Esso Petroleum Company Ltd. v Addison & Ors

The claimant, Esso Petroleum Company Ltd (“Esso”), is a household name, being one of the principal suppliers of petroleum products, including motor fuel and lubricants, in this country. The defendants are companies and individuals who at various times carried on business as retailers of motor fuel at petrol stations which they operated under licence from Esso. I shall refer to them as “the licensees”. These proceedings relate to disputes that have arisen between Esso and the licensees over the construction of Esso’s standard form of licence agreement and certain aspects of the operation of their service stations. They can be collected under three heads: those arising out of the operation of a sales promotion known as ‘The Esso Collection’; those arising out of certain changes to the financial provisions of the licences introduced by Esso between 1 ^st January 1996 and 1 ^st April 1998; and those relating to the supply of motor fuel at higher than ambient temperatures.

Between November 1986 and February 1996 a promotional scheme officially designated ‘The Esso Collection’, but perhaps better known as the ‘Tiger Token’ promotion, played a large part in Esso’s marketing strategy. The promotion, which is described in more detail later in this judgment, involved issuing tokens to motorists which could be redeemed for gifts, one token for each £6 spent on fuel.

The promotion was designed to be implemented across the whole country. It was advertised nationally by Esso and most, if not all, of those who operated Esso petrol stations became involved. A promotion of that kind inevitably gives rise to considerable expense: there are the costs of advertising, the costs of printing and distributing tokens, the costs involved in administering the promotion at each service station and, of course, the cost of providing the gifts that are given to motorists when they redeem their tokens. The Tiger Token promotion was designed by Esso to operate in such a way that the retailers themselves bore part of these costs. They were expected to bear the whole of the cost of administering the scheme at their individual service stations and also part of the cost of providing promotional gifts. The administration costs formed part of their general business expenses; the cost of promotional gifts was debited to the accounts which each of them maintained with Esso. In order to offset part of the cost of providing those gifts retailers were credited each month with an allowance based on the volume of fuel purchased during the previous month.

It was inherent in the nature of the promotion that the cost of providing gifts would be deferred to some extent, simply because motorists could collect tokens over a period of time before redeeming them for gifts. This might have given rise to little difficulty if the scheme had lasted for only six months, as was envisaged when it was first launched, but in the event it continued in operation for over ten years and when it was finally brought to an end the accumulated outstanding costs for some retailers were very substantial.

This is the source of the first limb of the dispute between Esso and the licensees. When the promotion was brought to an end Esso calculated the amount outstanding from each licensee in respect of promotional gifts and vouchers and sought payment accordingly. Many licensees paid the amount claimed or entered into an accommodation with Esso, but some resisted Esso’s demands and litigation ensued. A large number of claims were made against individual licensees in courts across the country, but eventually a group litigation order was made with a view to enabling this court to determine issues common to all those licensees whose disputes with Esso had not been resolved. The central question that arises in relation to the Tiger Token scheme is whether, on the true construction of the relevant licence agreements and in the light of the way in which the promotion was operated, Esso is entitled to recover from the licensees the cost of the promotional gifts supplied to them to enable them to operate the scheme.

In the latter part of 1994 and early 1995 Esso undertook a major review of its retail operations in order to find out why its share of the market was in decline. The review team examined all aspects of the Retail Division’s activities, including the operation of service stations, and quickly realised that the growing competition from supermarkets, which were driving down prices at the pumps, was making its own sites uncompetitive. In order to meet this threat Esso produced a series of best practice recommendations designed to ensure that as far as possible the costs involved in operating every retail outlet were contained at the levels achieved by the most efficient sites across the country. These changes to the way in which operations at service stations were intended to be carried out were given the name of ‘Business Process Redesign’ (“BPR”). From Esso’s perspective the licensees’ profit was one element in the overall cost of marketing motor fuels to the public and therefore one matter to which the review team directed their attention was the income that a reasonably efficient licensee ought to be able to generate at any given type of site.

A typical petrol station provided three main sources of profit: the sale of fuel at the pumps, the sale of newspapers, sweets, tobacco etc. from a shop on the forecourt and charges for the use of a car wash. In respect of fuel sales licensees obtained a small margin of profit on each litre sold which was limited by the terms of the licence agreement. They obtained profits in the usual way from sales made through the shop, but paid fees to Esso which were related in part to turnover. Likewise, licensees retained the income from the car wash, but paid Esso a fee for the right to operate it. In addition to the income from these sources Esso paid licensees an operating cost allowance designed to ensure that the net profit obtained from operating their sites was maintained at a reasonable level. The margin on fuel, the shop fees, the car wash fee and the operating cost allowance were all subject to review and adjustment in accordance with the terms of the licence.

Following the review of marketing operations which gave rise to BPR Esso made a series of adjustments to margins, fees and allowances. These have given rise to the second limb of its dispute with the licensees, many of whom complain that Esso reduced their margins and allowances and increased their fees to the point where it was commercially impossible for them to continue in business. They contend that in so doing Esso exceeded its powers under their licence agreements.

The third limb of the dispute relates to what has become known as ‘hot fuel’. Petrol (and to a lesser extent diesel) has a high coefficient of expansion and therefore the observed volume of any given parcel is significantly affected by its temperature.

Licensees were obliged to buy their requirements of motor fuel from Esso. Between 1993 and 1998 (which is the only period with which I am concerned) Esso supplied fuel to a number of licensees from distribution terminals at Hythe, Stanlow and Grangemouth. It was accepted that in each case it was common for fuel to be loaded on to road tankers at above ambient temperature. By the time the tanker reached the petrol station there had been time for the fuel to cool and further cooling occurred after it had been discharged into the underground storage tanks.

Licensees ordered fuel by volume, typically in parcels of between 5,000 and 8,000 litres, which were measured at the point of loading into road tankers at the terminal. All petrol station operators are required to keep records of the quantity of fuel on their premises (known as ‘wet stock’) and many licensees began to notice that they were incurring wet stock losses for which they could not account. Eventually they realised that these losses were due to the contraction of the fuel caused by cooling after it had been measured into the tanker at the terminal. They complained that because the fuel delivered to them was ‘hot’ when loaded into the tanker they received less fuel than they had ordered and paid for.

For many years the petroleum industry has recognised that accurate accounting for products passing through the refining and distribution system can only be achieved if all measurements are related to a standard temperature. This is known as standard temperature accounting. Those licensees who claim to have received deliveries of hot fuel say that Esso was under an obligation to adopt standard temperature accounting for the purpose of measuring deliveries to them and was in breach of contract in failing to do so.

In January 2001 appeals brought by Mr. Wood, Mr. & Mrs. Kenny, Mr. Mathieson and Mr. and Mrs. Wood against orders made by His Honour Judge McGonigal in favour of Esso on claims for outstanding amounts due in respect of the Esso Collection came before the Court of Appeal. The court set aside the orders on the parties’ undertaking that the claims should be tried together in the Commercial Court in conjunction with other cases raising similar issues in a manner that would enable the whole of the litigation to be dealt with as expeditiously as possible. Having transferred a number of cases into this court, and having publicised the court’s intention to proceed by way of a group litigation order, I made an order on 27 ^th June 2001 enabling the court to determine common issues concerning the construction of the licence agreement in relation to the Esso Collection promotion and such other issues arising out of the licence agreement as might conveniently be determined with them. The group litigation order was deliberately framed as broadly as possible because it had already become apparent that many licensees had raised similar matters by way of defence and counterclaim which it might be convenient to determine within the group litigation. At the start of the trial 102 licensees were parties to the order.

Although the issues for determination were largely agreed well in advance of the trial, there remained a certain amount of debate about their precise scope and content which had not been fully resolved. Broadly speaking, Mr. Pickering Q.C. urged me to determine as many issues of fact and law as possible on this occasion in order to enable his clients to obtain the maximum benefit from the group litigation. Miss Gloster Q.C. was more concerned to ensure that in the absence of full evidence from both sides the court did not determine issues that were specific to individual licensees. In deciding in the light of the evidence and arguments what issues can and cannot conveniently be determined at this stage I have been guided by two considerations. The first is that I should only determine generic issues, that is, issues that are common to all, or most, of the licensees, or which (in the case of the ‘hot fuel’ claimants) are common to defined group of licensees. This restriction is necessary both because it is in the nature of group litigation that the court can only decide issues that are common to a number of parties and because it would have been quite impossible at this trial, or indeed any single trial, to determine in an efficient manner a large number of disputes which turn on their own particular facts. One consequence of this approach is that although I received evidence from eight of Esso’s Area Managers and seventeen of the licensees, I have not attempted to make findings about what passed between any particular licensee and his own Area Manager at any stage. The second is that I should determine as many generic issues as possible in order to make full use of the benefits offered by this form of procedure and to enable the licensees to know as far as possible where they stand.

Three forms of licence agreement were current during the period of the Esso Collection promotion. They were broadly similar in form and content, but differed in certain respects. In 1986 the current form was the ‘Premier A’ Licence Agreement. That was superseded in 1989 by the first form of the Partnership Licence Agreement, which was replaced by a modified form in 1992. The ‘Premier A’ form of licence was expressed to run for the period set out in the schedule which was agreed on an individual basis. Both forms of the Partnership Licence Agreement, on the other hand, were expressed to run for a fixed period of three years.

By the ‘Premier A’ licence agreement Esso granted the licensee permission to use the land and buildings comprising the service station for the purposes of carrying on the business of selling such grades of motor fuel as Esso might from time to time designate and supply, as well as supplying the kinds of goods and services that were commonly provided at service stations. The licensee undertook to buy the whole of his requirement of motor fuel from Esso and to sell it at a price not greater than the maximum retail price fixed by Esso from time to time. The price at which fuel was sold to the licensee was the maximum retail price on the day of delivery less a margin specified in the agreement but subject to adjustment by Esso from time to time.

The following provisions of the Premier A licence agreement are of particular importance for present purposes:

The Partnership Licence Agreement introduced in 1989 followed a similar pattern. The following provisions are of particular importance for present purposes:

The Partnership Licence Agreement introduced in 1992 followed closely the form of the 1989 agreement. The following provisions are of particular importance for present purposes:

Before turning to consider the nature of the dispute itself it is necessary to describe the Esso Collection promotion in a little more detail. It was introduced in November 1986 as the latest in a series of short term sales promotions. A brief description of two of its immediate predecessors will suffice to place it in context.

During 1984 and 1985 Esso ran a series of drinking glass promotions under which motorists became entitled to receive glasses if they bought fuel to a certain value. There was a series of these promotions, each of which ran for a period of some weeks, but although they were national in the sense that they were operated by filling stations across the country, the offer in each case only related to the site at which fuel was bought. The operator of the site bought the glasses which were given away to customers, but Esso subsidised the cost to ensure that the net cost was limited to about 0.6 pence per gallon (“ppg”). As well as being of limited duration these promotions only continued while stocks lasted. Towards the end of this series of promotions Esso introduced for the first time vouchers, known as ‘Tiger Tokens’, which motorists could collect and redeem for gifts at a later date. However, the vouchers could still be redeemed only at the service station at which they had been issued.

The next promotion was a gift of an audio tape cassette, again linked to the issue of vouchers. This was a more valuable gift for which six vouchers were required. In order to enable motorists to redeem vouchers obtained from a number of different service stations at a single location Esso introduced a rudimentary clearing house scheme under which at the close of the promotion retailers received a credit in respect of the value of vouchers issued at other service stations which they themselves had redeemed and were debited with the value of vouchers which they had issued but which had been redeemed at other service stations. The audio cassette promotion lasted for no more than a few months.

The Esso Collection was seen as a natural successor to these earlier promotions. One of its key attractions to motorists was thought to be the opportunity to collect tokens from different petrol stations for redemption in exchange for quality gifts at any service station they found convenient. In order to make that possible the promotion had to be available at most, if not all, Esso petrol stations across the country; it was thus operated by retailers of all descriptions and was not limited to licensees. Those who were responsible for devising and introducing it considered it essential to ensure that it would be properly controlled by the retailers who would be responsible for issuing the tokens and supplying the gifts and this was one of the reasons why they considered it important for the retailer to bear a proportion of the cost. However, since retailers were expected to benefit personally from increased sales, Esso considered that it was reasonable for that reason also to expect them to bear some of the cost. One of the objects of the scheme was to encourage motorists to increase the amount of fuel they bought. At the time the promotion was introduced the average cost of a gallon of petrol was about £1.70 (37.5 pence per litre) and motorists had been in the habit of buying in multiples of £5. By offering one voucher for every £6 spent on fuel Esso hoped to break that habit. The redemption value of each voucher against promotional gifts was fixed at 7 pence.

Esso issued books of vouchers to each participating service station. In each case the vouchers bore a bar code containing an unique identification number for that site. No charge was made for the vouchers as such, but since each was worth 7p in the hands of a customer, retailers were advised to ensure that they were kept in secure conditions and to exercise careful control over their issue. The promotional gifts required to operate the scheme were not provided by Esso free of charge. Instead they were sold to retailers at prices equating to their redemption value. Thus a mug that could be obtained in exchange for three vouchers was sold to retailers at 21p. Retailers were expected to keep a stock of low value gifts ready for immediate distribution; higher value gifts were available on special order.

In order to enable motorists to redeem vouchers at any petrol station Esso set up a clearing house to process vouchers redeemed by retailers other than those by whom they had been issued. These became known as “foreign” vouchers. When a retailer redeemed foreign vouchers he could send them to the clearing house and after they had been checked and processed he received a credit in account with Esso of 7p for each voucher. The retailers by whom the vouchers had been issued were likewise each debited in account with Esso with 7p a voucher. The clearing house produced statements at regular intervals showing the net credits or debits resulting from this process which were posted to retailers’ accounts. By this means retailers bore the cost of all the vouchers which they issued and which were subsequently redeemed regardless of where redemption actually took place.

