Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd
[1968] A.C. 269(Judgment by: Lord Morris of Borth-y-Gest)
Between: Esso Petroleum Co Ltd - Appellant
And: Harper's Garage (Stourport) Ltd - Respondent
Judges:
Lord Reid
Lord Morris of Borth-y-GestLord Hodson
Lord Pearce
Lord Wilberforce
Subject References:
MORTGAGE
Equity of redemption
Restraint of trade
Mortgage tied with sales agreement with oil company for sale of petrol
Mortgage irredeemable for 21 years with sales tie
Whether doctrine of restraint of trade applicable to covenants in mortgage
Whether mortgage unreasonable and invalid
Whether mortgage oppressive and redeemable
RESTRAINT OF TRADE
Sale of goods
Restriction on brand of goods
Tied garages
Sales agreements with oil companies for sale of petrol
Agreements for four years and five months and 21 years respectively
Mortgage of garage irredeemable for 21 years with sales tie
Whether agreements in unlawful restraint of trade
whether Reasonable
Whether categories closed
Restrictions falling within doctrine
Whether applicable to covenants in mortgage
Judgment date: 23 February 1967
Judgment by:
Lord Morris of Borth-y-Gest
My Lords, we have been concerned in this case to decide as to the application of competing principles of law. In a system of law not contained in any formal code decision is reached by applying settled or recognised principle to particular ascertained facts. But in some situations more than one principle may be relevant and important. Particularly is this so where principles have, as their foundation, the dictates of public policy. That has been so in the case of those which have been prominent in the arguments in this case. The respondent company (Harper's) assert, while the appellants (Esso) deny, that what is generally called the "doctrine" of restraint of trade must be considered in reference to the solus agreements: if so, then the agreements must pass a test of reasonableness before they can qualify to be enforceable. Whether the doctrine must be considered and, if so, with what result is now the effective issue in the litigation, though it was not at first raised and, indeed, only emerged as an issue on the eve or at the commencement of the trial.
The law has for many centuries set itself against restraint of trade. Monopolies, likewise, have always been in disfavour with the law. In keeping with this, arrangements are condemned which have as their mere purpose the elimination of competition. Restraints which would result in preventing a man from pursuing his trade and earning his living may be injurious to the man himself and to a family dependent on his support and may be detrimental to the public interest. (See Mitchel v. Reynolds. [F24] The abhorrence of such restraints can be strong enough to prevail over certain well-accepted principles. In general, the law recognises that there is freedom to enter into any contract that can lawfully be made. The law lends its weight to uphold and enforce contracts freely entered into. The law does not allow a man to derogate from his grant. If someone has sold the goodwill of his business, some restraint to enable the purchaser to have that which he has bought may be recognised as reasonable. Some restraints to ensure the protection of confidential information may be similarly regarded. The law recognises that if business contracts are fairly made by parties who are on equal terms such parties should know their business best. If there has been no irregularity, the law does not mend or amend contracts merely for the relief of those for whom things have not turned out well. But when all this is fully recognised yet the law, in some circumstances, reserves a right to say that a contract is in restraint of trade and that to be enforceable it must pass a test of reasonableness. In the competition between varying possible principles applicable, that which makes certain covenants in restraint of trade unenforceable will in some circumstances be strong enough to prevail. Public policy will give it priority. It will have such priority because of the reasonable necessity to ensure and preserve freedom of trade.
Some words spoken by Sir George Jessel M.R. in Printing and Numerical Registering Co. v. Sampson, [F25] may, however, be kept in mind. He said:
"It must not be forgotten that you are not to extend arbitrarily those rules which say that a given contract is void as being against public policy, because if there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by courts of justice. Therefore, you have this paramount public policy to consider - that you are not lightly to interfere with this freedom of contract."
To a similar purport were some words by Scrutton L.J. in his judgment in English Hop Growers Ltd. v. Dering, [F26] when he said:
"I have always myself regarded it as in the public interest that parties who, being in an equal position of bargaining, make contracts, should be compelled to perform them, and not to escape from their liabilities by saying that they had agreed to something which was unreasonable."
