Shell Oil Co. v. HRN, Inc.

Supreme Court of Texas · Contracts

ContractsUCCOpen price termGood faith pricingUCC 2-305open price termgood faithposted price presumption

Facts

Shell sold Shell-branded gasoline to its lessee dealers under dealer agreements requiring purchase at Shell's then-current dealer tank wagon (DTW) price, an open price term governed by Texas Business and Commerce Code section 2.305(b). The dealers claimed Shell set DTW prices so high that they could not compete and that Shell was trying to replace them with more profitable company-operated outlets. Shell's DTW prices were commercially reasonable in comparison with other refiners' DTW prices in the relevant markets and were applied uniformly among similarly situated dealers. The dealers did not contest commercial reasonableness, but argued Shell acted in bad faith because it allegedly had a subjective motive to drive some dealers out of business.

Issue

Whether a refiner breaches the section 2.305(b) duty to fix price in good faith when it sets a commercially reasonable, uniformly applied posted price, but dealers present circumstantial evidence that the refiner may have subjectively wanted to force some dealers out of business. More specifically, the question was whether subjective improper motive alone can make an otherwise commercially reasonable, non-discriminatory posted price an 'abnormal' case outside Comment 3's posted-price presumption.

Rule

For purposes of Texas Business and Commerce Code section 2.305(b), a posted price or price in effect is presumptively a good-faith price in the normal case. A commercially reasonable price that is fairly and non-discriminatorily applied to similarly situated purchasers satisfies the good-faith requirement as a matter of law, and allegations of dishonesty under section 2.305 must have some basis in objective fact connected to the commercial realities of the case; subjective motive alone is not enough.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Blue Mesa Fuel Supply sells branded gasoline to its lessee dealers in Denver under contracts requiring purchase at Blue Mesa's 'dealer price in effect' on the delivery date. Blue Mesa shows that its posted dealer price is within the range charged by other refiners to comparable lessee dealers in the Denver market and that it charged the same posted price to all similarly situated dealers, but several dealers offer emails suggesting Blue Mesa hoped to convert more locations to company-run outlets.

If the dealers sue for breach of the seller's duty to fix price in good faith, what is the strongest answer?

Explanation. Under the majority rule, in the normal case a posted price or price in effect is presumed to be in good faith under UCC section 2.305(b). The seller establishes good faith as a matter of law by showing the price is commercially reasonable and fairly, non-discriminatorily applied to similarly situated purchasers. Alleged subjective bad motive, without objective facts tied to commercial realities such as discriminatory application or dishonest pricing methodology, does not defeat that presumption. (Derived from Shell Oil Co. v. HRN, Inc. (n.d.).)