Shell U.K. Ltd v Lostock Garage Ltd

JurisdictionEngland & Wales
JudgeTHE MASTER OF THE ROLLS,LORD JUSTICE ORMROD,LORD JUSTICE BRIDGE
Judgment Date30 June 1976
Neutral Citation[1976] EWCA Civ J0630-1
Judgment citation (vLex)[1976] EWCA Civ J0630-2
Docket Number1976 S No 1777
CourtCourt of Appeal (Civil Division)
Date30 June 1976
Shell U. K. Ltd.
Plaintiffs(Respondents)
and
Lostock Garage Ltd.
Defendants(Appellants)

[1976] EWCA Civ J0630-1

Before:

The Master of the Rolls

Lord Justice Ormrod and

Lord Justice Bridge

1976 S No 1777

In The Supreme Court of Judicature

Court of Appeal

On Appeal FRom The High Court of Justice Queen's Bench Division

(Mr. Justice Kerr)

MR. V. DURRAND. Q. C. and MR. M. KENNEDY (instructed by Messrs. Rowe & Maw, Solicitors, London) appeared on behalf of the Plaintiffs (Respondents).

MR. D. KEMP. Q. C. MR. D. TURIFF and MR. S. RICHARDS (instructed by Messrs. Bristow Cooke, Solicitors, London) appeared on behalf of the Defendants (Appellants).

THE MASTER OF THE ROLLS
1

There is quite a small garage in Cheshire called Lostock Garage. It has only three or four petrol pumps in action. It has a workshop for repairs. It also sells cars. Geoffrey Clarice runs it, as his father did before him, as a private company - Lostock Garages Limited. He employs two men. He keeps open all day, every day, six days a week, and Sunday afternoons. In all 81 hours a week.

2

For over 20 years the petrol has been supplied by the Shell Company or its associates. The garage has been tied to Shell by a solos agreement for all those years. Their relations were excellent until the oil crisis broke a year or so ago. As a result petrol increased sharply in price. Motorists economised and used less. By December 1975 there was a price war.

3

Lostock Garages were caught up in it. They had to meet competition from four other garages in the neighbourhood. All four within a radius of two miles. Two of them were Shell garages - one being owned by Shell, the other tied to Shell. Two were free of any ties, one selling V. I. P. petrol, the other I. C. I, petrol. In December 1975 these two free garages cut their prices. They sold four- star petrol at 70p a gallon, whilst Lostock were still selling at 75p. The two other Shell garages also cut their prices to 70p a gallon, or the equivalent, by giving incentives, such as Green Shield Stamps.

4

Lostock Garages could not afford to cut their prices to 70p in that way: because Shell were still charging them the pre-war price. Shell were still charging Lostock 68p a gallon. On top of it, Lostock had to add their own expenses of men, and so forth. They had to charge 75p to pay their way.

5

So Lostock was faced with cut prices all round them. To meet the competition, Mr. Clarke decided that he must leave Shell and buy cheaper elsewhere. He thought that the tie to Shell had come to an end. The"solus" tie had been for 20 years from March 1955. If so, it would have ended in March 1975. So he made enquiries of suppliers called Mansfield Petroleum Co. Ltd. This was a Company which could under-cut Shell. At that time there were surplus stocks of petrol at Rotterdam - available cheaply to Mansfield, and others. Mansfield offered to supply Lostock with petrol at low prices. So on Friday, 24th January, 1976, Mr. Clarke telephoned to Shell and said to their Manager: "Our sales are suffering because of cut- price people, and we intend to take deliveries from, Mansfield Petroleum so as to be able to compete". The Manager replied: "Wait a bit. I am attending a meeting today to hear Shell's plans to combat the cut- price people, I will let you know next week".

6

Mr. Clarke did wait a bit. But on Wednesday, 28th January, 1976 Mr. Clarke had his worst day ever. He sold only 35£ gallons during the whole day as against pre-war sales of 250 gallons a day. He straightaway ordered deliveries from Mansfields.

7

On Thursday, 29th January, 1976 the Mansfield tanker arrived outside the garage. Before it started delivery, the Shell manager arrived. The Manager told Mr. Clarke that Shell had a "support scheme" for helping some of the Shell garages, but that it did not apply to the Lostock Garages.

8

Under this "support scheme" the supported garages were expected to reduce their selling prices to 70p so as to meet the competition: and Shell guaranteed that they would not lose by so doing: because Shell would make up any loss. But this scheme only applied to garages which had suffered a drop in sales of 40,000 gallons in 1975. It did not apply to Lostock because they were only a small garage. They had suffered a drop of 13,000 gallons in that year. It was large for them, but would be small for a big garage.

9

The Shell Manager told Mr. Clarke the scheme in outline. Mr. Clarke replied: "That's not very helpful to me. I think my tie to Shell hasexpired. I am going to get deliveries from Mansfield".