While accepting the power and weight of these observations it can be remembered that, even if a contract is in restraint of trade, it will nevertheless be enforceable, provided always that the restriction is reasonable in reference to the interest of the parties and in reference to the interest of the public. Though a person has not been under any compulsion nor has laboured under any deception when making a contract under which he agrees to a restraint in trade, yet in some circumstances the law allows him to seek to defend himself from compliance with the terms of the restraint by inviting the court to say that the contract should not be enforced.
As, therefore, the policy of the law is to uphold freedom to contract and also to uphold freedom to trade, a certain adjustment is necessary. In his speech in Herbert Morris Ltd. v. Saxelby [F27] Lord Shaw said:
"The delicacy of the operation of law in settling the bounds of either freedom has been long familiar. In these cases, as I have pointed out, there are two freedoms to be considered - one the freedom of trade and the other the freedom of contract: and to that I will now again venture to add that it is a mistake to think that public interest is only concerned with one; it is concerned with both."
The inquiry is raised as to what are the circumstances in which the doctrine applies. In particular in the present case the question arises whether it can be said that the solus agreements by their terms involve a restraint of trade. If they do, then it is contended by Esso that the doctrine or principle of restraint of trade never has application to a restraint which is imposed upon the trading use to be made of a particular piece of land.
A review of the authorities shows that in some groups of cases there has been no assertion that the doctrine or principle of restraint of trade applies. It is said, therefore, that there are classes of cases in which the doctrine does not apply, and attempt is made to define those groups of cases in which alone the doctrine does apply. For my part, I doubt whether it is possible or desirable to record any very rigid classification of groups of cases. Nor do I think that any firm inference can be deduced from the circumstance that in respect of certain groups of cases no one has claimed that the doctrine applies or has sought to invoke it. That might be for the reason that there are some situations in which it would not be thought by anyone that the doctrine could successfully be invoked. In some cases it matters not whether it is said that the doctrine does not apply or whether it is said that a restraint would so obviously pass the test of reasonableness that no one would be disposed even to seek to invoke the doctrine. I take the test to be as laid down by Lord Macnaghten in his speech in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd.: [F28]
"All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public."
When attempt is made to define what is meant by a contract in restraint of trade, words are used which are of far-reaching application. Thus Lord Denning M.R., in Petrofina (Great Britain) Ltd. v. Martin, [F29] said:
"Every member of the community is entitled to carry on any trade or business he chooses and in such manner as he thinks most desirable in his own interests so long as he does nothing unlawful: with the consequence that any contract which interferes with the free exercise of his trade or business, by restricting him in the work he may do for others, or the arrangements which he may make with others, is a contract in restraint of trade. It is invalid unless it is reasonable as between the parties and not injurious to the public interest."
So Diplock L.J. in the same case said: [F30]
"A contract in restraint of trade is one in which a party (the covenantor) agrees with any other party (the covenantee) to restrict his liberty in the future to carry on trade with other persons not parties to the contract in such manner as he chooses."
These are helpful expositions, provided they are used rationally and not too literally. Thus, if A made a contract under which he willingly agreed to serve B on reasonable terms for a few years and to give his whole working time to B, it would be surprising indeed if it were sought to describe the contract as being in restraint of trade. In fact such a contract would very likely be for the advancement of trade. Yet counsel for Harper's did not shrink from the assertion that every contract of personal service is a contract in restraint of trade. I cannot think that either authority or logic requires acceptance of so extreme a view.
I approach the present case by considering first whether the agreements made by Harper's should, in a reasonable sense, be regarded as in restraint of trade and, if they are to be so considered, secondly, the submission which was made that, since the restriction can be said to be a restriction of the trading use to be made of a particular piece of land, the doctrine of restraint of trade has no application.
The essence of the agreement of June 27, 1963, in reference to Mustow Green Garage was that Harper's became tied to Esso. Harper's agreed to buy from Esso their total requirements of motor fuels for resale at Mustow Green Garage. They agreed also to operate the garage in accordance with the Esso dealer co-operation plan, one term of which was:
"To keep the service station open at all reasonable hours for the sale of Esso motor fuels and Esso motor oils."
