Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd
[1968] A.C. 269(Decision by: Lord Reid)
Between: Esso Petroleum Co Ltd - Appellant
And: Harper's Garage (Stourport) Ltd - Respondent
Judges:
Lord ReidLord Morris of Borth-y-Gest
Lord 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
Decision by:
Lord Reid
My Lords, the appellants are a large company whose most important product is Esso petrol, most of which is sold by them to garages and filling stations for resale to the public. The respondent company own two garages: they contracted with the appellants under what are known as solus agreements and bound themselves for the periods of those agreements, inter alia, to sell at their garages Esso petrol and no other. When cheaper "cut price" petrol came on the market they began to sell it and ceased to sell Esso petrol. The appellants then raised two actions, now consolidated, to prevent this: they sought injunctions to restrain the respondents from buying otherwise than from them any motor fuel for resale at these garages. On March 17, 1955, Mocatta J. granted an injunction, but on appeal the Court of Appeal set aside this order on the ground that the ties in these agreements were in restraint of trade and were unenforceable. The appellants now maintain first that these ties were not in restraint of trade and secondly that, if they were, they were in the circumstances valid and enforceable.
The earlier agreement related to the Corner Garage, Stourport, and was to remain in force for 21 years from July 1, 1962. But, as the case with regard to it is complicated by there being a mortgage in security for money lent by the appellants to the respondents, I shall first consider the second agreement which related to the Mustow Green Garage near Kidderminster. This agreement was to remain in force for four years and five months from July 1, 1963. It appears that the appellants had a similar agreement with the previous owners of that garage and that this period was chosen because it was the unexpired period of that earlier agreement.
The main provisions of the Mustow Green agreement are that while it remained in force the respondents agreed to buy from the appellants their total requirements of motor fuels for resale at that garage and agreed to keep it open at all reasonable hours for the sale of Esso motor fuels and Esso motor oils, and in return the appellants agreed to sell to the respondents at their wholesale schedule price at the time of delivery, and to allow a rebate from that price of one penny farthing per gallon payable quarterly. There were a number of other provisions with regard to advertising, service at the garage, etc., which I shall not specify because they do not appear to me to assist in determining the questions at issue. But there are two other provisions which I must notice. If the respondents wished to dispose of the garage they were not to do so except to a person who agreed to be substituted for them for all purposes of this agreement. If the agreement is otherwise unobjectionable, I do not think that this provision can invalidate it, because it was only by some such means that the appellants could ensure that their petrol would continue to be sold at this garage for the full period of the agreement. The other is a provision for retail price maintenance which the appellants at that time inserted in all their numerous tieing agreements with garages and filling stations. Shortly before the present action was raised the appellants intimated that they would not enforce this clause against any of their tied customers. The respondents were in favour of retail price maintenance and their original defence was that this change of policy by the appellants entitled them to rescind the whole agreement for the tie. This defence was rejected by Mocatta J. and it has not been maintained before your Lordships.
So I can now turn to the first question in this appeal - whether this agreement is to be regarded in law as an agreement in restraint of trade. The law with regard to restraint of trade is of ancient origin. There are references to it in the Year Books and it seems to have received considerable attention in the time of Queen Elizabeth I. But the old cases lie within a narrow compass. It seems to have been common for an apprentice or a craftsman to agree with his master that he would not compete with him after leaving his service, and also for a trader who sold his business to agree that he would not thereafter compete with the purchaser of his business. But no early case was cited which did not fall within one or other of these categories. And even in recent times there have been surprisingly few reported cases falling outside these categories in which restraint of trade has been pleaded: we were informed by counsel that there are only about 40 English cases which can be traced. On the other hand, there is an immense body of authorities with regard to the two original categories. I have not found it an easy task to determine how far principles developed for the original categories have been or should be extended.
The most general statement with regard to restraint of trade is that of Lord Parker in Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd. [F1] He said:
"Monopolies and contracts in restraint of trade have this in common, that they both, if enforced, involve a derogation from the common law right in virtue of which any member of the community may exercise any trade or business he pleases and in such manner as he thinks best in his own interests."
But that cannot have been intended to be a definition: all contracts in restraint of trade involve such a derogation but not all contracts involving such a derogation are contracts in restraint of trade. Whenever a man agrees to do something over a period he thereby puts it wholly or partly out of his power to "exercise any trade or business he pleases" during that period. He may enter into a contract of service or may agree to give his exclusive services to another: then during the period of the contract he is not entitled to engage in other business activities. But no one has ever suggested that such contracts are in restraint of trade except in very unusual circumstances, such as those in Young v. Timmins, [F2] where the servant had agreed not to work for anyone else but might have been given no work and received no remuneration for considerable periods and thus have been deprived of a livelihood: the grounds of judgment may not now be correct but I think that the case was rightly decided.