Although some of the costs of the promotion, such as national advertising, the production of promotional literature and display material for use at service stations and the operation of the clearing house, were borne by Esso, the promotion was organised in such a way that the cost of providing promotional gifts was borne by the retailers themselves. The theoretical maximum number of vouchers that any retailer could issue was represented by the total value in pounds sterling of all fuel sold by him divided by 6. This meant that at the start of the promotion the maximum theoretical cost of providing promotional gifts was about 1.98 ppg. However, in practice motorists do not buy all their fuel in multiples of exactly £6 and not all motorists want to collect vouchers to redeem for gifts. It was recognised, therefore, that the issue rate, that is, the number of vouchers actually issued expressed as a percentage of the theoretical maximum, would inevitably be less than 100%. Moreover, many vouchers that are issued are not redeemed for one reason or another and therefore the redemption rate, that is, the number of vouchers redeemed expressed as a percentage of the number issued, could also be expected to be less than 100%. Based on its experience with previous promotions, particularly the audio cassette and glass promotions, Esso estimated that the overall redemption rate, that is, the number of vouchers redeemed expressed as a percentage of the theoretical maximum that could be issued would be about 72%. That would reduce the average cost to retailers of providing promotional gifts to a little over 1.4 ppg.

In order to reduce the cost to retailers Esso introduced a ‘Temporary Merchandising Allowance’ (“TMA”) which was fixed by reference to the estimated overall redemption rate at a level that was intended to keep the average cost down to 0.6 ppg. This was very similar to the cost of previous promotions, but it is fair to say that those responsible for setting up the Esso Collection recognised that the actual cost to retailers could not be finally calculated until after the promotion had closed. TMA appeared as a credit in the retailer’s general monthly account with Esso and was paid throughout the life of the promotion at the rate of 0.9 ppg monthly in arrears on all motor fuel delivered to him, save for a period between June 1987 and September 1990 when it was reduced to 0.7 ppg.

The promotion was originally intended to last for only six months, but in May 1987 Esso decided to re-launch it for a further six months and it was subsequently extended continuously until it finally closed in February 1996. Even after that vouchers could still be redeemed for a limited period. When the promotion began the range of gifts was quite limited and the number of vouchers required to obtain gifts was relatively small, ranging from 3 for a china mug to 75 for an electrical extension cable. As time went on, however, the range of gifts increased substantially and by the time the promotion came to an end the number of vouchers required to obtain the most valuable gifts exceeded 2,000. The increase in the range and value of gifts on offer inevitably led many motorists to collect large number of vouchers over long periods of time. One consequence was that when the scheme ended some retailers were presented with very large numbers of vouchers for redemption and were obliged to obtain large numbers of gifts, some of which were very expensive.

The unusually long life of the promotion also served to exaggerate what were in fact two of its inherent characteristics. The first was the creation of deferred liabilities for the cost of promotional gifts. Although during the course of the trial there was a tendency on the part of some to confuse net cost to retailers with the creation of deferred liabilities, they are in fact quite different. The fact that TMA was paid in the month following delivery of the fuel and that many motorists retained vouchers for weeks or months before redeeming them meant that the cost of obtaining promotional gifts did not accrue in full until some time after it had been received. Therefore, even if TMA had been set at a level sufficient to cover the whole cost of promotional gifts, retailers would still have been faced with deferred liabilities in the form of the price payable to Esso in order to purchase them. The need to recognise and make proper allowance for such liabilities was first mentioned in a Management Guide issued to retailers when the promotion was re-launched in May 1987 and was drawn to the attention of retailers in increasingly explicit terms in subsequent editions.

The second characteristic that was exaggerated by the long duration of the promotion was the propensity for the cost of providing gifts to rise with the rising price of fuel. When the promotion was introduced petrol cost about £1.70 a gallon and the motorist received one voucher worth 7p for every 3½ to 4 gallons of fuel. By the time the promotion ended the cost of petrol had risen to over 70p a litre, or something over £3 a gallon, so that a motorist buying 4 gallons of fuel would have to pay over £12. If the value of the voucher and the qualifying purchase price remained constant, as in fact they did, the motorist would be entitled to receive two vouchers instead of one. Thus the cost to the retailer of providing gifts rose steadily during the lifetime of the promotion as the price of fuel rose.

Esso claims to be entitled to recover from individual licensees amounts alleged to be due to it in connection with the operation of the Esso Collection promotion. The licensees, however, say that they were not bound to take part in the promotion which, as a matter of construction, fell outside the scope of the Operating Standards, and that at no time did they agree to do so. Accordingly, they did not become liable to pay Esso for promotional gifts or to make payments to Esso in respect of vouchers issued by them but redeemed at other service stations. On that basis they say that they are not liable to Esso for the sums that Esso claims but are entitled to recover from Esso the amounts which they have paid during the life of the scheme in respect of promotional gifts.

These arguments raise a number of related issues, principally, whether licensees under any or all of the three forms of agreement in use during the relevant period were bound to join in the promotion and bear the costs associated with it; if not, whether those licensees who did operate the promotion thereby became liable for the cost of promotional goods and the redemption of vouchers which they had issued; and if not, whether licensees who renewed their licences while they were operating the scheme thereby became bound to the terms of the promotion.

It was common ground that both the 1989 and 1992 forms of the Partnership Licence Agreement imposed an obligation on the licensee to take part in promotional schemes falling within their scope. Miss Gloster submitted that the ‘Premier A’ licence, on the other hand, imposed no such obligation because clause 12) of the Operating Standards provided that the licensee “should”, rather than “shall” or “must”, join in such schemes.

It is possible to see at a glance that the tone and content of the ‘Premier A’ licence is very different from that of the two forms of Partnership Licence Agreement. The style is generally less formal and in particular Schedule 2 containing the Operating Standards leaves one with the impression that its drafting owes more to those responsible for the commercial side of the business than to the lawyers. That is not to say that it is poorly drafted, merely that one can detect a rather different approach to the use of language from that which one finds in the later agreements. For this reason I think that it is necessary to exercise some caution before placing a great deal of emphasis on linguistic distinctions, such as between the use of “shall”, “should” and “will”, and indeed other expressions, all of which are to be found in clauses which appear to be intended to impose obligations. Thus within the Operating Standards one finds:

Clause 9 of the agreement is quite clear in imposing on the licensee an obligation to comply in all respects with the operating standards. In this context I do not think that clause 12) is to be read as merely exhorting the licensee to join in promotional schemes, any more than clause 2) is to be read as exhorting him to ensure that staff uniforms are kept clean and in good repair or clause 8) is to be read as exhorting him to run the shop properly. In my view it is clear from the nature of the clause and from the purpose and language of the Schedule as a whole that the licensee is obliged to join in promotional schemes as Esso may reasonably require. There was no material distinction, therefore, between the licensee’s obligations under these three forms of agreement, except for the fact that the Partnership Licence Agreement did not contain the qualification that the requirement to join such schemes must be ‘reasonable’. By the time their participation in the Esso Collection promotion came to an end all the licensees were operating under the Partnership Licence Agreement and it is sufficient for present purposes to refer simply to the 1992 form of that agreement.

Miss Gloster submitted that the terms of the licence agreement were quite clear: licensees were bound to join in the promotion by virtue of paragraph 24 of the Seventh Schedule and by virtue of clause 8 of the agreement they were bound to do so at their own expense, which in this case involved bearing such costs as were inherent in the promotion as devised by Esso. Mr. Pickering submitted, however, that the obligation in paragraph 24 was not wholly unqualified and that the nature of the Esso Collection promotion was such that the licensees were not bound to join it.

One important plank in Mr. Pickering’s argument was the proposition that in commercial terms the business operated by the licensee was that of Esso, that the motorists who used the service station should be regarded as Esso’s customers rather than the licensee’s customers and that the benefit of the goodwill generated at the service station was likewise Esso’s. That being so, he submitted that the agreement should not be construed in such a way as would require the licensee to contribute directly to Esso’s costs of promoting its own business. Mr. Pickering accepted that licensees were obliged to join in Esso’s promotions, in the sense that they could be required to administer them, and that they were obliged to bear the costs of doing so. They were not, however, obliged to bear any part of the direct costs of a promotion, such as the cost of obtaining and providing advertising materials or gifts to customers. Nor could they be required to make payments to or for the benefit of Esso if that involved shouldering part of the costs of a promotion.

During the period of the Esso Collection promotion service stations operated by licensees played a substantial role in the marketing of Esso’s products. Together with stations operated by an Esso subsidiary, Dart Oil Company Limited, and privately owned stations selling Esso products, they provided a substantial network of retail outlets across the whole of the United Kingdom. There can be no doubt, therefore, that in one sense licensees played an important part in running Esso’s business and that motorists who used Esso service stations could be regarded as Esso’s customers. Equally, however, the licensees were all independent retailers responsible for running their own businesses and developing them to the best advantage. Motorists who used their service stations could properly be regarded as their customers as much as Esso’s. As one of the leading suppliers of motor fuel across the country Esso clearly had an interest in ensuring as far as possible that all retailers operating under the Esso brand name took part in national promotions. It is not surprising, therefore, that the license agreement should contain an obligation to join in promotions as Esso might require from time to time.

The fact is that both Esso and the individual licensee had the same interest in developing the business of the service station and selling as much fuel as possible. Whether the relationship was fairly balanced, commercially or financially, is another matter, but the interests of Esso and its licensees were essentially the same when it came to promoting the sale of Esso’s products. It would be wrong, therefore, in my view to regard promotions as being purely for the benefit of Esso since a successful promotion could be expected to maintain or increase sales to the benefit of both parties. I do not therefore think that one can treat Esso’s obvious interest in operating any promotion as pointing to the conclusion that licensees were not intended to bear any of the direct costs associated with it.

Once one accepts that the licensees are obliged to bear some costs associated with operating promotions, it becomes very difficult to draw a satisfactory line between costs of a kind that fall within the scope of that obligation and costs of a kind that do not. Mr. Pickering sought to draw a distinction on a variety of grounds between costs of administration and costs incurred by way of payments to Esso or other third parties to obtain goods or services required as a benefit to the customer and it is to these that I now turn.

The first ground on which he sought to support this distinction was the absence of any specific provision in clause 8 of the agreement or paragraph 24 of the seventh schedule requiring the licensee to make any payment to Esso of the kind required under this promotion. He submitted that the Partnership Licence Agreement is a sophisticated document which bears all the hallmarks of having been carefully constructed. It is quite clear in what it requires of the licensee by way of payments to Esso: these are limited to shop fees, car wash fees and some training expenses. In addition the licensee was required to buy petrol and other products from Esso. The licensee was required to bear all outgoings, such as the cost of gas and electricity, and to carry out various operations at his own expense, but none of those required him to make payments to Esso. Accordingly, since paragraph 24 makes no specific provision for payments by the licensee to Esso, the parties cannot have intended that the licensee should be obliged to participate in a promotion of a kind that would require such payments to be made.

Although I fully accept that clauses 8 and paragraph 24 must be construed in the context of the agreement as a whole, I do not find this a very persuasive argument. The fact is that both provisions 24 deal in general terms with obligations on the part of the licensee which may arise in a wide variety of different circumstances. The fact that other parts of the agreement contain specific provisions dealing with payments relating to specific aspects of the business tells one little about the scope of an obligation expressed in general terms such as one finds in paragraph 24.

Mr. Pickering’s next point is however, more powerful. He submitted that the context in which paragraph 24 is found points to the conclusion that it is concerned only with practical aspects of operating a service station and does not entitle Esso to impose on the licensee a promotion which has as one of its essential elements the purchase by the licensee of promotional gifts.

It is quite true, of course, that paragraph 24 forms part of the section of the agreement dealing with operating standards, much of which is directed to practical aspects of running a service station. That is perhaps not surprising, however, given that the service station is one of the primary points at which any promotion is advertised and almost the only point at which the customer is directly involved with it. The range of matters covered by the operating standards is very wide. It includes, for example, an obligation to operate credit card franchises (paragraph 21) and an obligation to undergo training (paragraph 25). Both of these inevitably imposed additional costs on the licensee which he was obliged to bear himself (though it is right to say that Esso did pay an allowance in respect of credit card costs), and in the case of training part of that cost took the form of fees payable to Esso. The seventh schedule is, therefore, best viewed simply as a broad collection of obligations linked only by the fact that they relate in one way or another to the operation of a service station.

Next Mr. Pickering submitted that issuing tokens which could be redeemed later for gifts was really no different from giving the customer a discount off the price of fuel; an obligation to take part in a simple discount promotion of that kind would be inconsistent with the express terms of the licence providing for a guaranteed margin on the sales of fuel and a derogation from grant. Similarly, requiring the licensee to participate in a promotion of this kind and to bear part of the cost of providing gifts eroded the margin and amounted to a derogation from grant. It was therefore uncontractual.

The Fifth Schedule to the agreement set out the prices at which the licensee was to buy and sell fuel. The effect of its terms was that he was prevented from selling fuel at a price higher than the maximum retail price set by Esso and was obliged to buy fuel at a price which, if he did sell at Esso’s maximum retail price, provided him with a gross profit margin on each litre sold. That margin (known as the ‘licence margin’) was set by agreement at the commencement of the licence, but was subject to review by Esso from time to time in accordance with the terms of the agreement.

The doctrine of derogation from grant was summarised by Lord Denning M.R. in Molton Builders Ltd v City of Westminster London Borough Council (1975) 30 P. & C.R. 182 as follows:

Miss Gloster submitted that the principal grant in this case is the grant of the right to use the property to carry on the business of a service station and that the various payments which Esso undertook to make to the licensee were incidental to that primary grant. The licence margin and operating cost allowance were both subject to variation by Esso and the agreement contains no guarantee as to the level of net profit that the licensee will be able to make. The licensee’s obligation to comply with Esso’s operating standards will inevitably impose costs of various kinds and no sensible distinction can be drawn between costs incurred in that way and costs incurred in operating a promotion, whatever their nature.

The doctrine of derogation from grant is most commonly invoked in the context of the sale or lease of land to prevent the grantor from acting in such a way as would substantially interfere with the use of the land by the purchaser or lessee in any of the ways contemplated by the sale or lease. In the present case, however, I am not concerned with the sale or lease of land but with the construction of a contract and even accepting that the principle of derogation from grant is, as Lord Denning suggested, one of general application, the nature and scope of the licensee’s obligation is a matter to be determined by reference to the contract as a whole having due regard to its commercial context. Accordingly, I do not think that the doctrine has any direct application to the present case, though it is no doubt a useful reminder that, in the absence of clear words, parties to a contract are unlikely to have intended to make significant derogations through the operation of a subsidiary clause from the primary benefits intended to be conferred under it.