I cannot accept the contention that there was no positive obligation in regard to operating the garage, but only an agreement as to method of operation, if the garage was in fact being operated. In my view, Harper's agreed to operate the garage in a particular way and, above all, they agreed to take all their requirements of motor fuels from Esso. Implied in this was an undertaking not to sell any other motor fuels than those of Esso. The very basis of the agreement was restrictive. It was designed to ensure that Harper's would not sell any of the motor fuels that competed with Esso. It restricted the manner in which Harper's would carry on their business. The supply agreement, dated July 5, 1962, in reference to the Corner Garage had in general the same features.
If the agreements are regarded, as I think that they must be, as being prima facie in restraint of trade, then the question arises whether there is validity in the contention that the restriction was merely of the trading use to be made of a particular piece of land and that, as a consequence, there was exclusion of the applicability of the doctrine of restraint of trade. It was powerfully argued that it has long been accepted that a covenant in a lease of premises which prohibits the carrying-on of any trade or business upon the premises is not subject to the tests of being reasonable as between parties and not injurious to the public interest: and it was argued that the reason for this can be stated to be that the doctrine of restraint of trade applies to agreements which in substance restrict the trade that a person may engage in, yet it does not apply to agreements which in substance merely restrict the use to be made of a particular piece of land. It was said that Harper's covenants did not limit their activities anywhere else than on particular pieces of land, that is, at their two garages.
There is a considerable difference between the covenants in the present case and covenants of the kind which might be entered into by a purchaser or by a lessee. If one who seeks to take a lease of land knows that the only lease which is available to him is a lease with a restriction, then he must either take what is offered (on the appropriate financial terms) or he must seek a lease elsewhere. No feature of public policy requires that if he freely contracted he should be excused from honouring his contract. In no rational sense could it be said that if he took a lease with a restriction as to trading he was entering into a contract that interfered with the free exercise of his trade or his business or with his "individual liberty of action in trading." His freedom to pursue his trade or earn his living is not impaired merely because there is some land belonging to someone else upon which he cannot enter for the purposes of this trade or business. In such a situation (that is, that of voluntarily taking a lease of land with a restrictive covenant) it would not seem sensible to regard the doctrine of restraint of trade as having application. There would be nothing which could be described as interference with individual liberty of action in trading. There is a clear difference between the case where someone fetters his future by parting with a freedom which he possesses and the case where someone seeks to claim a greater freedom than that which he possesses or has arranged to acquire. So, also, if someone seeks to buy a part of the land of a vendor and can only buy on the terms that he will covenant with the vendor not to put the land to some particular use, there would seem in principle to be no reason why the contract should not be honoured.
The agreements made by Harper's were quite different. Harper's had their garages. Esso had no interest in them or in the land on which they were situated. By the agreements, Harper's agreed for periods of years to limit and restrict their trading activity. They agreed (in general) not to sell any motor fuels other than those of Esso. Prima facie the agreements were in restraint of trade. They were naked covenants or covenants in gross. As covenants they seem to me to have more of a personal character than of a property character. They were concerned with the way in which Harper's would carry on their garages and their businesses. As Harman L.J. said in the Petrofina case, [F31] it is a person who trades and not the land.
It is agreed that no case has been cited which lays down or upholds the wide proposition that the doctrine of restraint of trade can have no application to a covenant which is merely restrictive of the trading use to be made of a particular piece of land. If such a proposition were held to be sound, then, as Diplock L.J. pointed out in the Petrofina case, [F32] there would be scope to reframe radius covenants in restraint of trade, even where the radius was very wide, as covenants not to carry on a particular trade in a particular manner on any premises in a defined area.
Indeed, as most activities and enterprises take place in some way or other on or in connection with land, it would be possible, if the proposition were upheld, to frame a great many covenants so as to avoid their being open to the tests to which covenants in restraint of trade must submit. But, apart from this consideration, there are cases in the books which point to the novelty of the proposition. Thus, in English Hop Growers Ltd. v. Dering [F33] the defendant undertook to deliver to the plaintiffs all the hops grown or produced by him in a particular year on land of a certain acreage. He contended that the agreement was not enforceable because it was in restraint of trade. The court did not say that the contention could not be advanced. They did not say that as the defendant's undertaking was restrictive of the trading use that he was making of his land the contention was not open to him. The court considered the contention but held that the undertaking of the defendant was not unreasonable: accordingly it was enforced.
