England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH COMMERCIAL COURT
MR. JUSTICE MOORE-BICK
A3/2000/3421

		Royal Courts of Justice Strand, London, WC2A 2LL
		12th November 2004

Lord Justice Tuckey:

1. This is an appeal from a judgment of Moore-Bick J. [2003] EWHC 1730 (Comm) given in group litigation between Esso, the well-known oil major, and about 100 of its retail licensees who had carried on business from Esso owned service stations in Great Britain during the 1990s. The judgment dealt with issues of construction of Esso's standard forms of agreement which gave Esso the right to adjust the amounts payable/receivable (margins, fees and allowances) by its licensees. The judge held that Esso was entitled to adjust these amounts at its discretion except for adjustments made arbitrarily, capriciously, dishonestly or irrationally, and that the adjustments in issue in the litigation had not been made in breach of the agreements in these respects. He also held that Esso was not entitled to make adjustments which would make it commercially impossible for the licensee to operate the service station; whether Esso was in breach of this term could only be decided on a case by case basis. The judge also had to decide what was called the "hot" fuel issue. Put simply this was a complaint of short delivery: the volume of fuel delivered to some of the licensees had been measured when it was above ambient temperature (hot). When it cooled to ambient temperature its volume contracted. The judge held that the fuel was sold on terms that its volume would be measured at the time it was loaded into the tanker making delivery, that is to say when it was hot, and so Esso was not in breach of contract.
2. By this appeal the licensees challenge the judge's construction of the standard forms of the agreement and contend for a more restrictive interpretation of Esso's right to adjust margins, fees and allowances. They argue that he should in any event have found that Esso had acted arbitrarily, capriciously, dishonestly or irrationally. They also challenge his findings on the hot fuel issue. Esso accept the judge's construction of the agreements and his decision on the hot fuel issue.
3. The litigation also resolved generic issues about aspects of a promotional scheme known as "The Esso Collection". The licensees have been refused permission to appeal the judge's findings on this part of the case and I do not need to refer to it again.

Margins, Fees and Allowances

4. The principal agreement between Esso and its licensees, the Partnership Licence agreement, was for three years on scheduled terms. Such a licence was usually preceded by a trial licence for one year on the same terms so that Esso could satisfy itself that the licensee was fit to be given a full licence.
5. The fifth schedule to the Licence agreement dealt with the sale and purchase of fuel. Esso agreed to sell and the licensee agreed to buy, on Esso's terms and conditions of sale ruling on the date of delivery, his total requirements of fuel at Esso's retail price less the licence margin. The licence margin was expressed in pence per litre and was the same for all licensees. It was the sum specified in the agreement or such other sums as Esso might from time to time notify. The licensee was obliged to sell at the retail price so the licence margin was his profit.
6. By the fourth schedule to the Licence agreement Esso was required to make an operating cost allowance to the licensee of the amount specified in the agreement or such other sum as Esso might notify. The operating cost allowance was expressed as an annual sum payable monthly and differed from site to site. The agreement did not specify how the operating cost allowance was to be determined.
7. Clause 6 of the fifth schedule to the Licence Agreement (Clause 6) said:

Prior to the 1^st November in every year Esso will review the Licence margin and the sum payable in respect of the monthly Operating Cost Allowance. Following such review Esso will notify the Licensee of the result of its review and if in Esso's opinion changes are required to the Licence margin or the monthly Operating Cost Allowance such changes will take effect on 1^st December following the review. Esso reserves the right, if necessary, to make adjustments to the Licence margin and/or the monthly Operating Cost Allowance at any other time upon notification to the Licensee.

8. All the service stations had Esso shops. They were the subject of a supplementary Shop agreement. This required the licensee to pay a percentage of shop turnover fixed for all shops (the marketing fee) and a site specific annual shop fee payable monthly which was determined each year by Esso by reference to previous performance.
9. Clause 6 of the schedule to the Shop agreement said:

Esso may at any time during the currency of this agreement give to the licensee 28 days notice in writing of a change in any of the fees chargeable under this agreement…