That Lord Parker cannot have intended those words to be a definition is I think made clear by a passage lower on the same page of the report: [F3]
"Contracts in restraint of trade were subject to somewhat different considerations. There is little doubt that the common law in the earlier stages of its growth treated all" (my italics) "such contracts as contracts of imperfect obligation, if not void for all purposes; they were said to be against public policy in the sense that it was deemed impolitic to enforce them."
He certainly never supposed that all contracts which by obliging a man to act in one way (for example, as a servant) prevented him from doing other things had ever been held to be of imperfect obligation or against public policy.
The leading case of Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co. Ltd. [F4] fell within the old categories, and it may be misleading to take the well-known passages out of context and try to apply them to cases of quite different nature. Lord Macnaghten said: [F5]
"The public have an interest in every person's carrying on his trade freely: so has the individual. 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."
By "interference" he meant interference to which the individual had agreed by contract but I am sure that he did not mean to include all cases in which one party had "interfered" with the liberty of another by getting him to agree to give his whole time to the other party's affairs. He had said: [F6]
"In the age of Queen Elizabeth all restraints of trade, whatever they were, general or partial, were thought to be contrary to public policy, and therefore void."
So he only had in mind the two original kinds of case. There was no need in Nordenfelt's case [F7] to attempt to define other classes of case to which the doctrine of restraint would apply.
If a contract is within the class of contracts in restraint of trade the law which applies to it is quite different from the law which applies to contracts generally. In general unless a contract is vitiated by duress, fraud or mistake its terms will be enforced though unreasonable or even harsh and unconscionable, but here a term in restraint of trade will not be enforced unless it is reasonable. And in the ordinary case the court will not remake a contract: unless in the special case where the contract is severable, it will not strike out one provision as unenforceable and enforce the rest. But here the party who has been paid for agreeing to the restraint may be unjustly enriched if the court holds the restraint to be too wide to be enforceable and is unable to adjust the consideration given by the other party.
It is much too late now to say that this rather anomalous doctrine of restraint of trade can be confined to the two classes of case to which it was originally applied. But the cases outside these two classes afford little guidance as to the circumstances in which it should be applied. In some it has been assumed that the doctrine applies and the controversy has been whether the restraint was reasonable. And in others where one might have expected the point to be taken it was not taken, perhaps because counsel thought that there was no chance of the court holding that the restraint was too wide to be reasonable.
In McEllistrim v. Ballymacelligott Co-operative Agricultural and Dairy Society Ltd. [F8] the society had changed its rules so as to prevent any member from selling (except under heavy penalty) any milk produced by him in a large area of County Kerry to anyone except the society, and a member could not terminate his membership without the society's permission. The plaintiff, who was a member, sought a declaration that the new rules were in unreasonable restraint of trade. Lord Birkenhead L.C. assumed that they were in restraint of trade and held that they were unreasonable, as did Lord Atkinson and Lord Shaw. Lord Finlay said, [F9] having referred to Herbert Morris Ltd. v. Saxelby [F10]
"The present case is really governed by the principle there enunciated that 'public policy requires that every man shall be at liberty to work for himself and shall not be at liberty to deprive himself or the state of his labour, skill or talent, by any contract that he enters into.' This is equally applicable to the right to sell his goods."
I doubt whether this last sentence is quite accurate. It would seem to mean that every contract by which a man (or a company) agrees to sell his whole output (or even half of it) for any future period to the other party to the contract is a contract in restraint of trade because it restricts his liberty to sell as he pleases, and is therefore unenforceable unless his agreement can be justified as being reasonable. There must have been many ordinary commercial contracts of that kind in the past but no one has ever suggested that they were in restraint of trade. But McEllistrim's case [F11] at least establishes that there comes a point at which such a contract can come within the doctrine of restraint of trade.
In English Hop Growers Ltd. v. Dering [F12] "the defendant had agreed to sell his crop of hops to the society for five years. He failed to do so and was sued: in defence he pleaded that the contract was in restraint of trade. The restraint was held to be reasonable but both Scrutton L.J. and the other members of the court appear to have been prepared to treat this as a contract in restraint of trade. This was not just an ordinary agreement, it was rather a marketing scheme accepted by the great majority of English hop growers.
