Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd
[1968] A.C. 269(Decision by: Lord Pearce)
Between: Esso Petroleum Co Ltd - Appellant
And: Harper's Garage (Stourport) Ltd - Respondent
Judges:
Lord Reid
Lord Morris of Borth-y-Gest
Lord Hodson
Lord PearceLord 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 Pearce
My Lords, on the assumption that the solus agreement relating to the Mustow Green Garage comes within the ambit of the doctrine of restraint of trade and that its reasonableness is a matter which the courts must decide, I am of opinion that it is reasonable.
The period of five years has been approved as a reasonable period for agreements of this nature in Canada (British American Oil Co. v. Hey; [F58] McColl Brothers v. Avery; [F59] Great Eastern Oil & Import Co. Ltd. v. Chafe [F60] and in South Africa (Shell Co. of S.A. Ltd. v. Gerran's Garages (Pty.) Ltd. [F61] In the courts of this country there is nothing which suggests that five years is an unreasonable length of time for a tie of this kind in a trade of this kind. In some cases the matter has passed sub silentio. And although the point was not relevant in Strick v. Regent Oil Co. Ltd. [F62] the language there used (per Lord Reid [F63] and Lord Upjohn [F64] seems to suggest that, had the question been raised or relevant, five years would not have been considered unreasonable. So, too, in the cases of Mobil Oil Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia [F65] and B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia. [F66] The facts set out in the report of the Monopolies Commission and its conclusion support this view.
Since the war there has been a world-wide re-organisation of the petrol industry. The old haphazard distribution has, in the interests of economy, efficiency and finance been converted into a distribution by the respective petrol producers through their own individual (and as a rule improved and more efficient) outlets. Vast sums have been spent on refineries, the improvement of garages and the like. Hand-to-mouth arrangements are no longer commercially suitable to the industry and considerable planning (involving inter alia the geographical spacing of the outlets) is obviously necessary. The garage proprietors were nòt at any disadvantage in dealing with the various competing producers of petrol. To hold that five-year periods are too long for the ties between the producers and their outlets would, in my opinion, be out of accord with modern commercial needs, would cause an embarrassment to the trade and would not safeguard any public or private interest that needs protection. I would, however, regard 21 years as being longer than was reasonable in the circumstances.
It is important that the court, in weighing the question of reasonableness, should give full weight to commercial practices and to the generality of contracts made freely by parties bargaining on equal terms. Undue interference, though imposed on the ground of promoting freedom of trade, may in the result hamper and restrict the honest trader and, on a wider view, injure trade more than it helps it. If a man wishes to tie himself for his own good commercial reasons to a particular supplier or customer it may be no kindness to him to subject his contract to the arbitrary rule that the courts will always reserve to him a right to go back on his bargain if the court thinks fit. For such a reservation prevents the honest man from getting full value for the tie which he intends, in spite of any reservation imposed by the courts, to honour.
And it may enable a less honest man to keep the fruits of a bargain from which he afterwards resiles. It may be in this respect similar to imposing on a trader the fetters of infancy; and many an upstanding infant who wishes to trade or buy a house or motorcar has found difficulty and frustration in the rule which the court has imposed for his protection. Where there are no circumstances of oppression, the court should tread warily in substituting its own views for those of current commerce generally and the contracting parties in particular. For that reason, I consider that the courts require on such a matter full guidance from evidence of all the surrounding circumstances and of relevant commercial practice. They must also have regard to the consideration. It is clear that the question of the consideration weighed with Lord Macnaghten in the Nordenfelt case. [F67] And although the court may not be able to weigh the details of the advantages and disadvantages with great nicety it must appreciate the consideration at least in its more general aspects. Without such guidance they cannot hope to arrive at a sensible and up-to-date conclusion on what is reasonable. That is not to say that, when it is clear that current contracts (containing restraints), however widespread, are in fact a danger and disservice to the public and to traders, the court should hesitate to interfere.