10. From 1995 the monthly operating cost allowance was netted off against the monthly shop fee. Esso's objective in fixing the operating cost allowance and shop fee was to produce a target income for the licensee.
11. By the sixth schedule to the Licence agreement Esso was to provide the licensee with such advice and assistance in connection with the operation of the service station and the shop as, in its opinion, was reasonably required. The eighth schedule, which dealt with termination, recorded that Esso would continually review the performance of the licensee and seek to assist him in organising his business efficiently and profitably.
12. The seventh schedule contains the licensee's obligations. These run to seventeen pages and demonstrate the degree of contractual control which Esso had over its licensees in the way in which they were to operate. One of the licensee's obligations was to provide financial information about his operations on the site.
13. For a number of years before 1995 Esso had been concerned that its UK retail division was losing market share to the supermarkets who were selling fuel at significantly lower prices than its own outlets. Esso's share had fallen from 20% to 17.7% over several years and fell a further 1% in 1995. Esso concluded that unless it did something to arrest the decline its retail business might contract to a point where it was no longer viable. With a view to becoming more competitive it conducted a number of studies including one designed to maximise fuel sales, which became known as Pricewatch, and another to improve the on-site efficiency of its 800 licensees, which became known as BPR (Business Process Redesign).
14. Pricewatch involved Esso reducing its retail prices for fuel to enable its licensees to match the prices being set by the supermarkets in their local area. This cost Esso in the order of £100m. but succeeded in restoring its market share to 20%.
15. As the preservation and regrowth of its retail business in the UK was also in the interests of its licensees the introduction of BPR was intended to enable Esso to reduce the amounts it paid to and increase the amounts it received from its licensees from the savings made by improving site efficiency. It estimated that BPR might effect savings of £25m.
16. The introduction of BPR led to the first of the two disputes we have to resolve. I take what happened from the judge's judgment as follows.
17. A 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.
18. 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.
19. 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:

i) On 1^st January 1996, a reduction in the margin from 1.199 pence per litre ("ppl") to 1.1 ppl;

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

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

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

v) 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.

20. It was Esso's case at trial that the adjustments to margin and operating cost allowance made on 1^st January 1996, 1^st January 1997, and 1^st April 1998 had been made following a review under the first part of Clause 6 of the fifth schedule to the Licence agreement. The other adjustments in 1996 had been made under the second part of Clause 6 because they were necessary. The adjustments to the shop fee had been made under clause 6 of the schedule to the Shop agreement.

Construction

21. The licensees' submission at trial about the construction of Clause 6 were summarised in their closing submissions as follows:

In summary the changes in margins, fees and allowances made pursuant to the BPR from 1996 to 1998 were the result of policy decisions carried out by Esso in the interest of its own business, and, primarily, to reduce its costs in certain areas.

(1) The changes were not made pursuant to a "review" of the nature required by the contract.

(2) The changes fell outside the terms of the contract because alternatively they were not "necessary" within the meaning of that term…

22. The judge records the way in which the first of these submissions was developed by Mr Murray Pickering Q.C. for the licensees as follows:

"Review" in this context meant reconsideration of the margin and operating costs 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 costs allowance to reflect what the parties might reasonably be expected to have agreed if current circumstances had existed at the time that the agreement was originally made… Wider commercial considerations had no part to play.

23. The judge rejected this submission for two reasons:

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 costs 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 pre-supposes 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 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 costs allowance was required, to have regard to fact that the overall profit derived from retailing motor fuel was shrinking.

24. The second of the licensees' submissions was that the word "necessary" in Clause 6 meant objectively justified. The judge rejected this argument because Esso alone was the judge of what adjustments were required following the review and it therefore made sense in that context that it should also be the judge of whether an adjustment was necessary at any other time. It was also diffuclt to identify the objective criteria by which it could be shown that any adjustment was necessary. The second part of the clause therefore meant no more than that Esso retained the right to adjust the margin and operating cost allowance at any time if it considered it necessary to do so.
25. The licensees challenge the judge's construction of Clause 6. Their challenge to the meaning of the word "necessary" is straightforward. They say the judge should have held that it meant "objectively necessary" as they contended at trial. But their challenge to the other part of the judgment is not at all straight-forward. What they now say is that the judge should have held that:

On a true construction of the Licence Agreement and in particular [Clause 6] a review of the operating costs allowance entailed reviewing what operating costs could be achieved by a competent licensee (meeting all his obligations including the operating standards) at the service station in question.

This formulation has undergone a number of changes since the notice of appeal was first filed. It is put forward by Mr Kelly, the solicitor advocate who has appeared for most of the licensees on this appeal. He was Mr Pickering's junior at trial.

