Business Case Study with Dissenting OpinionCasserlie v. Shell Oil Co.

As discussed in Chapter 13, in contrast to the rule under the common law of contracts, a contract for a sale of goods will not fail for indefiniteness even if one or more of its terms are left open. For example, under Section 2-305(1) of the Uniform Commercial Code (UCC), if the parties have not agreed on a price, a court will determine a "reasonable price at the time for delivery." If either the buyer or the seller is to determine the price, the price is to be set in good faith [UCC 2-305(2)].

In this context, good faith means "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade" [UCC 2-103(1)(b)].

In this Business Case Study with Dissenting Opinion, we review the case of Casserlie v. Shell Oil Co., in which a group of service station dealers brought an action against a gasoline distributor, claiming that the distributor engaged in bad faith in setting the price of gas under the open term provision of their contracts. Is a subjective inquiry into the distributor's motive required to make this determination?

Case Background

Donald Casserlie is one of a group of independent Shell Oil Company service station lessee-dealers in Cleveland, Ohio. The dealers lease gas stations, including equipment and land, from Shell.

In the 1990s, they contracted to buy gas only from Shell at a price set by Shell at the time of delivery. Shell charged the dealers a price that was based on such factors as the price of its competitor British Petroleum and the street price of gas in Cleveland. The price was referred to as the dealer-tank-wagon (DTW) price because it included the cost of delivery of the gas to the stations. Shell also sells gas to jobbers, which are independent companies operating non-Shell-owned gas stations. Jobbers buy gas at the oil company's terminal and thus pay the "rack price," which does not include delivery costs.

Casserlie and other dealers filed a suit in an Ohio state court against Shell, alleging that the DTW prices were being set in bad faith. The dealers contended that the pricing was commercially unreasonable and part of a plan to drive them out of business. They charged that Shell's goal was to take over the gas stations to profit from all of the sales, including nonfuel sales, not just from wholesale gas sales and rental income. The court issued a summary judgment in Shell's favor. A state intermediate appellate court affirmed the judgment. The dealers appealed to the Ohio Supreme Court.

Majority Opinion

MOYER, C.J. [Chief Justice]

* * * *

It is not disputed that the latter half of the definition of good faith, "the observance of reasonable commercial standards of fair dealing in the trade," requires only an objective analysis. The issue before us is whether there is room for a subjective inquiry within the honesty-in-fact analysis in these circumstances.

The UCC does not define the term "honesty in fact."

Comment 3 to UCC 2-305 * * * provides, * * * "In the normal case a 'posted price' or a future seller's or buyer's 'given price,' 'price in effect,' 'market price,' or the like satisfies the good faith requirement."

Comment 3 * * * provides a safe harbor where a "posted price" satisfies good faith in its entirety.

* * * *

* * * By its language, the safe harbor does not apply when it is not the "normal case" or when the price setter is not imposing a "posted price," "given price," "price in effect," "market price," or the like. As long as a price is commercially reasonable, it qualifies as the "normal case." The touchstone of prices set through open-price-term contracts under UCC 2-305(2) is reasonableness. A price that is nondiscriminatory among similarly situated buyers correspondingly qualifies as a "posted price" or the like. A discriminatory price could not be considered a "posted" or "market" price, because, in effect, the seller is not being "honest in fact" about the price that it is charging as a posted price, since it is charging a different price to other buyers. [Emphasis added.]

Therefore, a price that is both commercially reasonable and nondiscriminatory fits within the limits of the safe harbor and complies with the statute's good-faith requirement.

* * * *

The facts of this case demonstrate that the prices set by Shell were both commercially reasonable and nondiscriminatory. * * * The only evidence of bad faith was that the prices set were too high for dealers to remain profitable and compete with jobbers in the Cleveland area. However, Shell is not required to sell gasoline at a price that is profitable for buyers. A good-faith price under UCC 2-305 is not synonymous with a fair market price or the lowest price available. * * * The DTW prices set by the company were within the range set by its competitors.

* * * *

* * * The only other argument of discrimination put forth by the dealers is that jobbers were charged significantly less, specifically, the rack price rather than the DTW price. Jobbers and dealers are not, however, similarly situated buyers. The price difference is partially explained by the fact that the DTW price includes a delivery charge, while the rack price does not. * * * Jobbers perform additional functions compared to dealers, such as maintaining the properties they own and bearing the risk of environmental liability. Because jobbers relieve Shell of these obligations, they are charged a lower price.

* * * *

When a price that has been left open in a contract is fixed at a price posted by a seller or buyer, and the posted price is both commercially reasonable and nondiscriminatory, the price setter has acted in good faith as required by [UCC 2-305(2)] and a subjective inquiry into the motives of the price setter is not permitted. In this case, the dealers have not provided any evidence that the prices set by Shell were commercially unreasonable or discriminatory. The posted-price safe harbor therefore applies, and we affirm the judgment of the court of appeals.

Dissenting Opinion

PFEIFER, J. [Justice], dissenting.

* * * *

"Good faith" is generally treated as incorporating both subjective and objective standards. Although [UCC 2-305] deals exclusively with open-price terms, it does not define "good faith" differently from its customary meaning. Many different jurisdictions in many different contexts, including in the context of an open-price term, define "good faith" as requiring both subjective and objective analysis.

* * * The courts agree that it is not possible to determine whether a party acted in "good faith" without a subjective inquiry.

* * * *

"Good faith" in the context of open-price terms should be subject to both objective and subjective inquiry. Even courts and commentators who have written in favor of the safe-harbor presumption have concluded that an intent to drive a contractual partner out of business might overcome the presumption. I can conceive of situations in which nondiscriminatory pricing could violate "good faith." For instance, in this case, it is alleged that Shell charged all of its similarly situated [dealers] the same price, and it is alleged that that price was set too high for them to profitably operate a gas station. In that situation, even though the pricing was nondiscriminatory, it was designed to drive a contractual partner out of business.

* * * A court's analysis of a merchant's good faith, then, should be both subjective and objective. Furthermore, the safe-harbor presumption * * * only applies in the normal case; at a minimum, the appellants should be allowed to attempt to establish that this is not a normal case. I would reverse the judgment of the court of appeals and remand the case for further consideration.

Questions for Analysis

Law What was the majority's reasoning in this case? How did this affect the outcome?

The majority's opinion was based on two arguments. The first sought to examine whether Shell was

Law Why did the dissent disagree with the majority? If the court had adopted the dissent's position, how would this have affected the result?

Technology By what method could the distributor ensure the most immediate payment for its products from the dealers?

Economic Dimensions If the distributor granted credit to the dealers, how might it guarantee or secure payment for its products on default?

Implications for the Businessperson How might tariffs levied on imported oil affect the price of gas in Cleveland? What does this indicate about the ramifications of global developments for domestic businesses?

Answer rating: 100% (QA)

Law What was the majoritys reasoning in this case How did this affect the outcome The majority in this case led by Chief Justice Moyer argued that the prices set by Shell were commercially reasonable ... View the full answer