However, I do not think that the licence margin or the operating cost allowance can be viewed as benefits in some way distinct and separate from the remainder of the contract. Not only are they subject to variation, but they represent no more than two sources of income from which the costs of running the business must be paid. Compliance with Esso’s operating standards would inevitably impose a variety of costs on the licensee, some, but not all, of which were an inevitable part of running a business of this kind. I do not think that the licence agreement enables one to draw a satisfactory distinction between the costs of operating a promotion and the costs of complying with other requirements. They are all costs which have to be paid out of the licensee’s income. Moreover, in the case of a marketing promotion it is difficult to draw a distinction between costs incurred in administration and costs of any other kinds associated with it.

As further support for his argument Mr. Pickering submitted that although the promotion contemplated the sale of gifts by Esso to retailers, there was in this case no true sale of promotional goods to the licensees and that the sums charged to their accounts were in fact nothing more than contributions to Esso’s costs of its own promotion. The basis for this submission lay in what he submitted was the true legal nature of the promotion and the application to it of the Trading Stamps Act 1964.

The Trading Stamps Act 1964 was passed to regulate the operation of sales promotions under which retailers issued stamps or similar vouchers for eventual redemption in exchange for goods or services. The following sections of the Act are relevant for present purposes:

I think Mr. Pickering was right in saying that Tiger Tokens were trading stamps and that the Esso Collection was a trading stamp scheme within the meaning of the Act. Moreover, it appears that Esso appreciated that fact because it took steps to comply with the requirements of section 2, both as regards the name of the company acting as promoter and the value of the token (0.001p). I am satisfied that both as a matter of law and as a matter of commercial reality the scheme was being promoted by Esso and that Tiger Tokens in the hands of a motorist represented a right, subject to the terms of the promotion, to obtain goods from Esso.

However, I am not persuaded that this advances the licensees’ case. Although holders of Tiger Tokens had a right in accordance with the terms of the promotion to receive gifts from Esso with the benefit of the warranties in section 4 of the Act, I can see nothing in the Act to prevent Esso from satisfying its obligations by causing the operators of its petrol stations to supply the gifts on its behalf. The licensees submitted that there could not be a sale of goods by Esso to licensees and a supply by licensees to customers as agents for Esso, but in my view the argument fails to take account of the different relationships involved. Providing title in the goods passes to the customer on delivery (as was clearly the intention), there is no reason why a licensee should not hand the customer goods that he has bought from Esso and by doing so satisfy Esso’s obligation to the customer under the Act. Only in that sense does the licensee act as Esso’s agent to supply gifts. It makes no difference in my view, therefore, whether the gifts were the property of Esso and held by retailers as its agents (as I assume they were in the case of petrol stations run by agents) or were the property of the retailers themselves. Either way the customer who received a gift on redemption of his tokens obtained title to the goods in question with the benefit of the statutory warranties by Esso. If there were a breach of any of the warranties, the customer would no doubt have a complaint against Esso as the promoter, but I do not think that necessarily tells one anything about the terms on which promotional goods were supplied to, or held by, retailers.

One can see from the information that Esso provided to retailers in connection with the promotion that someone had been aware from an early stage that the provision on the sale of fuel of vouchers that could subsequently be redeemed for goods might cause difficulties when it came to accounting for VAT. Esso therefore reached an agreement with H.M. Customs and Excise that VAT would be charged to retailers on the cost of gifts debited to their accounts which they could recover as input tax in the ordinary way. This assumed, of course, that there was a sale of goods by Esso to the retailers and indeed that is how the supply of promotional goods was treated on each side. As I have said, I do not think that it was necessary for Esso to be the owner of the promotional goods to enable it to comply with the provisions of the Trading Stamps Act and in view of the fact that the promotion was structured and operated on the basis that there was a sale of goods by Esso to the retailers, I see no reason to conclude that as a matter of law there was not. However, even if the position had been otherwise I am not persuaded that it would have made any difference. Whether Esso was entitled under the terms of the licence agreement to require licensees to bear part of the cost of the promotion depends on whether a payment of that kind was contemplated by the contract rather than upon the precise form it took. I do not think it makes a great deal of difference for present purposes whether retailers bought gifts from Esso or were merely required to pay Esso specified sums in relation to gifts supplied to them for the purposes of operating the scheme.

At this point I should mention one further argument raised by the licensees in written submissions served after the close of the trial. This was based on paragraph 12 of Part III of the undertakings given by Esso to the Secretary of State for Trade and Industry relating to leases and licences of its service stations which provided as follows:

I am unable to accept that argument. Although I accept that the Undertakings may have a part to play in the construction of the licence agreement where its meaning is uncertain, I do not think that paragraph 12 is directed to sales promotion schemes of any kind. Its purpose, as I think is clear from its language, is to preserve for the retailer operating under a solus agreement who is bound to buy his supplies of fuel and lubricants from the company the freedom to stock and sell any other kinds of goods he likes. Nothing in the language of paragraph 12 suggests that it was directed to promotions of the kind under consideration, whether or not they are structured in a way that involves a sale of goods by the company to the retailer.

Finally, before leaving this part of the discussion I think it is important to emphasise that the licensees have not contended that as a matter of construction the obligation to join in promotions at their own expense is subject to any particular limitation, either in terms of the amount of costs that they can be required to bear, or in terms of the duration of the promotion. I heard no argument on these questions and it is unnecessary to express any view on them. The only question I have to decide is whether a promotion under which the licensee is required to bear any part of the costs of providing gifts to customers falls outside the terms of the agreement.

For the reasons I have given I can see no valid reason for drawing a distinction between costs incurred in administering a promotion and costs incurred in obtaining gifts for distribution. Nor can I see any valid reason for drawing a distinction between payments to Esso in respect of the cost of obtaining gifts and payments to third parties for the same purpose. I have reached the conclusion, therefore, that under each of the three forms of agreement the licensee was obliged to join in a promotion of the kind in question and to operate it at his own expense. It follows that in principle the licensees are liable to pay Esso sums properly debited to their accounts in respect of gifts and the value of tokens issued at their own service stations but redeemed at other service stations.

Miss Gloster submitted, however, that whether or not licensees were obliged under the terms of the licence agreement to join in the Esso Collection promotion, those who did operate the promotion became bound to pay for gifts supplied to them and for the value of their vouchers redeemed at other service stations in accordance with the terms of the scheme. She submitted that by participating in the scheme with full knowledge of its characteristics they had entered into a contract with Esso by conduct to implement the promotion in accordance with its terms. This contract became known for convenience as the ‘Scheme Contract’.

The Esso Collection was introduced to existing licensees in the late summer and early autumn of 1986 by the various Area Managers who represented the primary link between Esso and the licensees. They reported to Regional Managers who in turn reported to one of the two General Retail Managers. Area Managers received their instructions about the new promotion from their Regional Managers. These survive in the form of a memorandum from the then Marketing Manager, Mr. R. F. Hunting, which sets out the essence of the scheme and describes the gifts to be offered. Attached to the memorandum was a document described as a “Field Sell-in Guide” which contained instructions about the manner in which the new promotion was to be introduced to retailers.

It is apparent from the ‘Hunting Memorandum’, as it became known, that when the promotion was first introduced retailers were not sent any information about the promotion through the post; Esso depended entirely on oral presentations by Area Managers. The memorandum stated that the promotion would start in mid-November and run for about 6 months. It contained the following paragraph:

The Field Sell-in Guide explained how the promotion would be administered. It drew attention to the fact that a new account would be set up for each participating retailer to which the cost of promotional goods would be debited and the TMA credited. Attached to that document was a draft of a Retailer Guide designed as a manual for retailers operating the promotion. This also included a paragraph which stated that the expected cost to retailers should average 0.6 ppg.

Several of those who were Area Managers in late 1986 were called to give evidence. As one might expect, they all confirmed that they had explained the new promotion to licensees in their areas in accordance with the information contained in the Hunting Memorandum and the attached documents. Despite certain criticisms that were made of their evidence, I do not doubt that they were all doing their best to assist me and to give an honest account of matters. Nonetheless it is necessary to bear in mind that the events in question took place over sixteen years ago and that the exercise of selling-in the promotion must have become largely routine. It must be questionable, therefore, whether any of them had a reliable recollection of the details of his conversation with any particular licensee, though it is unnecessary to make any finding about that on this occasion. Naturally enough they had all taken the opportunity to remind themselves of the terms of the Hunting Memorandum before they gave evidence.

I also heard evidence from seventeen of the licensees. They came from different parts of the country and had become licensees at different times. Their experience as licensees ranged from over 30 years to a few months. Almost all of them said that they had been given an assurance by their Area Manager in one form or another that the promotion would cost them nothing. Those who were already licensees when the promotion was introduced said that they were on good terms with their Area Manager and accepted what he told them without question. Mr. Pickering submitted that for each licensee the introduction to the Esso Collection was a singular event of which he was likely to have a reasonably clear and generally reliable recollection. There is something in that, of course, and I accept that all of them were honest witnesses doing their best to recall what was said. Inevitably, however, the passage of time causes memories to fade and it may be difficult at this remove to reach a firm conclusion about exactly what was said by any particular Area Manager to any particular licensee.

Many of the licensees who are parties to the present proceedings have alleged that assurances given by their Area Managers amounted to representations or warranties of a kind which have legal consequences for their relationship with Esso. Mr. Pickering suggested that by the end of the trial I would have heard evidence from a fair cross-section of Area Managers and licensees and that in view of the difficulty of obtaining reliable evidence of conversations that took place up to seventeen years ago I should be as well-placed to decide what had been said by Area Managers to licensees as any court was ever likely to be. Miss Gloster, on the other hand, submitted that the quality of the licensees’ evidence was so poor that I should hold here and now that none of those who are parties to these proceedings have any real prospect of succeeding on a claim for misrepresentation or breach of warranty. In any event, she submitted, the licensees who gave evidence in these proceedings could not be taken to be representative of the body of licensees as a whole and I should not therefore make any findings of a general nature adverse to Esso on the basis of their evidence.

The licensees who are parties to these proceedings represent only a small proportion of the total number of those who were licensees of Esso service stations during the period that the Esso Collection promotion was running and those who gave evidence were, necessarily, a small proportion of those who are parties to the proceedings. Nonetheless, their evidence has provided a valuable insight into the general nature of the relationship between licensees and their Area Managers and the general manner in which licensees were introduced to the promotion. Moreover, I am not persuaded that those who gave evidence, let alone those who did not, are bound to fail in persuading a court that they received assurances of the kind they say they received. Having said that, the question whether an assurance of a legally significant nature was given by any particular Area Manager to any particular licensee is one that can only be answered on an individual basis since it depends on exactly what was said and in what context. That can only be determined after hearing evidence from the licensee and Area Manager concerned. For this reason alone it is impossible to make any all-embracing finding about the terms in which the promotion was explained to licensees. It is possible, on the other hand, to reach some broad conclusions about the way in which Esso set about introducing the promotion, although the findings I make in this context are necessarily general in nature and will not prevent any individual licensee, or indeed Esso, from seeking to show on another occasion that in his case events took a different course.

The Area Managers obtained their information about the promotion from the Hunting Memorandum and its attachments which between them set out all its essential elements, including the payment of TMA. The way in which the Esso Collection was organised bore some similarity to the previous audio cassette promotion, but the payment of TMA was an innovation and it was generally accepted that Area Managers had drawn that to the licensees’ attention, as one would expect. The Hunting Memorandum made it clear that the payment of TMA was intended to bring the cost of the promotion to retailers down to an average of 0.6 ppg, but many licensees said that they had been given the clear impression by their Area Managers that TMA would cover the whole of the cost. The principle that the retailer should make a contribution to the cost of gifts was not new, however; indeed, if the new promotion had been designed in such a way that retailers were to bear none of the cost, that would have been a significant factor and one which I have no doubt Area Managers would have been instructed to emphasise. That was not the case, however, and I find it difficult to accept that in general Area Managers told retailers that TMA would cover the whole cost or that the new promotion would cost them nothing. To have done so would have been to fly in the face of the Hunting Memorandum and I can see no reason why Area Managers should generally have behaved in that way nor any reason to think that they did so. Accordingly, I am satisfied that in general Area Managers did not tell licensees that TMA would cover the whole of their costs or that they would not be required to bear any of the costs associated with the promotion. Since it was hoped that the promotion would attract customers and increase the amount of fuel sold, I think it is certainly possible that some licensees were told that they would benefit overall and that the increase in profits resulting from the expected increase in sales would more than cover their costs. Again, however, whether that was said, and if so with what consequences, are questions that will have to be determined on another occasion.

In October 1986, a few weeks before the promotion was launched, Esso produced its first ‘Management Guide to the Esso Collection’ which was sent to all its retailers in order to provide information and guidance in connection with the operation of the promotion. The Guide described the gifts available and the number of tokens required to obtain them, gave advice and instructions about the display of advertising material, advice on security in relation to the storage and issue of vouchers, instructions about ordering gifts, and information about the clearing house and the treatment of gifts for the purposes of VAT. It also stated that the retailer’s cost should average 0.6 ppg if tokens and gifts were carefully controlled.

The promotion was designed to run for 6 months until the spring of 1987, but by that time a decision had already been taken to continue it for a further period and the ‘New Esso Collection’ was launched on 1 ^st June 1987. Although Esso described it as a new promotion, it was for all practical purposes a continuation of the original promotion with minor modifications. New tokens were designed and an extended range of gifts was introduced, but both old and new tokens were accepted as valid for the whole range of gifts. The new promotion was announced to retailers in a letter dated 15 ^th May 1987 from Mr. D. H. Ledlie enclosing a new Management Guide which they were asked to read carefully. The Guide contained the same kind of advice and information as was to be found in the previous edition, though in some respects the emphasis was different. This time in the section marked ‘Economics’ it contained a warning that although the costs had been lower than 0.6 ppg in the early stages, they would rise later. The same section also contained a warning that many customers were collecting tokens with a view to redeeming them later and that this represented a future cost to retailers for which they should budget.