26. Put shortly the contention now made on behalf of the licensees is that the review had (and had only) to be site specific and that no adjustment to operating cost allowance was permissible unless it could be achieved by a competent licensee on that site. The complaint now is that a review, which assumed that the licensee would be able to reduce his operating costs to those achieved by the average of the most efficient 25% of licensees, was outwith Clause 6.
27. This was not the case made at trial as is apparent from what I have already said. That case involved a construction which, if correct, meant that Esso had taken into account matters which it should not have done – the broader commercial picture. The present case involves a construction which, if correct, means that Esso failed to take into account matters which it should have done – site specific factors.
28. Understandably, Esso object to this change of case. Its preparation for and evidence at trial was directed to the case which the judge decided. If it had had to meet the new case it would have directed its evidence to the detail of BPR and the reasons why some, but not all, of the items of cost considered were the same for each site. As it was there was no examination of such issues.
29. Normally this court will not allow an appellant to make a different case to the one he made at trial if this is unfair to the respondent. That is the position here, and I would reject this part of the appeal on that ground alone. But as some of the licensees are in person, others obviously feel strongly about the matter and it is possible to do so I have considered the merits of the new case to avoid having to decide this part of the appeal on what might appear to be a technicality.
30. In support of his submission that the review was intended to be site specific Mr Kelly relied on the fact that Esso had detailed knowledge of each licensee and his operating costs especially because each had had a trial licence and had provided financial information about those costs. The negotiated operating cost allowance specified by the Licence agreement took these factors into account. A one-size-fits-all approach did not and could not have been contemplated by the parties.
31. Inherent in the new case on construction must be the proposition that the judge's conclusion on the old case was wrong. In other words, if the review could only take into account the operating costs attainable on the site in question, wider commercial considerations were irrelevant.
32. I cannot accept this. The operating cost allowance was only part of the overall package from which the licensee expected to derive his profit. The Licence agreement said nothing about how the operating cost allowance was to be determined. It did not promise reimbursement of reasonably incurred costs. Within the limits found by the judge I think Clause 6 gave Esso complete discretion to adjust the financial balance between itself and the licensee and in doing so it was entitled to have regard to changes in the nature in the retail market, which it was best able to judge, both in its own interests and that of its licensees. So I agree with the judge's conclusions about this for the reasons he gave.
33. For much the same reasons I cannot read Clause 6 in the restrictive way now contended for by Mr Kelly. I can see nothing in the wording of the Licence agreement to prevent Esso taking a general view of the standards of site efficiency to be expected from its licensees and adjusting, not only operating cost allowances, but also margins and shop fees accordingly. So I would reject the licensees' new case on construction.
34. As to the meaning of the word "necessary" Mr Kelly points to the difference in language between the first part of Clause 6 ("if in Esso's opinion") and "if necessary" in the second part. He submits that the same language would have been used in the second part if the meaning in the first part was intended.
35. It seems to me that the judge gave the answer to this point about the difference in language when he said:

It is necessary … to recognise that … the word "necessary" forms part of a parenthetical phrase in the third sentence of the clause which itself contains a qualification on the main provision set out in the second sentence.

It is unlikely therefore that the draftsman would have intended that the main (first) part of the clause should contain a subjective test, but the subsidiary (second) part should contain an objective test. Such a construction also faces the difficulty of uncertainty as the agreement gives no clue as to what would or would not make an adjustment objectively necessary. The fact that it is only Esso which can make the adjustment is consistent with the judge's construction as is the fact that Esso had the right to make adjustments to shop fees at any time. For these reasons I think that the judge correctly construed the second part of Clause 6.

Breach

36. As I have said Esso accept the judge's restrictions on their right to adjust margin, fees and allowances. At trial the licensees contended through Mr Kelly that the adjustments were implemented in breach of good faith and unreasonably in the sense that they lacked any rational basis. Both parties agreed that the judge should determine this as a generic issue and he said that he felt able to do so. He dealt with it quite shortly. Having said that the was unable to accept Mr Kelly's contention he continued:

137. 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.

138. 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.