The onus is on the party asserting the contract to show the reasonableness of the restraint. That rule was laid down in the Nordenfelt case [F67] and in Herbert Morris Ltd. v. Saxelby. [F68] When the court sees its way clearly, no question of onus arises. In a doubtful case where the court does not see its way clearly and the question of onus does arise, there may be a danger in preferring the guidance of a general rule, founded on grounds of public policy many generations ago, to the guidance given by free and competent parties contracting at arm's length in the management of their own affairs. Therefore, when free and competent parties agree and the background provides some commercial justification on both sides for their bargain, and there is no injury to the community, I think that the onus should be easily discharged. Public policy, like other unruly horses, is apt to change its stance, and public policy is the ultimate basis of the courts' reluctance to enforce restraints. Although the decided cases are almost invariably based on unreasonableness between the parties, it is ultimately on the ground of public policy that the court will decline to enforce a restraint as being unreasonable between the parties. And a doctrine based on the general commercial good must always bear in mind the changing face of commerce. There is not, as some cases seem to suggest, a separation between what is reasonable on grounds of public policy and what is reasonable as between the parties. There is one broad question: is it in the interests of the community that this restraint should, as between the parties, be held to be reasonable and enforceable?
The rule relating to restraint of trade is bound to be a compromise, as are all rules imposed for freedom's sake. The law fetters traders by a particular inability to limit their freedom of trade so that it may protect the general freedom of trade and the good of the community. And, since the rule must be a compromise, it is difficult to define its limits on any logical basis.
The court's right to interfere with contracts in restraint of trade (by withholding its enforcement, which is the ultimate sanction of contracts and to which the parties are normally entitled) has been put in very wide words. Those words, though adequate and appropriate to the particular cases in which they were uttered, were not directed towards an exact demarcation of the line where the court will have a right to investigate whether a bargain is reasonable and will decline to enforce it if it is not. The famous passages from the opinion of Lord Macnaghten in the Nordenfelt case [F69] and the opinion of Lord Parker of Waddington in the Adelaide Steamship case [F70] are not expressly limited in any way. Since any man who sells the whole, or even a substantial part, of his services, his output, his custom or his commercial loyalty to one party is thereby restraining himself from selling them to other persons, it might be argued that the court can investigate the reasonableness of any such contract and allow the contracting party to resile subsequently from any bargain which it considers an unreasonable restraint upon his liberty of trade with others. But so wide a power of potential investigation would allow to would-be recalcitrants a wide field of chicanery and delaying tactics in the courts. Where, then, should one draw the line?
It seems clear that covenants restraining the use of the land imposed as a condition of any sale or lease to the covenantor (or his successors) should not be unenforceable. It would be intolerable if, when a man chooses of his own free will to buy, or take a tenancy of, land which is made subject to a tie (doing so on terms more favourable to himself owing to the existence of the tie) he can then repudiate the tie while retaining the benefit. I do not accept Mr. Templeman's argument that such transactions are subject to the doctrine, but will never as a matter of fact be held unreasonable. In my view, they are not subject to the doctrine at all. Certainly public policy gives little justification for their subjection to it. This view would accord with the brewers' cases in which (after an earlier unfavourable protest by Lord Ellenborough C.J. in Cooper v. Twibill [F71] the law has, for many years past, been firmly settled in allowing covenants tying the publican (as lessee or purchaser) to a particular brewer (for example, Clegg v. Hands. [F72] In one case, however, in 1869 (Catt v. Tourle [F73] a perpetual tie on a sale of land was subjected to scrutiny and was held to be reasonable. But to allow a permanent tie is not very different from holding it exempt from scrutiny.
It may be, however, that when a man fetters with a restraint land which he already owns or occupies, the fetter comes within the scrutiny of the court.
Is one also to place mortgages in the class of cases from which the doctrine is excluded? Mr. Megarry for the appellants relies inter alia on the technical argument that under the mortgage he has in law a demise of 3,000 years with cesser on redemption; that this should not be regarded as a mere notional technicality; that he is a lessee for all purposes (see Regent Oil Co. Ltd. v. J. A. Gregory (Hatch End) Ltd.; [F74] that the mortgagor is a lessor in possession; and that, therefore, the covenant should bind him as on a lease.