In another case, Servais Bouchard v. Prince's Hall Restaurant Ltd. [F34] the defendants agreed (for a consideration) to give the plaintiffs the exclusive right of supplying certain wine for the defendants' restaurant. To a claim made by the plaintiffs for a breach of the agreement one plea made by the defendants was that the contract was void as being in restraint of trade and unlimited in time. Henn Collins M.R. in his judgment said that, in his opinion, the case did not come within the principle by which contracts in restraint of trade were held to be invalid as being contrary to public policy. He thought that contracts such as those by which persons bound themselves to supply customers with goods obtained from a particular merchant exclusively were for the benefit of the community. He pointed out that contracts for sole agency were matters of everyday occurrence. He said that, if the contract was one of a kind which might be treated as violating the common law rule against contracts in restraint of trade, the circumstances were such as to bring in the element of reasonableness, which afforded an answer to the general rule. Stirling L.J. in his judgment considered, and gave reasons for rejecting, the contention that the contract, being unlimited in point of time, was in restraint of trade. He did not suggest that, as the defendants' agreement was restrictive of the trading use that they would make of their premises, their plea was not open to them and could not be considered.
In another case, Foley v. Classique Coaches Ltd., [F35] the plaintiff agreed to sell a piece of land (adjoining other land belonging to him) to the defendants, who proposed to use the land for their business as motor coach proprietors. The sale took place. The sale was made subject to the defendants entering into another agreement, which they did, to buy from the plaintiff (who had a petrol-filling station on his adjoining land) all the petrol that they needed for the running of their business as motor coach proprietors so long as the plaintiff was able to supply them. In proceedings by the plaintiff to enforce this latter agreement, one contention of the defendants was that the agreement was an unreasonable and unnecessary restraint of the defendants' trade and was contrary to public policy and illegal. It was held that there was no "undue" restraint of trade. It does not appear to have been suggested that, as the defendants' agreement was restrictive of the trading use that they would make of the land which they acquired, the doctrine of restraint of trade could not possibly have application or be raised for consideration.
For the reasons which I have set out, and subject to what I have said above, I am unable to accept the contention in its wide form that in no circumstances can the doctrine of restraint of trade apply to contracts or covenants regulating the trading use to be made of a particular plot of land. The agreements made in reference to the two garages of Harper's were, in my view, agreements in restraint of trade. The question, therefore, arises whether the agreements can pass the tests of reasonableness. Esso allege that the agreements were reasonable as between the parties. The onus is on them to show that this is so. They must show that the restraint affords them no more than adequate protection for those interests which they have a right to have protected. In Herbert Morris Ltd. v. Saxelby [F36] Lord Parker of Waddington so stated the matter. In speaking of the covenantor he added:
"As long as the restraint to which he subjects himself is no wider than is required for the adequate protection of the person in whose favour it is created, it is in his interest to be able to bind himself for the sake of the indirect advantages he may obtain by so doing."
It becomes necessary to consider separately the agreements in reference to the two respective garages. In doing so, however, the nature of Esso's legitimate interests qualifying for protection must be remembered. There was evidence that they had expended a large sum of money in erecting refineries. They spent money in the operation of their dealer co-operation plan. Following their initiative in introducing solus agreements, other companies followed suit, with the result that, at the time of the hearing before the learned judge, out of 36,000 "outlets" in the United Kingdom at which a motorist could buy motor fuels, nearly 35,000 were subject to solus agreements. Of the 35,000 over 6,600 were with Esso. The circumstances that there are solus agreements in respect of so high a proportion of garages undoubtedly brings it about that delivery charges are reduced. Overall planning can effect further economies. All these and kindred considerations demonstrate that it is essential for Esso to be able to plan ahead. In particular, in order to ensure that they will be able to sell the motor fuel that they will produce for distribution, it will be reasonable for them to have secure outlets. And, as solus agreements became so much a feature of the trade and contained some features which were advantageous to garage proprietors, it was reasonable for Harper's to make arrangements in conformity with current practice. This all indicates, in my view, that, from the point of view of time alone, solus agreements which last for a few years are capable of being adjudged to be reasonable.
