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Shell Oil Co. v. HRN, Inc.

Supreme Court of Texas
144 S.W.3d 429 (2004)
ELI5:

Rule of Law:

A seller with the contractual right to set the price for goods under an open-price-term contract satisfies its duty of good faith under UCC § 2-305(b) if the price is commercially reasonable and non-discriminatory. Allegations of a seller's improper subjective motive, without more, are insufficient to establish a breach of this duty.


Facts:

  • Several hundred lessee dealers (Dealers) entered into lease and dealer agreements with Shell Oil Co. (Shell) to operate Shell-branded service stations.
  • The Dealer Agreement contained an open-price term, allowing Shell to set the price for gasoline (the 'dealer tank wagon' or DTW price) at the time of purchase.
  • The agreements contractually prohibited Dealers from selling any gasoline except Shell-branded gasoline.
  • Shell also sold its gasoline through other channels, including to wholesale distributors known as 'jobbers' at a lower 'rack price' and directly to the public through its own company-operated stations.
  • Agreements between Shell and its jobbers effectively prevented Dealers from buying Shell-branded gasoline from this alternative, cheaper source, as the jobber would be retroactively charged the higher DTW price for any such sale.
  • Dealers alleged that Shell set the DTW price so high that they could not remain competitive with other retailers, including Shell's own company-operated stations.
  • Dealers claimed this pricing strategy was part of a deliberate plan by Shell to drive them out of business and replace them with more profitable company-operated outlets.

Procedural Posture:

  • The Dealers sued Shell in a Texas trial court, alleging Shell breached its duty to set gasoline prices in good faith under Texas Business and Commerce Code § 2.305(b).
  • Shell moved for summary judgment, which the trial court granted, finding Shell had established its good faith as a matter of law.
  • The Dealers, as appellants, appealed to the Texas Court of Appeals, Fourteenth District.
  • The court of appeals reversed the summary judgment and remanded the case for trial, concluding that circumstantial evidence raised a fact issue regarding Shell's subjective good faith.
  • Shell, as petitioner, appealed that decision to the Supreme Court of Texas.

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Issue:

Does a seller in an open-price-term contract breach its duty under UCC § 2-305(b) to set a price in good faith by allegedly harboring a subjective, improper motive to harm the buyer, even if the price set is commercially reasonable and non-discriminatory?


Opinions:

Majority - Chief Justice Phillips

No. A seller does not breach its duty of good faith under an open-price-term contract based solely on an allegedly improper subjective motive, so long as the price set is commercially reasonable and non-discriminatory. The Uniform Commercial Code presumes that a 'posted price' or 'price in effect' is a good faith price. This presumption is intended to prevent discriminatory pricing—charging similarly situated buyers different prices—while minimizing judicial intrusion into price setting. Allowing claims based solely on a party's assumed subjective intent would inject uncertainty into commercial contracts and contradict the UCC's goal of promoting predictability. The Dealers' evidence, which includes the relatively high price, their 'captive' relationship with Shell, and their declining business fortunes, is 'inextricably tied to the amount of the price set by Shell.' Because the Dealers did not dispute that Shell's DTW price was within the range of prices charged by other refiners (commercially reasonable) and was applied uniformly to all lessee dealers (non-discriminatory), Shell satisfied its duty of good faith as a matter of law.



Analysis:

This decision significantly narrows the scope of the 'good faith' inquiry for open-price-term contracts under Texas's version of the UCC, aligning it with the majority of jurisdictions. By prioritizing objective factors (commercial reasonableness, non-discrimination) over subjective intent, the court provides a strong 'safe harbor' for sellers. This ruling makes it substantially more difficult for buyers to challenge a seller's pricing in court, as they can no longer rely on circumstantial evidence of a seller's alleged bad motive. Future plaintiffs must now demonstrate an objective commercial injury beyond merely a high price, such as discriminatory application or a deceptive calculation method, to overcome the presumption that a posted price is set in good faith.

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