A few days later on 28 ^th May 1987 Mr. Ledlie wrote again to all licensees giving further details of the promotion. Since this was the first written communication from Esso explaining how the costs of the promotion were to be borne it is of some importance and deserves to be quoted at length. The central section of the letter read as follows:

The letters from Mr. Ledlie and the Management Guides, in common with other communications and materials supplied by Esso to its retailers, were distributed by an independent mailing company, Eros Mailing Ltd (“Eros”). Esso provided Eros with an electronic database containing details of the names, addresses and status of the whole body of retailers which was brought up to date at regular intervals. At the time the Esso Collection was introduced the database was revised at weekly intervals; from some point during the early 1990’s it was revised daily.

Materials distributed by Eros were sent out by post in the case of letters or other documents and by courier in the case of more bulky materials such as posters and other promotional materials. If the publication of a new Management Guide coincided with a re-launch of the promotion, as was sometimes the case, the Guide was sent out together with the appropriate point of sale materials. These comprised posters of various sizes, pump crowners and other similar materials sometimes amounting to about fifty items in all which were sent by courier in a large cardboard flat pack. A signature was required from someone at the service station to acknowledge receipt and considerable care was taken to ensure that accurate records of deliveries were kept. If a flat pack was returned undelivered or if receipt was not acknowledged, steps could be, and were, taken to find out why. In the case of documents despatched by post Eros relied on the postal authorities to ensure that delivery was made in the ordinary course of business. However, all mail contained a return address and on the rare occasions when a letter was returned Eros would contact the Area Manager responsible for the site to find out what had gone wrong. If necessary, a second delivery was organised. For most of the time the promotion was running Mrs. Lucy Jones was responsible for managing the distribution of Esso’s materials by Eros and in the light of her description of the methods used to monitor the despatch and receipt of materials I am satisfied that the system worked efficiently. It is impossible, of course, to say that there was never an occasion on which a package or envelope went astray, but there was no reliable evidence that any particular package or envelope had failed to reach its intended destination. As soon as each new edition of the Management Guide was published Esso instructed Eros to distribute it to retailers and accordingly I am satisfied that copies of the Guide were despatched to, and received by, all the retailers taking part in the promotion at that time.

In the event the Esso Collection continued in substantially the same form until February 1996. Most of those who became licensees during that period completed a one year trial licence before they entered into the standard three-year commitment and most, if not all, new licensees also attended a training course designed to introduce them to various aspects of operating a service station at which the nature of the promotion was explained and discussed. Some of the licensees who gave evidence said that at the training courses they attended little or no attention was paid to the Esso Collection promotion, but having heard from Mr. Baker who was Training Manager for most of that period and having seen examples of the materials developed for use on training courses, I find that difficult to accept. The course papers make it clear that Esso set out to ensure that licensees understood clearly not just how to administer the promotion but what their liabilities under it were and how they could make suitable provision for them. Again, I am unable to exclude the possibility that in some cases sessions that should have been devoted to the promotion were used for other purposes, but I am satisfied that course papers explaining the scheme were routinely distributed to participants together with a copy of the current Management Guide and that those who attended the great majority of courses received training in understanding and calculating their outstanding liabilities.

One of the obligations of the licensee under the Partnership Licence Agreement was to provide Esso with a monthly operating statement showing gross revenue for the preceding month and other information required by Esso. Esso encouraged licensees to make use of the services of the specialist oil accountants E. K. Williams to produce these monthly statements and most did so. From an early stage E. K. Williams began to include in the operating statements they prepared a provision for the future cost of gifts. Some licensees noticed the provision and questioned it, some noticed it but did not question it, and some appear not to have noticed it at all. Many of the licensees who gave evidence sought to distance themselves from these operating statements by saying that they were prepared without their agreement or that they did not understand them. It remains the case, however, that those who did instruct E. K. Williams had available to them an additional source of information about the financial implications of the promotion and those who did not could in most cases obtain similar advice from their own accountants.

In fact, however, it was not difficult for licensees to grasp the essential nature of the promotion and I have no doubt that in general they well understood how it worked. They knew, for example, that one token had to be issued for each full £6 spent on fuel, that each token was worth 7p in the hands of the motorist and that they had to obtain gifts from Esso to enable motorists to redeem tokens at their sites. They were aware that they would be charged for those gifts by Esso; they were also aware that there was a clearing house for tokens and that they would receive credits and debits through the clearing house for the value of tokens redeemed at service stations other than those at which they had been issued. They knew that they received TMA on the fuel they bought each month and, most importantly, they were aware that in many cases the cost of providing gifts would not have to be borne until some time after tokens had been issued. What in many cases they did not realise was the level to which deferred obligations of that kind might rise towards the end of the promotion.

The nature of the relationship between Esso and a licensee who operated the Esso Collection promotion was touched on in Kato Holdings Ltd v Esso Petroleum Co. Ltd (unreported, 27 ^th October 1999). In that case it was apparently common ground that a contract was created between the licensee and Esso on terms which were to be gathered from the Management Guides, a matter which the judge in that case, Rattee J., did not find surprising, even if he was critical of the fact that Esso had never taken the trouble to reduce the terms of the contract to a formal document. Miss Gloster submitted that I should reach the same conclusion. Mr. Pickering submitted, however, that a licensee did not enter into contractual relations with Esso so as to add to the obligations imposed on him by the licence agreement simply by agreeing to operate the promotion. He pointed out that in Kato Holdings the court was not asked to decide whether or how such a contract had come into being and did not therefore have to consider the issues now before me. He submitted that I should not accept the concession made by counsel for the licensee in that case.

I turn first to the principles that the court should apply when considering whether parties have entered into a contract by conduct. Mr. Pickering drew my attention to the dictum of Bingham L.J. in Blackpool & Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 W.L.R. 1195 at 1202 to the effect that a contract arising out of conduct is not to be lightly implied and that

Where two parties to a business arrangement are already in contractual relations much of their conduct is likely to be referable to their existing obligations. In these circumstances it is particularly important that the court should examine with care the conduct said to have given rise to a separate contract in order to ensure that it does indeed evidence an intention to be bound to additional obligations. Thus a new contract will not normally be inferred if the parties would or might have acted as they did in the absence of one: see The Gudermes [1993] 1 Lloyd’s Rep. 213. Moreover, in order for the court to satisfy itself that the parties have entered into an agreement it should be possible to identify conduct from which an offer and acceptance of terms can reasonably be inferred: see The Aramis [1989] 1 Lloyd’s Rep. 213.

Mr. Pickering submitted that in the present case it was unnecessary and wrong in law to indulge in a process of legal construction in order to create a separate contract governing the operation of the scheme. The conduct of the licensees in operating the Esso Collection promotion, he submitted, was entirely referable to the performance of their duties under the licence agreement and no further contract was needed for that purpose. If Esso had wanted licensees to incur additional liabilities not falling within the scope of the licence agreement, it could and should have set out the terms clearly in writing, as had been done in the case of the earlier glassware promotions. The Management Guides were not presented to licensees as contractual documents and were not worded in such a way that a reasonable licensee would understand them as being intended to have that effect. None of the licensees were told that they were expected to enter into a separate contract with Esso to cover the operation of the scheme and no one suggested that any contract of that kind had come into existence until the present proceedings were well advanced.

This argument underlay a number of different aspects of Mr. Pickering’s argument on this limb of the case. If I have understood it correctly, it involves the proposition that licensees were obliged under the terms of the licence agreement to implement the Esso Collection promotion insofar as it involved carrying out activities at their service stations, such as displaying advertising material, issuing Tiger Tokens and handing out gifts to motorists, but were not obliged to bear any of the costs arising out of the provision of those gifts. A closely related submission was that there was no consideration for the so-called ‘scheme contract’ because the licensees were under an existing obligation to join in the promotion, at least to the limited extent mentioned above.

In my view these arguments are simply unrealistic. This particular promotion depended for its operation on retailers’ issuing vouchers to motorists, each of which represented an obligation valued at 7p, and on their buying gifts from Esso in order to enable them to discharge those obligations. It cannot sensibly be broken up into separate activities, some of which a licensee was bound to perform and some of which he was not. If, on the true construction of the agreement, the Esso Collection fell outside the terms of paragraph 24 of the seventh schedule, the licensees were not bound to perform any of the activities associated with it. The fact that licensees were not told that they had to enter into a new contract, or that the Management Guides were not presented as contractual documents, may be of relevance in deciding whether a contract was brought into existence by the conduct of the parties, but I do not think that either provides support for the conclusion that licensees who did operate the promotion did so under the terms of the licence agreement but in a limited way. I accept that if licensees were obliged under the terms of the licence agreement to join in such a promotion there was no consideration for an independent scheme contract, but in those circumstances the need for any such contract disappears.

In my view, therefore, the question whether licensees who operated the promotion thereby became contractually bound to Esso to pay for gifts supplied to them and to indemnify Esso against payments made to other retailers for redeeming their vouchers does not arise at all unless, contrary to my primary conclusion, the promotion fell outside the terms of the licence agreement. The starting point for any consideration of the arguments relating to the existence of a ‘scheme contract’ must therefore be an assumption that the licence did not impose on licensees an obligation to join in the promotion.

Mr. Pickering then made some play with the fact that Esso’s case on the existence of a ‘scheme contract’ had emerged late in the day and had undergone further refinement even after it had made its first appearance. He submitted that that only served to demonstrate that Esso had neither intended to enter into a contract of that kind with the licensees, nor had in fact done so.

The fact that the parties’ relationship was first analysed in terms of the ‘scheme contract’ only during the course of the proceedings does not strike me as a very strong point. There is evidence that when the promotion was first launched in November 1986 Esso treated it as optional, though in fact virtually all the licensees were happy to take part. From the time of the re-launch in June 1987, however, it was regarded as a promotion that licensees could be required to join. I am sure that when Area Managers introduced the promotion to retailers they did so in commercial rather than legal terms, but if licensees questioned whether they had to join Area Managers simply referred to the terms of the licence. Even when licensees began to challenge Esso’s right to recover Tiger Token debts it was natural for Esso to refer to paragraph 24 of the seventh schedule rather than seek to examine the position more closely. The ‘scheme contract’ is in fact simply a way of seeking to describe in legal terms, on the assumption that the promotion does not fall within paragraph 24, the relationship between Esso and those licensees who operated the scheme by issuing vouchers to their customers, receiving payment of TMA, ordering promotional goods and receiving credits for ‘foreign’ tokens submitted through the clearing house.

Mr. Pickering next submitted that the Management Guides were not the kind of documents which might be expected to contain contractual terms, and indeed it is right to say that many of the licensees who gave evidence said that they would have expected communications affecting legal aspects of their relationship with Esso to be dealt with formally in a letter. He submitted that insofar as the Management Guides were intended to have contractual effect Esso had failed to draw either that fact or their contents adequately to the licensees’ attention. In support of this argument he relied on the decisions in Parker v South Eastern Railway (1877) 2 C.P.D. 416 and J. Spurling Ltd v Bradshaw [1956] 1 W.L.R. 461. These are well-known authorities for the proposition that a person will not be bound by terms of which he has not received reasonable notice.

I quite understand that most if not all licensees would expect formal changes in their relationship with Esso to be dealt with by correspondence, but it remains true nonetheless that legal relationships may arise out of, or be affected by, the way in which business is actually conducted. The authorities on which Mr. Pickering relied are examples of cases in which onerous contractual terms were not adequately drawn to the attention of the party who was said to be bound by them. In the present case, however, the evidence suggests that in general the nature of the promotion was explained to licensees by Area Managers before they began to operate it, was explained in some detail at training courses run by Esso for new licensees and was accurately reflected in the instructions and advice given in the Management Guides. Moreover, I do not think that any of the licensees who gave evidence, with one possible exception, failed to understand from the outset how the promotion actually worked. In particular, they understood that there would be deferred liabilities for the cost of gifts even if they did not realise the extent to which those liabilities would accumulate by the time the promotion was finally discontinued.

Mr. Pickering submitted that certainty of terms is necessary for a contract made by conduct just as much as for a other contract made in any other way: see Foley v Classique Coaches Ltd [1934] 2 K.B. 1, Scammell & Nephew Ltd v Ouston [1941] A.C. 251 and Anglia Television Ltd v BBC and others (unreported, 16 ^th February 1989) in which Hirst J. said that it is a prerequisite of a contract by conduct that there should be an unequivocal offer in a form capable of acceptance by conduct. I entirely accept that. Esso’s case was that the terms of the contract are to be found in the Management Guides as issued to retailers from time to time. Mr. Pickering submitted, however, that there was no offer to the licensees in those terms capable of acceptance by conduct and that in any event the Guides do not set out the terms of the contract fully or with sufficient clarity to provide the basis for an enforceable contract. In other words, he submitted that the terms of the ‘scheme contract’ were too vague to be enforceable.

The first limb of this submission was that in the case of those who were existing licensees in 1986 any contract must have been made at the time when the Area Manager, having explained the promotion to them, invited them to join and they agreed to do so, all of which occurred before the first Management Guide was published. In my view, however, that is not necessarily the case. One can see from its terms that the first Management Guide was distributed to retailers before the promotion was launched. If there had been any significant difference between the scheme as described in the Management Guide and the scheme as previously described by the Area Manager, the conduct of the licensee in implementing the promotion in accordance with the terms of the Guide might well have been sufficient to demonstrate his acceptance of those terms. However, this is not a matter that I need to decide because the instructions contained in the first Guide were entirely consistent with the description of the promotion given in the Hunting Memorandum and, in general, by Area Managers to licensees.

The second limb of the argument was that the Management Guides did not set out with sufficient certainty the terms of the contract that is said to have arisen between Esso and the licensee. Mr. Pickering pointed out, quite correctly, that much of each Management Guide is devoted to information and advice about the operation of the promotion and submitted that it is not possible to distinguish satisfactorily between its different aspects. He also pointed out, again quite correctly, that none of the Management Guides referred to the payment of TMA. His main point, however, was that the extent of the burden on licensees in relation to the costs of the promotion had nowhere been clearly spelled out. This last point was developed at some length and in a variety of ways, but ultimately involved the submission that neither in the Management Guides nor in any oral presentation were the licensees given sufficient warning about the potential cost of the promotion.