In Foley v. Classique Coaches Ltd. [F13] the purchaser of a piece of land agreed with the seller to take from him all the petrol required for the purchaser's business carried on there. The question whether this was in restraint of trade was dealt with briefly, Scrutton L.J. merely saying [F14] that it was not in "undue restraint of trade." In Servais Bouchard v. Prince's Hall Restaurant Ltd. [F15] the Court of Appeal held valid a contract by which the restaurant agreed to take all burgundy sold there from the plaintiffs. It is not very clear whether they held that this was not in restraint of trade or that, though in restraint of trade, it was reasonable.
In United Shoe Machinery Co. of Canada v. Brunet [F16] the company leased machinery under a condition that it should not be used in conjunction with machinery made by any other manufacturer. and it was held that this condition was not in restraint of trade. I do not think that the reasons given for the decision are very satisfactory. Mogul Steamship Co. Ltd. v. McGregor, Gow & Co. [F17] is relied on. There an association of shipowners agreed to use various lawful means to dissuade customers from shipping their goods by the Mogul line. It was held that this agreement was lawful in the sense that it gave the Mogul Company no right to sue them. But it was recognised at least by the majority of their Lordships that the agreement would have been unenforceable as between the members of the association. Lord Watson said: [F18]
"... an agreement by traders to combine for a lawful purpose, and for a specified time, is not binding upon any of the parties to it if he chooses to withdraw, and consequently cannot be enforced in invitum."
One must always bear in mind that an agreement in restraint of trade is not generally unlawful if the parties choose to abide by it: it is only unenforceable if a party chooses not to abide by it.
The main argument submitted for the appellant on this matter was that restraint of trade means a personal restraint and does not apply to a restraint on the use of a particular piece of land. Otherwise, it was said, every covenant running with the land which prevents its use for all or for some trading purposes would be a covenant in restraint of trade and therefore unenforceable unless it could be shown to be reasonable and for the protection of some legitimate interest. It was said that the present agreement only prevents the sale of petrol from other suppliers on the site of the Mustow Green Garage: It leaves the respondents free to trade anywhere else in any way they choose. But in many cases a trader trading at a particular place does not have the resources to enable him to begin trading elsewhere as well, and if he did he might find it difficult to find another suitable garage for sale or to get planning permission to open a new filling station on another site. As the whole doctrine of restraint of trade is based on public policy its application ought to depend less on legal niceties or theoretical possibilities than on the practical effect of a restraint in hampering that freedom which it is the policy of the law to protect.
It is true that it would be an innovation to hold that ordinary negative covenants preventing the use of a particular site for trading of all kinds or of a particular kind are within the scope of the doctrine of restraint of trade. I do not think they are. Restraint of trade appears to me to imply that a man contracts to give up some freedom which otherwise he would have had. A person buying or leasing land had no previous right to be there at all, let alone to trade there, and when he takes possession of that land subject to a negative restrictive covenant he gives up no right or freedom which he previously had. I think that the "tied house" cases might be explained in this way, apart from Biggs v. Hoddinott, [F19] where the owner of a freehouse had agreed to a tie in favour of a brewer who had lent him money. Restraint of trade was not pleaded. If it had been, the restraint would probably have been held to be reasonable. But there is some difficulty if a restraint in a lease not merely prevents the person who takes possession of the land under the lease from doing certain things there, but also obliges him to act in a particular way. In the present case the respondents before they made this agreement were entitled to use this land in any lawful way they chose, and by making this agreement they agreed to restrict their right by giving up their right to sell there petrol not supplied by the appellants.
In my view this agreement is within the scope of the doctrine of restraint of trade as it had been developed in English law. Not only have the respondents agreed negatively not to sell other petrol but they have agreed positively to keep this garage open for the sale of the appellants' petrol at all reasonable hours throughout the period of the tie. It was argued that this was merely regulating the respondent's trading and rather promoting than restraining his trade. But regulating a person's existing trade may be a greater restraint than prohibiting him from engaging in a new trade. And a contract to take one's whole supply from one source may be much more hampering than a contract to sell one's whole output to one buyer. I would not attempt to define the dividing line between contracts which are and contracts which are not in restraint of trade, but in my view this contract must be held to be in restraint of trade. So it is necessary to consider whether its provisions can be justified.
