Royal Dutch Shell Group .com Rotating Header Image

Shell Marketers Protest ‘Lost Profits’ Provision

Shell Marketers Protest ‘Lost Profits’ Provision 

August 5, 2008

By Barbara Grondin Francella

WASHINGTON D.C. – The National Association of Shell Marketers is coming out strong against the “lost profits” provision in the incentive agreements designed by Shell Oil Co.

As of the 2007-2008 incentive agreements, Shell added lost profits language to the default provision of its Facility Development Incentive Program (FDIP) agreements, under which Shell Oil offers marketers and dealers money to re-brand, upgrade or build new Shell locations. Like most major oil companies, Shell historically has written incentive agreements to allow the company to recover brand-incentive funds that have not been fully amortized (generally involving a schedule of 10 years) when a marketer or dealer switches branded suppliers. However, under the new provision, Shell also asks for lump-sum payments to cover lost profits—money that would have gone to Shell if the marketer or dealer sold Shell-branded gasoline for the entire length of the incentive agreement—in addition to repayment of unamortized incentive money.

“This is the number-one issue for Shell marketers and may become the number-one issue for all marketers if other majors decide to add this provision to their incentive agreements,” said Darrell K. Smith, president of the National Association of Shell Marketers, a 300-member organization based in Washington, D.C. “This severely limits the ability of marketers and retailers to switch oil company suppliers and brands.”

The FDIP agreements, which do not include minimum volume commitments, are separate from Shell’s wholesale marketer supply contracts, which usually cover four to seven years and do include minimum volume guarantees. However, Shell contends, if a marketer switches to another brand, under its FDIP agreement it is entitled to lost profits from Shell-branded fuel not sold for rest of the time covered by the FDIP agreement, even if the marketer has met the minimum volume requirements under the supply contract.

“Our members have not expressed significant objections to the repayment of some or all of the money contributed by Shell under the incentive agreements according to the formula Shell set out in those agreements,” noted Bill Taylor, NASM’s legal counsel. “But if the marketer has met its volume commitment, Shell can’t complain about lost profits. Shell is essentially taking the position that, because it is unable to sell the Shell branded gasoline at the marketer’s location, it is stuck with that gasoline and will, therefore, lose profits on it. We believe Shell will actually sell the gasoline to someone else.” According to Shell, since the beginning of 2007, new contracts have had revised language “to clarify the point around the collection of unrealized volume.” 

“We don’t believe the revised contract language changed the existing terms or our ability to seek liquidated damages,” said Anne Bryan Peebles, a spokesperson for Shell. ” The revised language is simply an attempt to clarify the language around collection of liquidated damages for not fulfilling incentive contract terms.

“Shell and Motiva have contracts in place to protect both parties during the length of the incentive agreement, and it is our position that this provision is an option Shell has to lessen the economic loss we suffer as the result of a location not fulfilling a mutually agreed to contract term. Shell and Motiva intend on honoring each of our agreements and we fully expect our wholesalers to do the same.” 

Still, Peebles said the company will continue to evaluate contract issues on a case-by-case basis to insure it reaches “a fair and balanced resolution that take into effect all circumstances surrounding contract violations by Shell wholesalers. On occasion, extenuating circumstances can arise that may affect contractual performance and, as Shell and Motiva have done in the past, we will work with wholesalers to mutually resolve such issues.”

On the other hand, she said, when a wholesaler is clearly in breach of its contractual commitments to Shell and there are no extenuating circumstances justifying such a breach, the oil company reserves the right to enforce its legal rights under the Wholesale Marketer Agreement and any incentive agreement entered into with the wholesaler. 

The contractual language beginning in 2007 states Shell will collect up to 2 cents per gallon, based on the gallonage figure determined when the incentive agreement is initially reached, she confirmed. “The expectation is that most will be calculated at 2 cents per gallon, and that the amount owed will be based on the remaining estimated volume not purchased for resale at the outlet during the term of the brand commitment,” she explained. 

Smith, however, contends the profits loss calculation is subjective. “No one has a crystal ball on what would be sold,” he said.

Perhaps more importantly, though, is the provision hurts Shell-branded marketers who are trying to sign new dealers, Taylor said.

“Dealers may find other major brands’ agreements less risky,” he noted, “and it’s difficult to pass this commitment and potential liability on to a new dealer if the penalty for signing up with Shell is much more substantial than signing up with another refiner.”

If a wholesale marketer tell a new dealer the marketer will assume the potential “lost profits” if that dealer switches brands for any reason, the marketer is on the hook for it. “To put this burden on the Shell marketer is unfair,” Taylor said. 

Peebles, though, said Shell continues to grow through the wholesale channel. “Shell has provided our wholesalers best-in-the-industry marketing tools in the form of a robust fuels advertising program, a top NASCAR team sponsorship, a ‘build-your-own’ building incentive programs and credit card marketing and loyalty programs,” she said. “Additionally, our sales team is focused on growth through wholesale.”

http://www.csnews.com/csn/news/article_display.jsp?vnu_content_id=1003834979

This website and sisters royaldutchshellplc.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.

Comments are closed.