required by Esso (paras [33]-[59]).
2. If, contrary to that conclusion, the promotion was outside the licence agreement, a licensee who knowingly operated it entered into a contract by conduct. The essential terms, including the payment of the temporary merchandising allowance, were sufficiently identifiable from the surrounding communications and conduct. Uncertainty as to the eventual financial effect of the scheme did not make the contract void for uncertainty. Liability arose under the licence or scheme contract, rather than under a separate contract for each order of gifts (paras [78]-[98]).
3. Repayment agreements did not themselves create a separate liability on the evidence before the court. A promise to pay the full amount over time could be supported by consideration where it compromised an existing dispute, but the agreements in evidence acknowledged an existing debt and did not themselves bear the hallmarks of compromise. Any underlying compromise required separate proof (paras [103]-[108]).
4. Margins, fees and allowances. Esso could adjust the contractual financial provisions by reference to wider commercial circumstances. Its discretion was subject to implied limits: it could not act dishonestly, arbitrarily, capriciously or irrationally, and could not make adjustments whose combined effect rendered operation of the service station commercially impossible. The evidence established that the BPR adjustments were made honestly and rationally. Whether they had made operation commercially impossible for any individual licensee remained fact-sensitive (paras [121]-[150]).
5. Hot fuel. The contracts required fuel to be measured in accordance with established industry practice. During the relevant period that practice was measurement in observed volumes at the loading gantry, at the temperature then prevailing. Statutory requirements to use standard litres for excise-duty purposes did not imply a contractual obligation to sell in standard litres. The hot-fuel claims therefore failed (paras [152]-[170]).

The judgment records earlier Court of Appeal proceedings which led to the claims being tried together in the Commercial Court. It does not state an appeal from this judgment.