But before considering this question I must deal briefly with the other agreement tying the Corner Garage for 21 years. The rebate and other advantages to the respondents were similar to those in the Mustow Green agreement but in addition the appellants made a loan of £7,000 to the respondents to enable them to improve their garage and this loan was to be repaid over the 21 years of the tie. In security they took a mortgage of this garage. The agreement provided that the loan should not be paid off earlier than at the dates stipulated. But the respondents now tender the unpaid balance of the loan and they say that the appellants have no interest to refuse to accept repayment now, except in order to maintain the tie for the full 21 years.
The appellants argue that the fact that there is a mortgage excludes any application of the doctrine of restraint of trade. But I agree with your Lordships in rejecting that argument. I am prepared to assume that, if the respondents had not offered to repay the loan so far as it is still outstanding, the appellants would have been entitled to retain the tie. But, as they have tendered repayment, I do not think that the existence of the loan and the mortgage puts the appellants in any stronger position to maintain the tie than they would have been in if the original agreements had permitted repayment at an earlier date. The appellants must show that in the circumstances when the agreement was made a tie for 21 years was justifiable.
It is now generally accepted that a provision in a contract which is to be regarded as in restraint of trade must be justified if it is to be enforceable, and that the law on this matter was correctly stated by Lord Macnaghten in the Nordenfelt case. [F20] He said:
"... 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."
So in every case it is necessary to consider first whether the restraint went farther than to afford adequate protection to the party in whose favour it was granted, secondly whether it can be justified as being in the interests of the party restrained, and, thirdly, whether it must be held contrary to the public interest. I find it difficult to agree with the way in which the court has in some cases treated the interests of the party restrained. Surely it can never be in the interest of a person to agree to suffer a restraint unless he gets some compensating advantage, direct or indirect. And Lord Macnaghten said: [F20] "... of course the quantum of consideration may enter into the question of the reasonableness of the contract."
Where two experienced traders are bargaining on equal terms and one has agreed to a restraint for reasons which seem good to him the court is in grave danger of stultifying itself if it says that it knows that trader's interest better than he does himself. But there may well be cases where, although the party to be restrained has deliberately accepted the main terms of the contract, he has been at a disadvantage as regards other terms: for example where a set of conditions has been incorporated which has not been the subject of negotiation - there the court may have greater freedom to hold them unreasonable.
I think that in some cases where the court has held that a restraint was not in the interests of the parties it would have been more correct to hold that the restraint was against the public interest. For example, in Kores Manufacturing Co. Ltd. v. Kolok Manufacturing Co. Ltd. [F21] the parties had agreed that neither would employ any man who had left the service of the other. From their own points of view there was probably very good reason for that. But it could well be held to be against the public interest to interfere in this way with the freedom of their employees. If the parties chose to abide by their agreement an employee would have no more right to complain than the Mogul Company had in the Mogul case. [F22] But the law would not countenance their agreement by enforcing it. And in cases where a party, who is in no way at a disadvantage in bargaining, chooses to take a calculated risk, I see no reason why the court should say that he has acted against his own interests: but it can say that the restraint might well produce a situation which would be contrary to the public interest.
Again, whether or not a restraint is in the personal interests of the parties, it is I think well established that the court will not enforce a restraint which goes further than affording adequate protection to the legitimate interests of the party in whose favour it is granted. This must I think be because too wide a restraint is against the public interest. It has often been said that a person is not entitled to be protected against mere competition. I do not find that very helpful in a case like the present. I think it better to ascertain what were the legitimate interests of the appellants which they were entitled to protect and then to see whether these restraints were more than adequate for that purpose.
What were the appellants' legitimate interests must depend largely on what was the state of affairs in their business and with regard to the distribution and sale of petrol generally. And those are questions of fact to be answered by evidence or common knowledge. In the present case restraint of trade was not pleaded originally and the appellants only received notice that it was to be raised a fortnight before the trial. They may have been wise in not seeking a postponement of the trial when the pleadings were amended. But the result has been that the evidence on this matter is scanty. I think however that it is legitimate to supplement it from the considerable body of reported cases regarding solus agreements and from the facts found in the Report of the Monopolies Commission of July, 1965.
When petrol rationing came to an end in 1950 the large producers began to make agreements, now known as solus agreements, with garage owners under which the garage owner, in return for certain advantages, agreed to sell only the petrol of the producer with whom he made the agreement. Within a short time three-quarters of the filling stations in this country were tied in that way and by the dates of the agreements in this case over 90 per cent. had agreed to ties. It appears that the garage owners were not at a disadvantage in bargaining with the large producing companies as there was intense competition between these companies to obtain these ties. So we can assume that both the garage owners and the companies thought that such ties were to their advantage. And it is not said in this case that all ties are either against the public interest or against the interests of the parties. The respondents' case is that the ties with which we are concerned are for too long periods.