37. It is clear from what the judge said that the thrust of the licensees' allegation was that Esso had made the adjustments for an improper motive and not as a rational response to the commercial considerations which they relied on. This was obviously a general allegation, and a serious one at that, which the judge rejected after hearing and accepting the evidence of the two senior managers involved in the design and implementation of BPR.
38. In this court Mr Kelly's challenge to the judge's finding of no breach has been mounted on a broad front. It is grouped under two heads: "facts and evidence which the judge ignored" and "additional reasons" related to the way in which BPR was implemented. The submissions are supported by 97 pages of what Mr Kelly described as "core evidence".
39. I will summarise the allegations. Under the first head it is alleged that the licensees were asked to accommodate a £75m. loss by Esso; that for two years BPR was based on universal rates, particularly wage rates which Esso must have known were unattainable for many of its licensees unless the licensee himself worked for more than the 45 hours per week expected of him; that for 15 months BPR fixed a single projected gross profit margin for all goods sold in the shops when Esso must have known that this was unrealistic; that licensees were unable to take advantage of bulk deals for non-motor fuel goods negotiated by Esso; that BPR ignored the costs of down-sizing a labour force and the implications of doing so as far as health and safety and other matters were concerned. Under the second head it is alleged that Esso failed to disclose that licensees would be subsidising its losses on Pricewatch at the time when its UK holding company increased its profits; that Esso misrepresented the percentage of licensees who had attained the levels of efficiency demanded by BPR; that Esso failed to inform licensees of the reduction in their target incomes or that they might apply for relief by asking for an additional cost allowance; that Esso's policy was not to explain and encourage the use of best practices but simply to dictate what were best costs.
40. The difficulty about all this is that none of these allegations were pleaded or foreshadowed in the licensees' opening or written closing submissions. The trial took two months. Mr Kelly has pointed to snippets of his cross examination raising some but by no means all of these points. We have no record of his oral closing submissions. Esso clearly did not come prepared to meet such allegations (some of which are serious) at trial and their answers to them were not and have not been heard. There is no way in which we are able to judge whether there is any merit in them.
41. In these circumstances I have no doubt that the licensees should not be permitted to attack the judge's finding in this way on appeal. He made clear findings of fact on the basis of the case which he was asked to try and I do not think that those findings can now be undermined in the way Mr Kelly has attempted to do.
42. Under the judge's "commercial impossibility" exception individual licensees may be able to raise some of the allegations if they impact upon that issue. However, for the reasons I have given I think it would be quite wrong to allow such allegations to be used to challenge the judge's finding that Esso did not act arbitrarily, capriciously, dishonestly or irrationally which I would uphold.

Hot Fuel

43. The volume of fuel delivered by Esso to its service stations was measured at the time it was loaded into a tanker at the terminal. A tanker only delivers its load to one service station and it is no longer the practice to measure the volume of fuel delivered by dipping the tanks or measuring equipment on the tanker. The licensee therefore received delivery of and paid for the volume of fuel measured at the terminal.
44. From 1993 Esso supplied some of its licensees from its terminal at Hythe, Shell's terminal at Stanlow and BP's terminal at Grangemouth. The production and delivery practices at these terminals meant that the fuel loaded onto tankers was often at a few degrees above ambient temperature. A change in the temperature of petrol of 4°C gives rise to a change in volume of 0.5%; in diesel the change is about 0.3%. So, if such a delivery of "hot" fuel cooled in the licensees tanks before it was sold, its volume contracted. From 1998 at least Esso paid what was called a "wetstock allowance" to licensees affected by having received deliveries of hot fuel, but the issue remained whether they were entitled to damages for breach of contract for the earlier years.
45. The contracts for the sale of fuel were on terms that:

The Seller's measurements of quantity will be accepted by the Buyer.

However the judge accepted that as this term did not prescribe where or how those measurements were to be taken, it did not resolve the issue.

46. The licensees had pleaded their case in the alternative. Firstly they said Esso was required to adopt a method for the measurement of volume which was based on prevailing industry practice. This, they said, meant volume measured at a standard temperature of 15° C (standard litres). Alternatively the licensees contended that such a term was to be implied by law from the fact that standard litres are the prescribed measure for charging fuel excise duty. Volumes measured in this way have to be calculated.
47. The first of these contentions was not supported by the experts who gave evidence at trial. They agreed that it was, and still is, standard industry practice to measure volumes for the purposes of sale by distributors to retailers (and by retailers to motorists) on the basis of observed volumes. Standard litres are used in the refinery for some purposes but not in the chain between the refinery and the consumer. The judge rejected the alternative contention on the basis that, 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 by anyone.
48. Accordingly the judge said:

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.

He had earlier noted that if a contract for the sale of goods by volume did not provide expressly or by implication for the circumstances in which the goods were to be measured the natural implication was that they were to be measured in accordance with established good practice in the trade or industry concerned.

