Addison & Ors. v Esso Petroleum Company Ltd.

A contractual power to review and adjust margins, fees or allowances is not confined to site-specific matters where the language is neutral. It may address broader commercial conditions and the overall financial balance, subject to limits against arbitrary, capricious, dishonest or irrational action and any commercial-impossibility constraint. The word “necessary” may impose a subjective test where the contract places the decision with the same party. In a sale by volume silent as to measurement, quantity may be measured according to established good practice in the relevant trade. Legal requirements for excise measurement do not necessarily imply sale by standard litres or remeasurement on delivery. A term cannot be implied merely because it appears fair or is insufficiently certain.

Esso and about 100 retail licensees litigated issues concerning Esso’s contractual powers to adjust fuel margins, operating cost allowances and shop fees, together with the measurement of fuel delivered at above ambient temperature.

Moore-Bick J, in the Queen’s Bench Commercial Court, held that Esso could make the adjustments within limits against arbitrary, capricious, dishonest or irrational conduct, and that the adjustments challenged had not breached the agreements. He also held that fuel was sold by reference to the volume measured when loaded into the delivery tanker. The licensees appealed, challenging the construction of the agreements, the findings on breach, and the rejection of implied terms requiring standard-litre, ambient-temperature or delivery measurements.

Appeal dismissed. Tuckey LJ gave the judgment, with Neuberger and Ward LJJ agreeing.

1. Construction of the adjustment provisions. Clause 6 of the Licence agreement gave Esso broad discretion, within contractual limits, to adjust the financial balance between itself and the licensee. The review was not confined to costs attainable at the particular site. Esso could consider broader commercial circumstances, including changes in the motor-fuel retail market and the decline in overall profitability. The provision did not promise reimbursement of reasonably incurred costs or preservation of the licensee’s financial position. The word “necessary” in the second part of the clause was also subjective: Esso could adjust the relevant sums when it considered an adjustment necessary. (paras [32]-[35])
2. New case and breach. The licensees’ site-specific construction was materially different from the case advanced at trial. Since allowing it would have been unfair to Esso, the court rejected it on that ground and, having considered the merits, rejected it substantively as well. The unpleaded factual allegations raised on appeal could not be used to undermine the first-instance findings. The adjustments were based on a genuine examination of Esso’s commercial circumstances and were rational and made in good faith. The finding that they were not arbitrary, capricious, dishonest or irrational was upheld. Individual licensees remained able to raise matters bearing on the commercial-impossibility exception.
3. Hot fuel. The contracts did not specify where or how volume was to be measured. The natural implication was measurement in accordance with established good practice in the relevant trade. The evidence showed that the relevant industry practice was measurement of observed volume when fuel was loaded into the tanker, at the temperature then prevailing. The fact that fuel was required to be measured in standard litres for some statutory purposes did not imply that it had to be sold in standard litres.
4. Weights and measures provisions and proposed terms. The Weights and Measures (Liquid Fuel Carried by Road Tanker) Order 1985 did not require remeasurement at the service station in every case. Article 6(1) had to be read with Article 3(2)(e), and Article 5 showed that the regulations did not contemplate measuring equipment on every tanker. A term requiring measurement at ambient temperature or remeasurement on delivery could not be implied merely for reasons of fairness. The ambient-temperature proposal was also uncertain. The agency and satisfactory-quality arguments did not alter the analysis. The appeal was therefore dismissed.

1. Court of Appeal (Civil Division): On 12 November 2004, dismissed the licensees’ appeal.
2. Queen’s Bench Commercial Court: Moore-Bick J determined the group-litigation issues in a judgment reported at [2003] EWHC 1730 (Comm.). He held that Esso’s adjustments were contractually permitted, subject to specified limits, and rejected the hot-fuel claim.