The advantage to the garage owner is that he gets a rebate on the wholesale price of the petrol which he buys and also may get other benefits or financial assistance. The main advantages for the producing company appear to be that distribution is made easier and more economical and that it is assured of a steady outlet for its petrol over a period. As regards distribution, it appears that there were some 35,000 filling stations in this country at the relevant time, of which about a fifth were tied to the appellants. So they only have to distribute to some 7,000 filling stations instead of to a very much larger number if most filling stations sold several brands of petrol. But the main reason why the producing companies want ties for five years and more, instead of ties for one or two years only, seems to be that they can organise their business better if on the average only one-fifth or less of their ties come to an end in any one year. The appellants make a point of the fact that they have invested some £200 millions in refineries and other plant and that they could not have done that unless they could foresee a steady and assured level of sales of their petrol. Most of their ties appear to have been made for periods of between five and 20 years. But we have no evidence as to the precise additional advantage which they derive from a five-year tie as compared with a two-year tie or from a 20-year tie as compared with a five-year tie.
The Court of Appeal held that these ties were for unreasonably long periods. They thought that, if for any reason the respondents ceased to sell the appellants' petrol, the appellants could have found other suitable outlets in the neighbourhood within two or three years. I do not think that that is the right test. In the first place there was no evidence about this and I do not think that it would be practicable to apply this test in practice. It might happen that when the respondents ceased to sell their petrol, the appellants would find such an alternative outlet in a very short time. But, looking to the fact that well over 90 per cent. of existing filling stations are tied and that there may be great difficulty in opening a new filling station, it might take a very long time to find an alternative. Any estimate of how long it might take to find suitable alternatives for the respondents' filling stations could be little better than guesswork.
I do not think that the appellants' interest can be regarded so narrowly. They are not so much concerned with any particular outlet as with maintaining a stable system of distribution throughout the country so as to enable their business to be run efficiently and economically. In my view there is sufficient material to justify a decision that ties of less than five years were insufficient, in the circumstances of the trade when these agreements were made, to afford adequate protection to the appellants' legitimate interests. And if that is so I cannot find anything in the details of the Mustow Green agreement which would indicate that it is unreasonable. It is true that if some of the provisions were operated by the appellants in a manner which would be commercially unreasonable they might put the respondents in difficulties. But I think that a court must have regard to the fact that the appellants must act in such a way that they will be able to obtain renewals of the great majority of their very numerous ties, some of which will come to an end almost every week. If in such circumstances a garage owner chooses to rely on the commercial probity and good sense of the producer, I do not think that a court should hold his agreement unreasonable because it is legally capable of some misuse. I would therefore allow the appeal as regards the Mustow Green agreement.
But the Corner Garage agreement involves much more difficulty. Taking first the legitimate interests of the appellants, a new argument was submitted to your Lordships that, apart from any question of security for their loan, it would be unfair to the appellants if the respondents, having used the appellants' money to build up their business, were entitled after a comparatively short time to be free to seek better terms from a competing producer. But there is no material on which I can assess the strength of this argument and I do not find myself in a position to determine whether it has any validity. A tie for 21 years stretches far beyond any period for which developments are reasonably foreseeable. Restrictions on the garage owner which might seem tolerable and reasonable in reasonably foreseeable conditions might come to have a very different effect in quite different conditions: the public interest comes in here more strongly. And, apart from a case where he gets a loan, a garage owner appears to get no greater advantage from a 20-year tie than he gets from a five-year tie. So I would think that there must at least be some clearly established advantage to the producing company - something to show that a shorter period would not be adequate - before so long a period could be justified. But in this case there is no evidence to prove anything of the kind. And the other material which I have thought it right to consider does not appear to me to assist the appellant here I would therefore dismiss the appeal as regards the Corner Garage agreement.
I would add that the decision in this case - particularly in view of the paucity of evidence - ought not, in my view, to be regarded as laying down any general rule as to the length of tie permissible in a solus agreement. And I do not think that the case of Petrofina (Great Britain) Ltd. v. Martin [F23] can be regarded as laying down a general rule. The agreement there was in unusual terms. I think the decision was right, although I do not agree with all the reasons. But I must not be taken as expressing any opinion as to the validity of ties for periods mid-way between the two periods with which the present case is concerned.