49. In the course of his judgment the judge recorded that the experts had agreed that 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 others. Obviously the latter would be unlikely to agree to such terms. The judge noted that although Esso could have sold to retailers in standard litres this would have required significant changes to the way it handled this aspect of its business. Esso therefore would also be unlikely to agree to such terms. For these reasons the contention that measurement in standard litres was an implied term of the contract of sale based on necessity or the intention of the parties was impossible.
50. Recognising this difficulty Mr Kelly put forward a new case on appeal. His final formulation was as follows:

Esso's measurement of fuel shall be accepted by the buyer provided:

(1) it is measured and loaded at ambient temperature; and

(2) it is re-measured on delivery to the service station and, if necessary, the invoice is adjusted to show the actual volume delivered.

51. (1) of Mr Kelly's reformulation is self-explanatory. (2) depends on an argument based on the Weights and Measures (Liquid Fuel Carried by Road Tanker) Order 1985 (SI 1985/778). This Order applies to the carriage of liquid fuel by a road tanker along the highway. Article 3 requires the driver of a tanker carrying fuel for delivery to a buyer to be provided with certain documents including a delivery document for the buyer containing particulars including

(2)(e) if known to the seller or his agent the quantity of each type of liquid fuel … which is to be delivered to the buyer.

Article 6 (1) says that after the fuel has been delivered the driver shall "before leaving the premises …

(a) if necessary amend, add to or replace the delivery documents so as to show the quantity of each type of liquid fuel … actually delivered to the buyer …

Mr Kelly submits that these provisions require re-measurement of fuel on delivery to the service station.

52. Before considering these submissions further I must note Esso's objection to this new case. No consideration was given at trial to the practicalities of a term which required loading at ambient temperature at the terminal, particularly where, as in this case, two of the terminals concerned were not owned by Esso. Esso's tankers no longer carry measuring equipment and, as I understand it, it is no longer industry practice to measure or re-measure on delivery to site. No consideration was given at trial as to whether this is now possible and if so how much it would cost.
53. Once more it seems to me that Esso's objection is well founded. However I think it is possible to reach a clear view about the merits of the new case and so I proceed to consider it.
54. I do not think the regulations support Mr Kelly's submissions. I accept the submission of Mr Hapgood Q.C. for Esso that Article 6 (1) has to be read with Article 3 (2)(e). Article 3 (2)(e) contemplates a situation where the seller will not know how much fuel is actually to be delivered. If so, it becomes "necessary" to amend the delivery document to show this information. There may be other unforeseen circumstances which make this necessary, but I think it is impossible to spell out of these provisions an obligation to re-measure on delivery in every case. Article 5 makes it clear that the regulations did not contemplate that every tanker would be fitted with measuring equipment. The regulations are not in any way directed to the kind of difficult contractual problem which the hot fuel issue raises.
55. Mr Kelly contends for ambient temperature because he says this is fair to the licensee. Variations in ambient temperature will alter the observed volumes of fuel delivered and paid for, but such swings and roundabouts would be acceptable. Measurement at above ambient temperature is unfair and risks eliminating the license margin altogether. He also supported this argument by analogy with the law of agency contending that elimination of the licence margin was the equivalent of a principal preventing his agent from earning commission. Mr Kelly also relied on the statutory implied term of satisfactory quality saying that the raised temperature of the fuel was an aspect of its quality.
56. I do not accept these submissions. I cannot see that any term requiring measurement at ambient temperature would be implied as a matter of necessity or the parties' intention. It might or might not be fairer to licensees than the industry practice, but Esso would be most unlikely to agree to it for the reasons they have given. It is also uncertain. Where in the terminal should ambient temperature be measured? When should it be measured? Should it be an average for the day or at a particular time? If the measurement is not to be made at the terminal the proposed term becomes hopelessly uncertain.
57. The agency analogy does not help the licensees. The licence margin is not a commission. The dispute is about quantity and has nothing to do with quality. There is nothing wrong with the quality of hot fuel – it can be used immediately. If the licensees have a remedy it is for damages for short delivery under a contract for the sale of goods. Whether there was short delivery in this case depends upon the terms of the contract. One must look for some implied term to tell one where and how the agreed contract quantity was to be measured. Measurement at standard accounting temperature was rejected by the judge and is no longer pursued. Ambient temperature is a non-starter for the reasons I have given. One is left with established industry practice. Like the judge I can see no legal difficulty in implying a term based on such usage in this case.
58. It follows that I think the judge reached the right decision on this issue.

Conclusion

59. I would dismiss this appeal.

Lord Justice Neuberger:

60. I agree.

Lord Justice Ward :

61. I also agree.