I think it is important for these purposes to distinguish between certainty as to the meaning of terms and certainty as to their effect. If parties have failed to identify with sufficient certainty the terms of the contract or have expressed their agreement in such a way that the court cannot determine with a reasonable degree of certainty what they meant, the contract will fail because the court cannot be satisfied that they were in fact in agreement: see Scammell v Ouston per Viscount Maugham at page 255. That is quite different from the position which arises where the meaning of the contract is clear but at the time of making it the parties do not know exactly what its effect will be since that depends on how circumstances develop thereafter. Uncertainty of that kind may call into question whether one or other party can be taken to have agreed to the term in question, but it will not render the contract void for uncertainty if the court is satisfied that an agreement was made. For example, it is quite possible for a person to agree to carry out certain work at his own expense over a period of several months knowing that the cost of doing so is subject to various contingencies. If the terms of the contract are clear, the contract is not void for uncertainty simply because the cost of performing the work was uncertain and ultimately proves to be greater than originally expected.

When the Esso Collection promotion was re-launched in 1987 I do not think that there was much room for doubt about how it was to work or what costs the licensees were required to bear. A copy of the second edition of the Management Guide was sent out with Mr. Ledlie’s letter of 15 ^th May 1987 before the promotion was re-launched and retailers also received the detailed information about the costs of the scheme contained in his letter of 28 ^th May. I accept that the letter of 28 ^th May in particular calls for quite careful reading, but I do not think that licensees who did read it carefully could reasonably have been left in any doubt that they were being expected to bear an average estimated net cost, after receipt of TMA, of 0.6 ppg. More importantly, perhaps, they must also have been aware that the cost would ultimately depend on the number of tokens redeemed. That was bound to be a matter of uncertainty, but it does not mean that there was any uncertainty about the retailer’s obligation to issue tokens or purchase the gifts that were needed to provide to motorists on redemption.

Although some licensees said that they thought that the costs they were being asked to bear related to the administration of the promotion, that was in most cases linked to their evidence that they believed that the promotion would ultimately cost them nothing, but in any event I am unable to accept that Mr. Ledlie’s letters or the Management Guides gave any grounds for reaching that conclusion. If they had been involved in previous promotions they would have been aware of the fact that administration costs were treated simply as part of their overheads. There is nothing in the Hunting Memorandum or in either of Mr. Ledlie’s letters to suggest that Esso was directing itself to administration costs; nor is there any evidence that anyone thought that it had sufficient information to enable it to do so.

Mr. Pickering was on somewhat stronger ground, however, in submitting that the Management Guides did not contain all the terms of the proposed contract because they omitted any reference to TMA. From the retailer’s point of view the payment of TMA was a critical element in the scheme. With vouchers having a value of 7p each for the purposes of redemption the promotion would have cost him in the order of 1.4 ppg depending on the final redemption rate if TMA had not been paid. I have no doubt, therefore, that the payment of TMA at a rate that was expected to keep the net cost down to 0.6 ppg on average over the life of the promotion as stated in Mr. Ledlie’s letter of 28 ^th May 1987 was an essential term of any scheme contract.

That being so, is it fatal to the existence of a scheme contract that none of the Management Guides refers to TMA? I do not think so. In the present case the Management Guides, although important, are only one part of the circumstances surrounding the operation of the promotion. Licensees who joined in 1986 had the scheme (including the payment of TMA) described to them by their Area Managers and those who joined after November 1986 but before June 1987 received the letters from Mr. Ledlie as well as the second Management Guide. Moreover, it is necessary to bear in mind that new licensees did not generally begin operating service stations without receiving a certain amount of information from their Area Managers. I am quite satisfied that few licensees began operations without having received an explanation of how the promotion worked as well as a copy of the current Management Guide. I am also satisfied that in general the explanation they were given included information about the payment of TMA. Provided the payment of TMA was explained to licensees, as I am satisfied it was, the fact that it was not mentioned in any of the Management Guides is irrelevant. This is also the answer in my view to Mr. Pickering’s submission that Esso did not make an offer to the licensees in a form that was capable of being accepted by conduct. All that is required for this purpose is that the essential terms of the proposed contract, the fact that they are intended to be legally binding and the manner in which they can be accepted are all made clear. In the present case the nature of the promotion and the manner in which it was intended to operate were made clear and it was implicit that it was intended to give rise to legal relations if a licensee operated the promotion in accordance with its terms. In those circumstances I do not think that the lack of any document encapsulating its terms prevented Esso from making an offer to the licensees or the licensees from accepting it in that way.

Mr. Pickering’s next submission was that if Esso is right, the terms of the contract could be varied by Esso at will and indeed were altered each time a new version of the Management Guide was issued. In my view this argument proceeds on a misunderstanding of the nature of the Guides. It is undoubtedly the case that each successive version of the Management Guide differed in some respects from its predecessor, for example, in the manner in which it drew attention to the need for retailers to make financial provisions for the redemption of outstanding tokens, but the essential nature of the promotion did not change at all. The nearest one gets to a change in the scheme itself is the introduction from time to time of new gifts of higher value which is said to have encouraged the hoarding of tokens and thus to have led to an increase in the amount of the deferred liabilities. I think it was implicit in the original scheme that Esso could vary the gifts on offer from time to time, but even if it was not, I do not think that would prevent a scheme contract from coming into existence in the first place, though each time the gifts were changed licensees would no doubt have the right to decide whether to continue with the promotion. Similarly, if Esso were to modify the promotion in other respects, for example, by withdrawing TMA or changing the redemption value of tokens, licensees could decide whether they wished to carry on with it, but if they chose to do so, I see no reason why they should not be bound by the new arrangements. It must be remembered that the question is not whether licensees were bound to take part in the promotion: that depended on the terms of the licence agreement. The question is whether, having taken part in the promotion by issuing tokens to their customers, receiving credits against their fuel bills in the form of TMA and supplying gifts to motorists who redeemed tokens at their service stations, they were under any obligation to pay for the gifts required for that purpose.

Whenever one party alleges that a contract has been made informally the court must look at the circumstances as a whole with some care in order to decide whether the parties reached agreement on terms to which they intended to be bound. If in the course of business two parties have embarked on a course of conduct under which each expects to receive certain benefits from the other at different times, the likelihood is that they intended their relationship to operate within a legal framework and so give rise to legal obligations on both sides. In some cases, of which the Kapetan Markos is a good example, the application of established principles leads to the conclusion that the relationship between the parties is already regulated in a way that makes an additional, informal, contract superfluous and inappropriate. Where, however, the absence of contractual relations would leave the parties operating in a legal vacuum it may not be difficult to conclude that the parties intended to become bound. For the reasons I have given I am satisfied that if the terms of the Partnership Licence Agreement did not oblige licensees to take part in the Esso Collection, any licensee who did so with knowledge of the nature of the scheme entered into a contract with Esso to operate it in accordance with its terms and thus became liable for the cost of gifts supplied by Esso and for the cost of redemption of tokens issued at his service station but redeemed at another service station.

An alternative submission put forward by Miss Gloster was that a separate contract for the sale and delivery of goods came into existence each time a licensee placed an order with Esso for a batch of gifts. The argument is attractive in its simplicity, but I do not think it adds much, if anything, to that which I have just been considering. The obligation to order and pay for the gifts necessary to operate the scheme was just one of its aspects and any licensee who chose to join in knowing of its essential characteristics became bound to pay for any goods he ordered. Since the goods were only supplied for purposes of redeeming tokens, it is difficult to imagine how they could be ordered otherwise than by a retailer who understood himself to be operating the scheme. Having said that, however, if the retailer did not become bound to pay for gifts he ordered by virtue of being a party to a ‘scheme contract’, I do not think that he can be treated as having incurred liability under an independent contract for the sale of goods.

Licences granted under the Partnership Licence Agreement were normally expressed to continue for a period of three years. By the time the dispute with Esso erupted many licensees who had been in continuous operation of their service stations had renewed their agreement at least once during the currency of the promotion, and in some cases had done so several times. Miss Gloster submitted that by so doing they had confirmed their willingness to operate the promotion in accordance with its terms during the lifetime of the new agreement.

This argument becomes relevant only if, contrary to my earlier conclusions, licensees were not bound to join in the promotion under the licence agreements and had not become bound under the ‘scheme contract’ either. No doubt the communications between Esso and each licensee differed from case to case and each case will therefore have to be considered on its merits, but I think it is useful to consider the principles that apply in such circumstances. Mr. Pickering submitted that when Esso offered an existing licensee the opportunity to enter into a new licence agreement it amounted to no more than an offer to enter into the standard form of licence agreement and nothing more. Unless anything were said about the Esso Collection promotion the licensee’s obligations under the new agreement remained the same as they had been under the old one. In my view that is to over-simplify the matter. One must assume for these purposes that the licensee had been operating the promotion for long enough to enable him to gain a reasonable understanding not only of how it was intended to work (which he probably knew at the outset), but how it worked in practice. The renewal of the licence represented an opportunity for both sides to clarify, if necessary, the terms of their relationship. Licensees were in general well aware of the importance Esso attached to the promotion and unless anything was said to the contrary were aware that they were expected to operate it. For its part Esso was entitled to assume, unless it had been given any reason to think otherwise, that a licensee who had previously been operating the promotion without demur was willing to go on doing so and to accept the costs inherent in it. In such circumstances it is difficult to see how the licensee could not have become liable under the ‘scheme contract’. However, I think that on renewal the position would be placed beyond doubt and that the licensee would become bound to operate the scheme in accordance with its terms.

After the promotion was brought to an end Esso sought to recover from its licensees the various amounts which it claimed to be outstanding in respect of gifts supplied during the final months of the scheme. Many licensees who were unable or unwilling to meet the claims against them in full immediately entered into agreements with Esso under which they acknowledged their indebtedness and undertook to settle the claim over an extended period, or in some cases more promptly for a modest discount.

Three distinct forms of repayment agreement can be identified: (a) an agreement under which the licensee agreed in consideration of a prompt settlement discount of 5% to pay the balance within a few weeks; (b) an agreement under which the licensee agreed to pay the whole amount in instalments over a period of 12 months; and (c) an agreement under which the licensee agreed to pay the whole amount in instalments over a period of 24 months together with interest at 9% per annum. Miss Gloster submitted that even if Esso was unable to succeed on any of the other ways in which it put its case, each type of agreement embodied an independent contract enforceable in accordance with its terms.

Since I have already reached the conclusion that Esso is entitled to succeed on other grounds it is unnecessary to decide whether the repayment agreements represent an alternative ground of recovery, but since the matter was fully argued during the trial I think it right to express my views on the common issues relating to these agreements. I recognise that individual licensees may wish to say that in their cases any liability that would otherwise arise under an agreement of this kind is vitiated by mistake or that the agreement cannot be enforced for some other reason, but issues such as these cannot be determined at this trial.

One issue that arises in relation to all three forms of agreement is whether the promise to pay is supported by consideration. Miss Gloster submitted that Esso gave consideration either simply by giving a discount or time to pay, or by doing so as part of a compromise of its claim to immediate payment which, at the time the agreement was made, was being actively disputed by the licensee. Mr. Pickering submitted, however, that neither an agreement to accept part of a debt nor an agreement to accept deferred payment is good consideration and that it makes no difference that liability was in dispute. He relied principally on the decision in Foakes v Beer (1884) 9 App. Cas. 605.

In Foakes v Beer Mrs. Beer obtained judgment against Dr. Foakes for the sum of £2,090 19s. He asked for time to pay and as a result they entered into an agreement in which he acknowledged the debt, paid part immediately and undertook to pay the balance over a period of time. In consideration of the part payment and Dr. Foakes’s undertaking to pay the balance in instalments Mrs. Beer agreed not to take any proceedings on the judgment. After the whole sum had been paid, however, she sought to take proceedings on the judgment to recover interest. The House of Lords held, applying the rule in Pinnel’s Case (1602) 5 Co. Rep. 117a, that since the obligations undertaken by Dr. Foakes under the agreement added nothing to his existing obligation under the judgment, he had provided no consideration for Mrs. Beer’s promise not to take action on the judgment which was therefore unenforceable. The principle upon which the decision proceeds has been subject to much criticism, notably by Lord Blackburn in Foakes v Beer itself, but the decision still stands and has been applied in many subsequent cases, including Re Selectmove Ltd [1995] 1 W.L.R. 474 to which Mr. Pickering also drew my attention.

Mr. Pickering submitted that if the licensees provided no consideration for the promises made by Esso, Esso’s promises were not binding and therefore Esso in turn provided no consideration to the licensees for their promises to pay. However, I think that reflects a somewhat artificial approach to the problem. Whatever may be said about the rule in Foakes v Beer , it clearly proceeds on the footing that the promisor is already obliged to do that which he has undertaken to do under the new agreement. If the licensee was bound to pay for promotional goods in any event, the repayment agreement, if binding on Esso, added nothing and could only work to his advantage insofar as Esso’s compliance might enable him as a matter of practicality to reduce or defer that obligation. As far as Esso is concerned, it does not need to rely on the agreement to recover the debt. If the licensee was not under any existing obligation, however, the rule in Foakes v Beer cannot apply. The only question then is whether the repayment agreements operated to create an obligation where none previously existed.

In my view the answer to this question depends on whether the agreement in any given case involved the compromise of an existing dispute. Insofar as it did, it will be enforceable as such (assuming that it is not vitiated by, for example, fraud or mistake) whether or not there was any underlying liability. After all, it is common practice for a claim to be compromised on terms that the claimant accepts less than the full amount he was seeking and I see no reason why a claim should not be compromised on the basis that the claimant will receive the full amount of his claim but over an extended period.

None of the present agreements, however, bears the hallmarks of a compromise. In particular, each of them begins with an acknowledgment of an existing indebtedness on the part of the licensee, rather than with the recital of a claim, and continues by recognising Esso’s right to immediate payment in full, subject only to the concessions provided by the agreement itself. The thrust of the document, therefore, is to provide a discounted or deferred basis of settlement of an acknowledged debt rather than to compromise a disputed claim. It is possible, of course, that the debt referred to in the agreement itself represents a compromise of a larger claim by Esso against the licensee, but that is not apparent from the language of the document itself. Accordingly, I am unable to accept that on the evidence of the repayment agreements themselves they embody compromises of claims against the licensees. Any underlying compromise would have to be proved by separate evidence. In these circumstances I do not think it would be profitable to consider whether and if so under what circumstances a compromise agreement might be vitiated by mistake as to the parties’ respective rights and liabilities.