But the technicalities of the position where the mortgagor has no subdemise and is only notionally a lessor in possession put it on the wrong side of the line and the mortgagor cannot, therefore, come into the class of lessees to whose covenants the doctrine has no application.
Then, on broader grounds, does the mere fact that a restraint is embodied as an obligation under a mortgage exclude it from critical scrutiny and prevent its being unenforceable if it would have been so apart from the mortgage? I think not. In Biggs v. Hoddinott [F75] the point was not raised and the case is, therefore, of little guidance. The court of equity which declines to enforce the terms of a mortgage, if as a matter of conscience they are harsh and oppressive, cannot be less conscientious with regard to ties which as a matter of public policy the common law courts from earliest times, and thereafter courts of equity, have consistently refused to enforce in contracts. And the court has rightly applied the doctrine against restraint of trade to a tyrannous mortgage of future earnings in Horwood v. Millar's Timber & Trading Co. Ltd. [F76]
But on the question whether a restraint is reasonable, the fact that it is contained as a term in a mortgage may be a determining factor in its favour. The object of a mortgage is to provide fair security for the lender. And a restraint may be reasonably necessary to protect the security when it would not have been reasonable without that object. Moreover, it seems usually reasonable for the tie to subsist as long as there is a loan outstanding which the borrower is unable or unwilling to repay. It may be that even so there must be a limit; but, if so, I would not regard 21 years as necessarily excessive since ex hypothesi that length of time was commercially necessary for the borrower to have the benefit of the loan for his business. If, therefore, there had been in the mortgage of the Corner Garage a right to redeem either when the mortgagor wished or at any time after a reasonable term of years, say five or seven years, and thereby to terminate the tie I would not have regarded the tie as unreasonable, in view of the amount of the loan. But here there was no such right to redeem. Nor did the tie add anything to the protection of the security. Here even in the most unlikely event of a shortage of petrol supplies the supplier has a discretion not to supply if his own sources of supply fail or go short. And in any other set of circumstances I cannot think that a tied garage would be more valuable than, or even as valuable as, a free garage. Moreover, if the mortgagees entered on their security they would have to treat it as a free garage and account on that basis. If one regards the mortgage as a whole, the prolonged fetter on the right to redeem seems to have been inserted merely to prolong the tie. In this case, therefore, the existence of the mortgage neither removes the tie from the area to which the doctrine of restraint of trade applies nor, in the particular circumstances, does it assist the appellant on the question whether the tie was reasonable.
Mocatta J. in his clear and careful judgment held that neither tie was in restraint of trade since it was merely restrictive of the trading use to be made of a particular piece of land so that the doctrine of restraint of trade had no application. I feel the force of his reasoning, but I do not feel able to accede to it. Had the garage proprietor had no obligations to carry on his garage I might have been persuaded otherwise. But here there was a positive obligation to carry on the business (or to find a transferee who must do likewise) and to purchase from none save Esso. The practical effect was to create a personal restraint. Although the covenant affected only petrol sold on the particular land it did affect the proprietor with an obligation which he or his agents could not by mere abstention avoid. Both the English Hop Growers' case [F77] and Foley v. Classique Coaches, [F78] in both of which the restraint was regarded as reasonable, and McEllistrim's case, [F79] where it was not, lend some support to this view.
Finally, there is the important question whether this was a mere agreement for the promotion of trade and not an agreement in restraint of it.
Somewhere there must be a line between those contracts which are in restraint of trade and whose reasonableness can, therefore, be considered by the courts and those contracts which merely regulate the normal commercial relations between the parties and are, therefore, free from doctrine. The present case seems near the borderline, as was the case of Servais Bouchard v. Prince's Hall Restaurant, [F80] where the learned Master of the Rolls held that the doctrine did not apply while the other two Lords Justice apparently held that it did apply but that the restraint was reasonable.
One of the mischiefs at which the doctrine was aimed originally was the mischief of monopolies. But this was dealt with by legislation and the executive has from time to time taken efficient steps to prevent it. Indeed, in the case of petrol ties there has now been exacted (we are told) from the petrol producers an undertaking which in practice limits these ties to five years.