10

The Shell Manager said that he thought 12 months' notice was necessary to end the tie: and he went off. And Mr. Clarke took action. He asked the Mansfield tanker to deliver. And it did. 3,000 gallons into the Lostock tanks. And Lostock began selling at 70p instead of 75p. The lowering of the price brought a tremendous boost in sales. Whereas in January 1976 Lostock's sales had fallen to 900 gallons a week, by the end of February 1976 they had increased to 3,000 gallons a week.

11

But there was, as I said, a difference about the tie. To resolve it, the Shell Manager went back to his office. He looked up the correspondence and found that, although he original tie was for 20 years from March 1975, nevertheless in 1966 it had been varied by a letter so as to be determinable by twelve months' notice at any time after 1971. So the Manager went back to Mr. Clarke and told him so. Mr. Clarke said: "I do not feel bound "by any such letter: but, even if I am, the situation calls for drastic action. I must continue to take supplies from Mansfield". He did so.

12

Both sides went to their lawyers. Shell claimed that the tie was still binding on Lostock: and that Mansfield were inducing a breach of the contract. Faced with the threat of legal proceedings Mansfield stopped supplying Lostock on 6th March, 1976. Lostock then had no option but to take their supplies from Shell, paying them pre-war price of 68p. But, to meet the competition, Lostock had to sell it at 70p, thus suffering serious loss because the 2p difference did not cover their expenses. Lostock still claimed that they were not bound by the tie: but, in case they were, they gave twelve months' notice to determine the "solus" agreement - to expire on 4th March, 1977.

13

Legal proceedings took place. During them, Lostock discovered that, Shell had been supporting the two Shell garages near to them. The extent of it was not known to Lostock. But it undoubtedly enabled these two Shellgarages to reduce prices and give incentives so as to undercut the Lostock garage. The Judge summarised it in this way: "Shell contend that they are entitled to continue to enforce the tie against Lostock, notwithstanding the inclusion in their Price-Support Scheme of the two Shell garages on either side of Lostock. Shell accept - and they could not do otherwise on the evidence - that this has operated harshly on Lostock… Lostock must continue to keep their promises open for the sale of petrol at all times. But, so long as the two Shell garages are supported, and Lostock is not, I am satisfied that Lostock must operate at a loss if the agreement is enforced".

14

The Judge held that the effect of the support scheme was "to inflict an unreasonable and unforeseen degree of hardship" on Lostock: and that Shell were not entitled to enforce the tie so long as hardship was caused. Both Lostock and Shell appeal to this court. Lostock say that the tie has gone altogether. Shell say that it remained in being all the time and that they are entitled to an injunction and damages. As it happens Shell gave up their support scheme at the end of April 1976, but the question of principle remains: Was the tie binding whilst Shell operated their support scheme?

15

Before dealing with this question of principle, I must set out the principal provisions of the "solus" agreement.

16

The "Solus" Agreement. The original agreement was between Shell-Mex and B. P. Ltd. (the sellers)and Mr. Clarke, senior (the buyers). It was for 20 years, from 1st April, 1955 to 31st March, 1975. The principal clauses for present purposes were these: Clause 3: The sellers agree: (A) "To supply to the Buyers such quantities of those brands of motor-fuel supplied by Shell-Mex and B. P. Ltd. … as the Buyers may reasonably require …"; and (B) "To allow the Buyers a special rebate of One penny per gallon…";(D) "To maintain… all the pumps in good mechanical working condition…". Clause 4: The Buyer agrees: (A) "… to sell from four of their pumpsonly motor-fuel supplied by Shell-Hex and B. P. Ltd"; (S) "To keep the premises in a clean and smart condition, provide an adequate staff and keep open for the sale of motor-fuel… at all reasonable times and to ensure that a proper and effective service is provided to the public". Clause 6: (A) The Buyer agrees to "make payment at or before the time of delivery for motor-fuel at a price which shall be the wholesale schedule price ruling at that date and place of delivery". Clause 6 (B)(C): Shell-, Mex and B. P. Ltd., were not to be under any liability to the Buyers if there was a shortage of supplies or be under any liability to the Buyers if delivery was prevented by any event which was not within the reasonable control of Shell-Mex and B. P. Ltd.: but that, in those circumstances, the Buyers were at liberty to buy from other sources to make good and sell the same. Clause 8 said that: "In the event of any breach whatsoever by either party of any of their obligations hereunder, the other party shall have the right (without prejudice to any other right or remedy arising from such breach) forthwith upon giving notice in writing to the party in breach to treat this Agreement as having been terminated by such breach".

17

In 1966 there was a decision in the Courts in which it was said that a "solus" agreement might be in unreasonable restraint of...

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