The Fifth Schedule to the Partnership Licence Agreement dealt with the sale and purchase of motor fuel. Clause 4 fixed the price at which the licensee could sell fuel in such a way that the “licence margin” effectively represented his profit on the sale of fuel to the motorist. Schedule 4 to the Partnership Licence Agreement provided for certain payments to be made by Esso to the licensee. These included a monthly “operating cost allowance”. The margin and the operating cost allowance were both expressed as

Those licensees who operated shops at their service stations also entered into shop agreements which provided for the payment of an annual flat rate shop fee and a marketing fee expressed as a percentage of the gross sales of goods and services sold in or through the shop. Although these are quite different in nature it is convenient to refer to them together as “shop fees”. The agreement provided in terms that Esso was entitled to vary the amount of the shop fees from time to time on 28 days’ notice to the licensee.

Clause 6 of the Fifth Schedule to the Partnership Licence Agreement provided as follows:

By the latter part of 1994 when Esso undertook the wide-ranging review of its retailing operations that led to BPR the market was becoming much more competitive as a result of the increasing activity of the supermarkets. It is unnecessary to describe in detail the investigations undertaken by Esso in the course of its review. For present purposes it is sufficient to mention three particular aspects, two of which focused on the cost of running service stations and one on licensees’ income.

The review team obtained details of the costs incurred by individual retailers in carrying out different aspects of their operations and having done so was able to rate them in order of efficiency, operation by operation. It then decided that in relation to each operation all licensees could reasonably be expected to control their costs so as to keep them down to the average amount incurred by the most efficient 25% of licensees judged by reference to that particular operation. This became known as the ‘best practice’ level of costs. In other words, the review team concluded that in relation to each aspect of his operations each licensee should be expected to operate at best practice levels of costs. In order to make it easier for licensees to do so Esso took advantage of its position in the market to negotiate reduced rates for the supply of a variety of goods and services, from sandwiches to insurance, of which individual retailers could take advantage. The review team also investigated the levels of income that might be derived from what it considered to be comparable business opportunities in the retailing sector and on that basis set target levels of profit for individual service stations. Having carried out these exercises Esso proceeded to adjust margins, fees and operating cost allowances to levels that were expected to enable licensees to achieve the target profit provided they kept their costs down to the best practice levels.

BPR was introduced through the Area Managers who visited each of their licensees during the autumn of 1995 to explain the new approach to controlling costs. The Area Managers took with them pads of self-copying sheets containing target cost estimates for various aspects of the licensee’s business and spent some time going through the figures with the licensee explaining where he needed to reduce his costs, how he might do so and what he could expect to earn if he were reasonably successful. Each sheet was signed by the licensee and a copy was given to him.

In 1996 Esso wound up the Esso Collection promotion having decided that it was more likely to attract and retain customers by competing directly on price rather than through gift promotions. This new strategy was implemented by the ‘Pricewatch’ scheme under which Esso set out to ensure that the price of fuel at its own petrol stations were no higher than that at other petrol stations in the area. This called for constant monitoring of prices in each locality and a swift response to any alterations on the part of competitors. Part of the burden of operating ‘Pricewatch’ fell on the retailers themselves who were expected to monitor at frequent intervals the prices being charged by other petrol stations in their area and report back to Esso. This involved a significant amount of additional travelling in those cases where the competing petrol stations were disposed over a wide area. All this, of course, added to their costs, but overall Esso bore the financial brunt of the scheme which it regarded as essential to retain its presence as a significant participant in the motor fuel retail market.

Following the introduction of BPR Esso adjusted the margin, shop fees and operating cost allowance three times in the first six months of 1996. Further adjustments were also made in each of the following years. The nature and timing of these changes were as follows:

on 1 ^st January 1996, a reduction in the margin from 1.199 pence per litre (“ppl”) to 1.1 ppl;

on 15 ^th February 1996, a further reduction in the licence margin from 1.1 ppl to 0.75 ppl;

on 1 ^st May 1996, a reduction in operating cost allowance and an increase in shop fees;

on 1 ^st January 1997, a further reduction in operating cost allowance and a further increase in shop fees;

on 1 ^st April 1998, a further reduction in some operating cost allowance, an increase in marketing fees and a reduction in some shop fees.

The adjustments introduced on 1 ^st January 1996, 1 ^st January 1997 and 1 ^st April 1998 were each preceded by a review. Mr. Pickering submitted that the wide-ranging review that took place in 1995 was not a review of the kind contemplated by clause 6 and I think it follows that the same criticism is made of the reviews that took place in the following years since they involved similar criteria. This is a question to which I shall return, but for the moment I shall proceed on the assumption that they were all reviews that did comply with the requirements of clause 6.

On 31 ^st October 1995 Esso wrote to its licensees to inform them that changes would be introduced on 1 ^st January 1996 instead of 1 ^st December 1995. The details of the changes were in fact notified to the licensees on 15 ^th November 1995. A similar course was followed at the end of 1996, the adjustments taking effect from 1 ^st January 1997. On 3 ^rd November 1997 Esso wrote to its licensees advising them that following the annual review there would be no changes to the margin, shop fees or operating cost allowance on 1 ^st December 1997, but that changes would take place with effect from 1st April 1998.

Mr. Pickering submitted that all these changes were uncontractual because Esso did not implement them with effect from 1 ^st December each year, but since, as he conceded, the overall effect of each of the adjustments was adverse to the licensees, it is difficult to see that they have any real ground of complaint. In each case the review which give rise to the adjustment had been completed, as required by clause 6, before 1 ^st November in the preceding year; Esso simply waived the right to introduce the change as early as it was entitled to. In the circumstances I do not think that its failure to implement the adjustment on 1 ^st December amounted to a breach of contract at all, but if it did it can only have been beneficial to the licensees and I certainly cannot accept that deferring the adjustment rendered it invalid. The position would obviously be different if any of the adjustments had been beneficial overall to the licensees since any deferral of its introduction would have operated to their disadvantage. Since all the adjustments were to their detriment, however, I can see no basis for saying that if Esso, for whatever reason, was unable, or did not wish, to introduce it with effect from 1 ^st December, it was precluded from doing so at a later date.

The position is different in the case of the changes made on 15 ^th February and 1 ^st May 1996, neither of which resulted directly from a review undertaken in accordance with clause 6. Shop fees could be adjusted at any time on 28 days’ notice, but these adjustments to margin and operating cost allowance can be justified, if at all, only if they were permitted by the final sentence of clause 6.

In the final sentence of clause 6 Esso reserved the right “if necessary” to make adjustments to the margin and the operating cost allowance at any other time upon notification to the licensee. Mr. Pickering submitted that by using the word “necessary” the parties intended to have regard to supervening events of a kind that required an adjustment to be made in order to make the licence agreement work. In support of this submission he reminded me of the definition of “necessary” in the Oxford English Dictionary, namely,

It is the second sentence of clause 6 which in my view provides the key to the meaning of the phrase “if necessary” in the third sentence. That sentence gives Esso the right once a year to make such adjustments to the margin and operating cost allowance as in its opinion are required. Subject to any limitation that may be implicit in the agreement (to which I shall come in a moment), Esso alone is the judge of what adjustments are “required” following the annual review and it makes sense in that context that Esso should also be the judge of whether an adjustment is “necessary” at any other time.

The licensees have derived some encouragement for the view that necessity is to be determined by reference to some external (though as yet unidentified) criteria from a passing remark of Simon Brown L.J. in Esso Petroleum Co. Ltd v Milton [1997] 1 W.L.R. 938 to the effect that Esso might be in some difficulty in establishing that the adjustments made in February and May 1996 were necessary. However, it is important to bear in mind that the only issue before the court on that occasion was whether Mr. Milton’s counterclaim was sufficiently arguable to go to trial. The court did not analyse clause 6 in any detail because it was unnecessary for it to do so and there is no reason to think that it heard much, if any, argument on the question.

In my view to construe the words “if necessary” as importing some objective criteria by reference to which not only the need for an adjustment to the margin and operating cost allowance but also its extent is to be determined creates more difficulties than it solves. Mr. Pickering attempted to identify reasons or factors that would justify an adjustment on the grounds of necessity, but he did not attempt to identify the yardstick by reference to which the extent of any adjustment was to be gauged. That is not surprising because the licence is silent on the point, but the concept of a “necessary” adjustment makes no sense if one cannot identify with some degree of certainty the objective to which it aspires.

For these reasons I am of the view that the third sentence of clause 6 means no more than that Esso retains the right to adjust the margin and operating cost allowance at any time if it considers it necessary to do so.

I now come to the more fundamental challenge made by the licensees to the adjustments made to margin, fees and operating cost allowance in 1996, 1997 and 1998. Although he recognised that Esso enjoyed a large measure of discretion in making such adjustments, Mr. Pickering submitted that it was nonetheless subject to certain limits which, in the case of margin and operating cost allowance, were imposed partly by the terms of clause 6 itself and partly by implication. Shop fees as such were not covered by clause 6, but Esso’s right to vary them was, he submitted, by implication subject to the same limits. Miss Gloster, on the other hand, submitted that Esso had a complete discretion to make whatever adjustments in margin, fees and operating cost allowance it thought appropriate.

Clause 6 gave Esso the right to adjust the margin and operating cost allowance if in its opinion changes were required following the review which it promised to undertake prior to 1 ^st November each year. Mr. Pickering submitted that “review” in this context meant reconsideration of the margin and operating cost allowance in the light of current circumstances and by reference to the factors which the parties had, or could (if they had existed) be expected to have, taken into account at the time of entering into the licence. An adjustment would be required only insofar as changes in the margin and operating costs allowance were necessary to reflect changes in those factors. The review, therefore, was intended to lead to an adjustment of the margin and operating cost allowance to reflect what the parties might reasonably be expected to have agreed if current circumstances had existed at the time the agreement was originally made. In his submission wider commercial considerations had no part to play. In support of that argument he referred me to two decisions on rent review clauses, British Gas Corporation v Universities Superannuation Scheme Ltd [1986] 1 W.L.R. 398 and Basingstoke and Deane Borough Council v Host Group Ltd [1988] 1 W.L.R. 348.

As the Court of Appeal pointed out in Basingstoke and Deane Borough Council v Host Group Ltd , quoting a passage from the judgment of Sir Nicolas Browne-Wilkinson V.-C. in British Gas Corporation v Universities Superannuation Scheme Ltd , the general purpose of a rent review clause in a lease is to enable the landlord to obtain from time to time the market rental which the premises would command if let on the same terms on the open market at the review date. It is thus a means of ensuring that the current rent reflects changes in the value of money and the market value of the property.

In my view, however, the analogy which Mr. Pickering sought to draw between an ordinary lease of commercial property and the present Partnership Licence Agreement cannot be pressed too far. Unlike a lease, which simply puts the premises at the tenant’s disposal in running his own business (subject to any restrictive covenants), the licence agreement gave Esso a large measure of control over the licensee’s profit by allowing it to adjust the margin, operating costs and shop fees. The very nature of these payments reflects the fact that, although the licensee was running the service station as an independent businessman, Esso also had a real interest in its operation. Despite its name the licence did not give rise to a partnership in any formal sense, but in a broad sense it might be said that Esso and the licensee were sharing the overall profits of retailing motor fuel. The licensee was not guaranteed any particular level of net profit and in that respect his position was different from that of a manager or agent who would receive an agreed salary or fixed commission.

The submission that in carrying out the review required by clause 6 and in making any consequent adjustment to the margin, shop fees and operating cost allowance Esso was obliged to undertake the same exercise in relation to the same factors as had led to the agreement of the original rates and to make such adjustments as would preserve the licensee’s financial position in my view faces two main objections. The first is that it is difficult, if not impossible, to know precisely what factors were originally taken into account in setting the margin, fees and operating cost allowance in any given licence agreement other than Esso’s general analysis of the retail market and its own assessment of the income that it considered it appropriate at the time for a licensee at the site in question to earn. The second is that the argument presupposes that it was the parties’ intention that the licensee’s financial position should be preserved come what may. However, the agreement is not drafted in a way that supports any such conclusion. If that had been the parties’ intention, it would have been easy to include in clause 6 some wording to that effect, but in fact the language they adopted is neutral. It is just as consistent with a reduction in the overall benefit to the licensee as with an increase, as Mr. Pickering accepted. Looking at the clause as a whole in the context of this agreement, I think it was intended to give Esso the right to adjust, within certain limits, the financial balance between itself and the licensee in order to take account of changes in commercial circumstances generally and that the use of the word “required” simply denotes the adjustment necessary to achieve what Esso considered to be an appropriate balance. If an adjustment of that kind was envisaged, it was inevitable that it should take into account an assessment of the wider commercial factors as well as any factors peculiar to the service station in question. Accordingly, I think that when conducting a review under clause 6 Esso was entitled to take into account the broader picture, including changes in the nature of the retail market for motor fuel, and, when deciding whether a change in margin, fees and operating cost allowance was required, to have regard to the fact that the overall profit derived from retailing motor fuel was shrinking.

Clause 6 provided that Esso was to form its own opinion about the need for a change in the margin or operating cost allowance. Mr. Pickering accepted that, but he submitted that in forming its opinion and deciding whether any changes were required Esso had to act honestly, fairly and in good faith and that its opinion had to be based on reasonable grounds. All this, he said, was necessary in order to give effect to the reasonable expectations of the parties. Miss Gloster, on the other hand, submitted that clause 6 gave Esso the right to make any changes to the margin, operating cost allowance or shop fees that it considered, for whatever reason, appropriate. The test, she submitted, is entirely subjective, a sufficient element of control being found in Esso’s own commercial interest in ensuring that it retained a sufficient body of efficient and well-motivated licensees.