In the case of the Mustow Green Garage the duration of the solus agreement was four years and five months. Though that period was arranged because it was the unexpired period under a former agreement which had been made in reference to that garage, I think that the question to be decided is whether the appellants have established that the tie as arranged for that period was reasonable as between the parties. When the agreement was made (in June, 1963), price maintenance was in existence, and Harper's agreed to abide by the retail schedule prices as fixed by Esso, if they were so fixed. Though at a later date price maintenance no longer continued, it is pertinent to note that under the agreement Harper's were obliged to buy from Esso their total requirements of motor fuels for resale and to buy at Esso's wholesale schedule price. Harper's had a rebate from the price as fixed. Esso could, therefore, themselves fix their schedule price from time to time. Also, there was nothing to prevent them from selling directly to some others (farmers and traders) at a price less than that which they fixed as their wholesale schedule price. In addition to being obligated only to buy from Esso, Harper's agreed to keep the filling station open (at all reasonable hours) and agreed only to sell or transfer to someone who would undertake the obligations for any remaining period. Though in regard to the price that Harper's would have to pay Esso for their motor fuel, Harper's were in one sense at the mercy of Esso, it is reasonable to assume that Esso would wish to arrange matters in such manner as was best calculated to bring about a high volume of trade in Esso motor fuels. They would naturally have regard to the prices fixed by others and also to the circumstance that there existed a certain number of garages not bound by any ties. From a business point of view Harper's were not being unwise in entering into a solus agreement of only a few years' duration: but, whether they were or not, they freely entered into it and it was their decision to repose a measure of confidence in Esso. I consider, therefore, that the real problem in the case of the Mustow Green contract is to decide whether for a contract of its nature a duration of four years and five months makes the contract unreasonable as between the parties. Though the evidence adduced by Esso might have been more ample, and probably would have been had the litigation been initiated on the lines along which it has later developed, I consider that Esso did discharge the onus of showing that the contract was reasonable as between the parties.
In the case of the Corner Garage the arrangements were very different. There was a solus agreement. There was also a loan agreement and a mortgage. The solus agreement (dated July 5, 1962) was for a period of 21 years. It was in similar terms to the solus agreement relating to the Mustow Green Garage. Esso lent a sum of £7,000 to Harper's for the purpose of helping Harper's to buy the Corner Garage and to improve it and, by the loan agreement (dated July 12, 1962) Harper's agreed to purchase all their requirements of motor fuels from Esso until the loan and interest had been repaid. Furthermore, Harper's were to grant a mortgage to Esso as security for the loan. By the mortgage (dated October 6, 1962), Harper's were to pay off the loan (with interest) over a period of 21 years. Harper's could only redeem in accordance with the agreement as to repayment - with the result that they could not redeem for 21 years. In the mortgage deed there was also a covenant by Harper's to occupy the garage and to conduct it and keep it open during normal business hours as retailers of motor fuels and there was a covenant to purchase motor fuels exclusively from Esso. There were various other provisions of importance.
A consideration of the facts and the documents leads me to the view that the solus agreement, the loan agreement and the mortgage can be linked together as incidents of one transaction and that the intention was that in providing that the mortgage should be irredeemable for the period of the tie it should become a support for the solus agreement. It was the contention of Esso that the doctrine of restraint of trade does not apply to covenants contained in mortgages of land. As to this I will content myself with expressing agreement with the Court of Appeal, that the doctrine of restraint of trade does apply to mortgages. In regard to the period of 21 years I consider that Esso have failed to show that a period of that length was reasonable in the interests of the parties. There was an unreasonable restraint of trade and the inclusion of it in the mortgage which was made irredeemable for the period went beyond what could be justified as a protection of Esso's interest to secure their loan. I agree with the Court of Appeal that in the circumstances Esso should be entitled to redeem.
In the result I would allow the appeal in regard to the Mustow Green Garage and I would dismiss the appeal in regard to the Corner Garage.