If Miss Gloster is right, the licensee under this form of agreement put himself entirely in Esso’s hands when it came to adjusting the financial basis of the licence. For practical purposes a licensee’s only sources of income were the pumps and the shop. (Car washes and vacuums were not installed at all service stations and can be ignored for present purposes, but most service stations operated a shop of some description.) Shop fees could be altered on 28 days’ notice, apparently without any restriction, and the margin on fuel and the operating cost allowance could, if Esso is right, be altered entirely at its own discretion. I do not doubt that parties are free to make an agreement under which one of them effectively puts himself in the power of the other in relation to some aspect of the contract - see the comments of Staughton L.J. in Lombard Tricity Finance Ltd v Paton [1989] 1 All E.R. 918 at page 923 - but it would be an unusual thing to do and I do not think that one should readily accept that it was what the parties intended. In deciding the matter it is, of course, necessary to examine both at the language of the contract and its commercial context.

I have already drawn attention to the fact that service stations operated by licensees formed an integral part of Esso’s national retail marketing operation. They were not the only outlets for its motor fuel because Esso also supplied independent dealers who owned their own sites and sold fuel through its subsidiary, Dart Oil, which operated its own chain of petrol stations run by agents. Nonetheless, during the decade leading up to these proceedings service stations operated by licensees represented a substantial proportion of Esso’s retail outlets.

As its name suggests, the relationship created by the Partnership Licence Agreement, although not one of equals, was one which contemplated a significant degree of co-operation between Esso and the licensee in running and developing a business in which they both had an interest. Thus, increases in throughput at the pumps and sales through the shop could be expected to benefit both parties. The parties’ interests were not the same, however, in relation to the overall profits generated by the operation of the service station since the more the licensee received in the form of margin and operating cost allowance or retained out of the profits generated by the shop, the less Esso received. This tension was resolved by including in the licence and the shop agreement provisions for the payment of margin, fees and operating cost allowance at specific rates which at the outset must be taken to have been acceptable to both parties. From the licensee’s point of view that meant a level at which he considered he could earn a reasonable income if he was reasonably efficient and worked reasonably hard.

Mr. Pickering submitted that it was at least implicit in the agreement that in deciding whether changes should be made in the margin, shop fees or operating cost allowance Esso would not act arbitrarily, capriciously or irrationally. I think that is correct. In Paragon Finance plc v Nash [2002] 1 W.L.R. 685, a case concerning a loan agreement under which the lender had the right to vary the rate of interest at its discretion, the Court of Appeal held that the agreement was subject to an implied term that the power would not be exercised dishonestly, for an improper purpose, capriciously or arbitrarily. It also held the agreement was subject to an implied term that the lender would not exercise its discretion unreasonably, but only in the limited sense that it would not base its decision on considerations wholly extraneous to the commercial circumstances in which it came to be made. However, the court rejected a submission that the lender was precluded from imposing a rate of interest substantially higher than the market rate if to do so was a rational response to the circumstances in which it found itself.

In my view the present licence agreement is subject to a similar implied term. In general people enter into contracts on the understanding that the other party will act honestly and rationally (albeit in his own interests) rather than arbitrarily or capriciously, but whether it is necessary to imply a term to that effect is likely to depend on the nature of the contract and the circumstances in which it is made. Clause 6 gave Esso a wide power to vary the terms of the licensee’s remuneration and to that extent the licensee was at Esso’s mercy. I do not think it is an answer to say that the licensee could give up his licence if he did not like the new arrangements. Although it appears that Esso did in practice permit licensees to terminate their licences before the end of their term at fairly short notice, the agreement does not give them an express right to do so. More importantly, however, the licence was intended to run for three years and provide an opportunity to develop a business over that period. This requires a degree of mutual co-operation that is inconsistent with one party’s having the right to impose terms on the other in an arbitrary manner. I am unable to accept, therefore, that if the question had been raised at the time they entered into the agreement either party would have thought for a moment that Esso was entitled to act arbitrarily, capriciously or irrationally in exercising its rights to vary the margin, shop fees or operating cost allowance.

Whether Esso did act in such a manner in making adjustments to the margin, fees and allowances in 1996 and subsequent years is a question of a generic nature and one which in my view the court ought to answer at this stage if it is possible to do so. Mr. Kelly on behalf of the licensees submitted that the evidence pointed to the conclusion that the adjustments were implemented in breach of good faith and unreasonably in the sense of lacking any rational basis. I am unable to accept that. I heard evidence from Mr. Peter Szanto, the Planning and Economics Manager of Esso’s Retail Division from mid-1994 to early 1996 and Mr. Mark Cash, his immediate successor who were responsible for the review that led to BPR and the subsequent introduction of best practice standards across the network of Esso’s service stations. It was apparent from their evidence that BPR was the product of a thorough review of Esso’s retail operations involving Esso’s own staff and specialist consultants over a period of many months. It represented an attempt to identify the reasons for a gradual loss of market share and the means by which that could be reversed and the retailing of motor fuel to the public made profitable. The review led Esso to the conclusion that its retail operations as a whole had to become more efficient if it were to compete effectively and as part of that it was necessary to make service stations more efficient.

Running through Mr. Kelly’s submissions was the thinly veiled suggestion that the introduction of BPR and the consequent adjustments to margins, fees and operating cost allowance was little more than a device on the part of Esso to force licensees to give up their sites so that it could progressively eliminate them from its retailing operations. However, there is no evidence to support that conclusion. Whether the general approach to the calculation of target levels for income and costs was or was not too rigorous in general, or whether in any individual case it failed to make adequate allowance for the character of the particular site, is not the point. The question is whether the adjustments to the margin, fees and operating cost allowances which the licensees criticise were based on a genuine examination by Esso of the commercial factors affecting its retailing business in general and a rational response to the conclusions it reached. On the evidence before me I have no doubt that the adjustments were made rationally and in good faith.

It is convenient at this point to consider a distinct, but related, argument put forward by Mr. Pickering, namely, that there is to be found in the licence agreement an implied term that Esso will not alter the margin, fees and operating cost allowance in such a way as would prevent the licensee from obtaining sufficient profit to enable him to carry on the business. This argument made its first publicly reported appearance in Esso v Milton and was considered again in Esso Petroleum Co. Ltd v Mahoney (unreported, 14 ^th July 2000). In effect it raises the question whether there are any limits on Esso’s right to adjust the level of margin, fees and operating cost allowance even when acting honestly and in good faith.

In Esso v Milton Esso sought to recover from one of its licensees, Mr. Milton, an amount due in respect of fuel that had been sold and delivered to him at his two service stations in Exeter. In his defence Mr. Milton alleged that Esso had repudiated the licence agreements by adjusting his margin, operating cost allowance and shop fees to the point where he could no longer make a profit. He purported to accept that conduct as terminating the agreements by cancelling the direct debit mandates set up to pay sums due to Esso and claimed damages for the losses he said he had suffered by reason of Esso’s premature termination of the licences. He sought to set off his claim for damages against his liability for fuel.

Esso brought proceedings for summary judgment. The price due for the fuel was not in dispute and therefore the court was only concerned to decide two points: whether Mr. Milton’s case that Esso had repudiated the licences by the way in which it had adjusted the margin, fees and operating cost allowance had any real prospect of success; and whether, if it had, he could set off any damages he might recover against his liability for fuel. All three members of the court considered that the counterclaim was arguable, but none of them discussed the issue in any detail and I do not think that the comments in the various judgments can be said to provide strong support for it.

The same point was raised, also in opposition to an application for summary judgment, in Esso v Mahoney . Sir Christopher Bellamy Q.C. discussed the argument at greater length and certainly expressed more enthusiasm for it than had been shown by any of the members of the Court of Appeal in Esso v Milton , but again the court only had to decide whether it had sufficient merit to justify allowing the counterclaim to go to trial.

It is essential, of course, that any implied term be capable of being formulated with reasonable precision: see, for example, Shell UK Ltd v Lostock Garage Ltd [1976] 1 W.L.R. 1187 in which the contention that a solus agreement contained an implied term that Shell should not “abnormally discriminate” against the retailer was rejected on that ground. The particular term with which I am presently concerned was formulated by the defendants in their pleading in the following way:

Miss Gloster submitted that the concept of “effectively forcing the licensee out of business”, like “abnormal discrimination” in Shell v Lostock Garage , was too vague to be capable of forming the basis of an implied term since it begged questions about the minimum acceptable level of profits and the individual licensee’s own efficiency that were impossible to answer. I see much force in that argument, but it is interesting to note that in Shell v Lostock Garage itself Bridge L.J. did not regard difficulty of application in any given case as an insuperable obstacle to implying a term provided that the criterion embodied in the term is sufficiently clear. Thus, although in common with the other members of the court he could not accept a term that Esso should not abnormally discriminate against the defendant, he was able to accept that the contract in that case contained an implied term that Shell would not discriminate against the retailer in such a way as to render the commercial operation of the petrol sales business impracticable.

Since both parties clearly intended the licensee to operate the service station for three years during which he would seek to build up the business for the benefit of himself and Esso, it would be surprising in my view if either party had contemplated that Esso should have the right to vary the margin, fees and operating cost allowance to such an extent as would make it commercially impossible for the licensee to operate the service station and thereby deprive him of substantially the whole benefit that he was intended to obtain from the remaining life of the agreement. An implied term that Esso should not adjust the margin, fees and operating cost allowance in such a way as would make it commercially impossible to operate the service station is in substance the same, although expressed slightly differently, as the term put forward by the licensees and is one that Bridge L.J. in Shell v Lostock Garage considered to be sufficiently certain in content to be capable of enforcement. Moreover, the criterion on which it depends is essentially the same as that adopted by the common law to determine whether a breach of an intermediate term is sufficiently serious to go to the root of contract: see Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha [1962] 2 Q.B. 26. In my view such a term is both sufficiently certain to be capable of being implied in the licence agreement and necessary in this case to enable the commercial purpose of the licence to be achieved.

Other implied terms for which the defendants argued strike me as less plausible. The suggestion that a term is to be implied that Esso should not adjust the margin, fees and operating cost allowance in such a way as would prevent the licensee from carrying on business at a reasonable profit is one that I cannot accept since it seems to me to be both uncertain in its effect and inconsistent with the nature of the agreement. If the licensee were simply a manager operating the service station on behalf of Esso, it would not be difficult to imply a term that he be paid a reasonable sum by way of remuneration which could, if necessary, be determined by reference to the market for similar types of employment. However, the licensee is responsible for running his own business and his profits will depend to a large extent on his efforts and his skill as a businessman. Quite apart from that, however, what is to be regarded as a reasonable profit in this context is too uncertain to be capable of giving rise to legal rights and obligations.

Mr. Pickering submitted as an alternative that the object of the review was to produce rates that were fair and reasonable having regard to the factors that were taken into account at the outset, or would have been taken into account if they had existed at that time. Once again he sought to derive support from two rent review cases, Beer v Bowden [1981] 1 W.L.R. 522 and Central & Metropolitan Estates Ltd v Compusave (1983) 266 E.G. 900.

At first sight the suggestion that the review for which clause 6 provided was intended to produce a result that was fair and reasonable to both parties appears attractive, but the difficulty lies in ascertaining how that is to be judged. The rent review cases do not provide a good analogy, both because the purpose of a rent review clause is now well established and because in determining what level of rent would be fair and reasonable to both parties resort can be had to objective criteria in the form of the market. In the present case, as I have already pointed out, it is impossible to know precisely what factors were originally taken into account in setting the margin, fees and operating cost allowance in any given licence agreement and if the whole range of commercial factors is to be taken into account, both those affecting Esso and those affecting the licensee, the precise criteria by which the fairness of any adjustment is to be determined remain largely obscure.

In my judgment, therefore, Esso’s right to make adjustments to the margin, shop fees and operating cost allowance was subject to only two limitations: it was not entitled to make adjustments arbitrarily, capriciously or irrationally and it was not entitled to make adjustments the combined effect of which was to render the operation of the service station commercially impossible. Subject to those restrictions Esso was in my view entitled to make such adjustments as it thought fit on the basis of such commercial factors as it considered appropriate, including prevailing market conditions and its ability to attract and retain licensees of suitable calibre. It follows that in my view provided Esso acted honestly and rationally I do not think that its opinion on the need for an adjustment or as to the appropriate amount of any such adjustment is open to challenge.

Many of the licensees who gave evidence described the effect that the introduction of BPR had had on their businesses and indeed on themselves personally which in many cases were said to have been profound. Although Esso had recognised the need for licensees to be able to make a reasonable income when setting margins, fees and operating cost allowances, that was avowedly on the basis that they were able to keep the costs of each area of their operations down to the level achieved by the most efficient sites across the country. That was a tall order and there were complaints from a number of licensees that allowances for some costs did not adequately reflect local conditions. These complaints were exacerbated by the introduction of the ‘Pricewatch’ campaign which called for additional work on the part of licensees in monitoring prices in their localities.

As time passed the implementation of BPR became more sophisticated in that differences between local conditions received greater recognition than they had at the outset, partly due to an increase in the information available to Esso. Nonetheless, some licensees said that they still found it impossible to keep going. The effect of introducing BPR inevitably varied from site to site, not only because costs, shop sales and fuel throughput varied but because there were differences between the ways in which licensees ran their businesses and responded to the challenge. It is therefore impossible, as Mr. Pickering recognised, to make any findings of a generic nature about the impact of BPR on licensees generally since each case must be considered on its own facts. For better or worse, therefore, individual claims will have to be determined in separate proceedings.

The substance of the licensees’ complaint in relation to hot fuel is that they paid for more fuel than they actually received. In accordance with standard industry practice at the time motor fuel sold by Esso to its licensees was delivered by road tankers, having been measured at the distribution terminal by meters situated at or close to the loading gantries. The meters measured the volume of fuel passing through them at its current temperature giving a reading in what are generally known as “observed volumes”. Retailers who bought motor fuel delivered by road tankers were charged for the volume shown on the gantry meter.

Petrol, and to a lesser extent diesel fuel, is a highly volatile substance with a high coefficient of expansion. In the case of petrol a change in temperature of 4 ^o C gives rise to a change in volume of about 0.5%; in the case of diesel the change in volume is of the order of 0.3%. It follows that if the temperature of the fuel is significantly higher than ambient temperature at the time of loading into the road tanker, there can be an appreciable reduction in volume by the time the inevitable cooling has taken place. The extent of any reduction obviously depends on the temperature of the fuel at the time of loading, the ambient temperature in the course of carriage and the temperature of the fuel already in the storage tanks at the service station. Changes in production and delivery practices at UK refineries have made it more common than it once was for motor fuel to be loaded into road tankers at distribution terminals at higher than ambient temperatures but that is not something with which I am directly concerned. I am only concerned to identify the terms on which Esso sold motor fuel to the licensees and to determine whether it failed to comply with its obligations.

By clause 6 of the licence agreement and clause 1 of the Fifth Schedule the licensee was bound to buy all his stock from Esso on Esso’s current terms and conditions of sale. At the time in question these provided as follows:

Miss Gloster submitted that these clauses determine the issue in Esso’s favour because they make it clear that Esso’s measurements are to be binding and that the risk of any loss between the terminal and the service station resulting from the natural characteristics of the fuel falls on the buyer. Mr. Pickering accepted that by virtue of clause 5 Esso’s measurements were binding, but submitted that that since it does not prescribe where or how those measurements were to be taken it did not answer the point raised by the licensees. Nor did clause 8 since by its own terms it only applies to a reduction in volume arising from evaporation and has no application to a reduction in volume caused by a fall in temperature. I think that both of these points are sound and that it is necessary to look elsewhere to find the answer to the present question.

Mr. Pickering began by submitting that in the case of a contract for the sale of goods the seller is under a strict duty to deliver exactly the quantity he has agreed to sell, neither more nor less: see Arcos Ltd v E. A. Ronaasen and Son [1933] A.C. 470. That may be so, but that principle does not of itself tell one by whom, under what conditions and by reference to what units (if different units are available) the measurement is to be made. It was accepted in the present case, for example, that the gantry meters at the distribution terminals were highly accurate, so if the contract provided for measurement by Esso in observed volumes at the point of delivery into the road tanker, any divergence between the quantity that Esso had agreed to sell and the quantity actually delivered was too small to be significant. The question is simply whether observed measurements at the gantry, not corrected to a standard temperature, complied with the requirements of the contract.

The licensees say that Esso was under an obligation to deliver quantities of fuel measured in standard litres. In their pleadings they put their case in two ways. First, they say that on the true construction of the contract Esso was required to adopt a method of measurement that was based on prevailing petroleum industry practice or was the best available petroleum industry practice in use at the time. Alternatively, they say that a term is to be implied by law into contracts for the sale of motor fuel that the seller would use the same standard of measurement as it is required to use for the purposes of calculating excise duty and VAT. Either way, however, the licensees’ case is that on the true construction of the contract, or as a matter of necessary implication, each time a retailer ordered fuel from Esso the parties entered into a contract for the purchase and sale of a certain volume of fuel measured by standard temperature accounting; or, to put it another way, that the contract was for the sale of a certain number of standard litres of fuel. The contract itself, however, is silent on this point and it is therefore necessary to look more closely at the commercial and legislative background against which such contracts were made.

There was a great deal of common ground between Mr. John Minton and Mr. Peter Barlow, the experts who were called to give evidence in relation to this limb of the case. They agreed that standard temperature accounting has been used by the oil industry for at least 50 years and that well before 1993 (the earliest point from which the present claims date) it was used in the mainstream oil terminals as well as for some product deliveries. Significantly, however, they also agreed that standard temperature accounting has not yet been generally used within the UK for sales of petrol or diesel, either by distributors to retailers or by retailers to motorists. It was, and still is, standard industry practice to measure volumes for the purposes of the sale of petrol by distributors to retailers (and by retailers to motorists) on an observed basis. In the refinery products are measured on the basis of standard temperature accounting, but at the other end of the chain the pumps on the petrol station forecourt measure observed volumes. The experts agreed that it would be technically possible to introduce the equipment required to enable standard temperature accounting to be carried right through the distribution chain from the refinery to the pump, but it would require the co-operation of the whole industry and would take some time to implement. At any rate, apart from some short-lived experiments, standard temperature measurement at the pumps has not yet been introduced in this country. Clearly, therefore, until that time comes there must be a point in the chain between the refinery and the pump at which the transition from standard temperature accounting to accounting in observed volumes occurs. The current practice is for that transition to take place at the loading gantry on the sale by the distributor to the retailer.

Nowadays motor fuel is universally measured in litres for the purposes of the retail market. The assumption that measurement in standard litres is inherently more accurate or fairer than measurement in observed litres and could only benefit retailers permeated the whole of the licensees’ arguments. However, it is only partly true. Standard temperature accounting is inherently fairer or more accurate in the sense that it compensates for differences in volume caused by changes in temperature. Thus, if one is accounting for oil or products passing through a system in which temperatures vary significantly, as in a refinery, standard temperature accounting avoids the distortions that would otherwise result from changes in temperature. That is why it has been adopted for these purposes by the oil industry. Accuracy of measurement is another matter, however, depending entirely on the quality of the equipment used and the care taken in carrying out the operation. Because petrol pumps in this country dispense fuel in observed litres rather than standard litres it is not possible to account for motor fuel on a standard basis through the retail distribution system. Accordingly, even if Esso were to supply retailers in standard volumes measured at the gantry there would usually be a discrepancy between the standard volume supplied and the observed volume received into the retailer’s tank. The experts agreed that in these circumstances the adoption of standard temperature accounting for the sale of fuel by distributors to retailers would operate to the advantage of some retailers but to the disadvantage of many. Under present conditions, therefore, it cannot be said that the prevailing industry practice is generally unsatisfactory from the retailers’ point of view or that the adoption of standard temperature accounting would in general be fairer.

The relevant legislative background to contracts for the sale of motor fuel by distributors to retailers is to be found in the statutory provisions dealing with the payment of excise duty on motor fuel and the production of delivery notes in respect of loads despatched by road tanker. Since October 1993 the volume of motor fuel delivered from refineries and distribution depots within the United Kingdom has been measured in standard litres (that is, litres at 15 ^o C) for the purposes of calculating excise duty. Similarly, since October 1993 the operator of a distribution terminal has been obliged by virtue of paragraph 12 of the Hydrocarbon Oils Regulations 1973 (as amended) to ensure that any parcel of fuel leaving the terminal by road tanker is accompanied by a delivery note stating the description and quantity of the oil in standard litres.

I am satisfied that since at least October 1993 all three distribution terminals with which I am concerned, that is, Hythe, Stanlow and Grangemouth, had in one form or another the equipment necessary to enable the operator to comply with the regulations governing the calculation of excise duty. The three characteristics required for calculating standard litres are volume, temperature and density. Flow meters were invariably fitted at distribution terminal gantries to record and control the volume of fuel entering the tankers. In most cases temperature meters were also fitted at the gantry. In-line densitometers were available, but I am satisfied that they were not generally fitted. When standard temperature accounting was introduced in October 1993, Customs and Excise accepted that measurements of temperature and density taken at the storage tanks could be used to make the necessary calculations and in practice, although the temperature of the product was frequently measured at the loading gantry, density continued to be measured at the storage tanks. Temperature-compensating meters were available throughout the period in question and I am satisfied that they were used at the Stanlow terminal. Apart from that, however, there was no reliable evidence about the nature of the equipment installed at any of the three terminals at any particular time.

Mr. Minton suggested that it would take some considerable time to calculate the volume in standard litres of the fuel loaded into of each of the several compartments of a road tanker and that this would be a practical obstacle to adopting standard temperature accounting for measuring individual parcels despatched by road. However, he accepted that throughout the period in question the equipment was available in the form of in-line densitometers and temperature compensating meters to enable the necessary measurements to be taken and that if the necessary systems had been put in place the volume of individual parcels of fuel could have been calculated and recorded with the aid of computers without a great deal of difficulty or delay. Moreover, delivery notes were in fact issued by some, if not all, operators showing the volume loaded in standard litres. In my view, therefore, it would have been possible for the industry as a whole to have sold fuel to retailers in standard litres, although in Esso’s case this would have required significant changes to the way in which it handled this aspect of its business. The evidence clearly shows, however, that Esso was not alone in the oil industry in continuing the practice of selling fuel to retailers in observed rather than standard volumes.

If a contract for the sale of goods by volume does not provide expressly or by implication for the circumstances under which the goods are to be measured, the natural implication is that they are to be measured in accordance with established good practice in the trade or industry concerned. The first way in which the licensees put their case is not in fact far removed from that, although when they referred to “prevailing practice” or “the best available practice” it is clear that they meant standard temperature accounting. The fact is, however, that the between 1993 and 1998 the universal practice in the petroleum industry in relation to sales by distributors to retailers (other than a few retailers controlling several outlets) was to sell fuel by reference to observed volumes rather than standard volumes. This strongly suggests that in a contract for the sale of motor fuel by a distributor to a retailer references to “litres” is to be construed as meaning “observed litres”.

Mr. Pickering submitted, however, that in the light of the requirements of the legislation and of the fact that the equipment was available to enable Esso to comply with them, the parties to contracts for the sale of fuel must have intended to refer to the same units as those used for calculating excise duty, namely, standard litres.

If service stations were equipped for standard temperature accounting right through to the point of delivery to the motorist, this argument would have a good deal of force, but they are not and I can see no reason why under present conditions the parties should be presumed to have intended that the requirements of the regulations (of which I suspect many of those who operated service stations were unaware) should be imported into contracts of sale between Esso and its retailers. The fact that standard temperature accounting for the purposes of recording stock has been practised within refineries and distribution terminals for a long time was no doubt one of the factors that led to the regulations taking their present form. Since 1993 oil delivered from terminals has been recorded in standard volumes for duty purposes, but Esso did not collect excise duty from its retailers; it sold fuel to them on a “duty paid” basis. There was no reason, therefore, why retailers should have been aware of, or concerned with, the basis on which fuel was measured for the purposes of paying duty. VAT, by contrast, is paid by the retailer on the duty paid price charged to him under the contract. It is not charged on the volume as such and the retailer recovers VAT from motorists based on the price at which he in turn sells the fuel.

Mr. Pickering pointed out that the hot fuel problem resulted from a characteristic of the product that lay within the control of Esso or those from whom it chose to obtain its supplies. It could not be right, he submitted, for Esso to be in a position to increase the temperature of the product before measuring it for delivery it to its customers, thereby artificially increasing the quantity at the point of delivery and reducing the quantity available to them for resale when it subsequently cooled. I should make it clear that there are no grounds for suggesting that the temperature of fuel supplied from any of the three terminals in question was deliberately increased at any time (it should also be remembered that two of the three terminals in question, Stanlow and Grangemouth, were not operated by Esso but by Shell and BP respectively), but I think that the answer to the point is that Esso agreed by implication to supply fuel at the temperature at which it was currently available from the storage tanks following the ordinary refining and storage procedures. In other words, it agreed to supply fuel which in terms of temperature was of fair average quality at the terminal on the day in question.

Nor do I think that any support for the licensees’ argument is to be drawn from the fact that various suppliers have made allowances to their retailers in relation to fuel supplied from certain terminals and that in March 1997 Esso itself introduced an allowance of that kind. Granting such allowances certainly involves a recognition of the fact that when fuel is sold in observed volumes apparent stock losses may arise as a result of subsequent cooling if it is measured at the terminal when it is at higher than ambient temperature. It also reflects a willingness to mitigate the effects of a contract which in certain circumstances can work to the disadvantage of the buyer. However, I do not think that it goes beyond that and I cannot see how the introduction of an allowance in March 1997 sheds any light on the terms of contracts made before that date.

For all these reasons I reject the first of the licensees’ arguments.

As far as the second is concerned, although the law requires motor fuel to be measured in standard litres for some purposes, it does not require it to be sold in standard litres, whether between producers, by producers or distributors to retailers, or by retailers to consumers, and in practice it is not. Accordingly, I can see no grounds for saying that in a contract for the sale of motor fuel by volume there is to be implied by law a term to the effect that the volume is expressed in standard units. I therefore reject the second of the licensees’ arguments.

For these reasons I am unable to accept that contracts between Esso and its retailers for the sale of motor fuel should be construed as referring to volumes measured in standard litres. In my view each contract was for the purchase and sale of a volume of fuel measured by Esso in accordance with established industry practice, namely, at the point of delivery into the road tanker at the temperature at which it reached the loading gantry in the ordinary course of production. Accordingly the licensees’ claim for damages for breach of contract in relation to the supply of hot fuel must fail.

I can summarise my main conclusions in this matter as follows:

Under each form of licence agreement the licensee was bound to join in the Esso Collection promotion at his own expense;

Even if that were not the case, any licensee who joined in the promotion and operated it with knowledge of its terms entered into a ‘scheme contract’ with Esso under which he became liable for the cost of gifts supplied to him to enable him to redeem tokens and for the value of tokens which he issued but which were redeemed at other service stations;

Any liability to pay for gifts supplied by Esso arose under the licence itself or the ‘scheme contract’ rather than under any separate contract for the sale of goods;

Most licensees were correctly informed of the nature of the promotion before they began to operate it, but some licensees may have been given an assurance in one form or another that they would incur no costs in operating the promotion. Whether any particular licensee was given any such assurance and, if so, what were its precise terms and effect, will have to be determined in separate proceedings;

The repayment agreements do not in themselves give rise to any separate liability;

Esso was entitled to adjust the margin, shop and marketing fees and operating cost allowance at its discretion save that

it was not entitled to make any adjustment arbitrarily, capriciously, dishonestly or irrationally; and

it was not entitled to make such adjustments as would make it commercially impossible for the licensee to operate the service station;

All the adjustments made by Esso between January 1996 and January 1998 were permitted by the express terms of the licence agreement and shop agreement and none of them was made arbitrarily, capriciously, dishonestly or irrationally;

whether any of those adjustments, either alone or in conjunction with others, made it commercially impossible for any licensee to operate his service station is a matter that will have to be determined in separate proceedings;

Contracts for the supply of fuel by Esso to retailers provided for the sale and delivery of a stated volume measured at current temperature (that is, “observed volume”) at the distribution terminal at the time of loading into the delivery vehicle;

Esso was not in breach of contract in delivering fuel the temperature of which was higher than ambient temperature at the time of loading into the delivery vehicle.