When Lord Macnaghten said in the Nordenfelt case [F81] that: "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" he was clearly not intending the words "restraints of trade" to cover any contract whose terms, by absorbing a man's services or custom or output, in fact prevented him from trading with others; so, too, the wide remarks of Lord Parker of Waddington in the Adelaide case. [F82] It was the sterilising of a man's capacity for work and of its absorption that underlay the objection to restraint of trade. This is the rationale of Young v. Timmins, [F83] where a brass foundry was during the contract sterilised so that it could only work for a party who might choose not to absorb its output at all but to go to other foundries, with the result that the foundry was completely at the mercy of the other party and might remain idle and unsupported.
The doctrine does not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract, provided that any prevention of work outside the contract, viewed as a whole, is directed towards the absorption of the parties' services and not their sterilisation. Sole agencies are a normal and necessary incident of commerce and those who desire the benefits of a sole agency must deny themselves the opportunities of other agencies. So, too, in the case of a film-star who may tie herself to a company in order to obtain from them the benefits of stardom (Gaumont-British Picture Corporation Ltd. v. Alexander. [F84] See, too, Warner Brothers Pictures Incorporated v. Nelson. [F85] And partners habitually fetter themselves to one another.
When a contract only ties the parties during the continuance of the contract, and the negative ties are only those which are incidental and normal to the positive commercial arrangements at which the contract aims, even though those ties exclude all dealings with others, there is no restraint of trade within the meaning of the doctrine and no question of reasonableness arises. If, however, the contract ties the trading activities of either party after its determination, it is a restraint of trade, and the question of reasonableness arises. So, too, if during the contract one of the parties is too unilaterally fettered so that the contract loses its character of a contract for the regulation and promotion of trade and acquires the predominant character of a contract in restraint of trade. In that case the rationale of Young v. Timmins [F86] comes into play and the question whether it is reasonable arises.
The difficult question in this case, as in the case of Servais Bouchard, [F87] is whether a contract regulating commercial dealings between the parties has by its restraints exceeded the normal negative ties incidental to a positive commercial transaction and has thus brought itself within the sphere to which the doctrine of restraint applies. If Esso had assured to the garage proprietor a supply of petrol at a reasonable price, come what may, in return for the garage proprietor selling only Esso petrol, it might be that the contract would have come within the normal incidents of a commercial transaction and not within the ambit of restraint of trade. But Esso did not do this. They hedged their liability around so that they had an absolute discretion in the event inter alia of a failure in their own sources of supply, whether or not Esso should have foreseen it, to withhold supplies from the garage proprietor (leaving him the cheerless right in such a situation to seek supplies elsewhere), and then at a later stage it would seem, if and when they were prepared to supply him once more, they could hold him to his tie with them. And the price was to be fixed by Esso. And for the duration of the contract he owed them a contractual obligation to continue to keep his garage open (or find a successor who would do so on like terms). When these contracts are viewed as a whole the balance tilts in favour of regarding them as contracts which are in restraint of trade and which, therefore, can only be enforced if the restraint is reasonable.
I do not here find help in the well-known phrases that a man is not entitled to protect himself against competition per se or that he is only entitled to protect himself if he has an interest to protect. It is clear that a restraint which merely damages a covenantor and confers no benefit on a covenantee is as a rule unreasonable. But here Esso had a definite interest to protect and secured a definite benefit. They wished to preserve intact their spaced network of outlets in order that they could continue to sell their products as planned over a period of years in competition with the other producers. To prevent them from doing so would be an embarrassment of trade, not a protection of its freedom. If all the other companies owned garages and Esso were trying for the first time to enter the market it would stifle trading competition rather than encourage it if Esso were prevented from being able to enter into a binding solus agreement for a sole outlet in order to compete with the others. And in a doctrine based on the wide ground of public policy the wider aspects of commerce must always be considered as well as the narrower aspect of the contract as between the parties.
Since the tie for a period of four years and five months was in the circumstances reasonable, I would allow the appeal in respect of the Mustow Green Garage. Since the tie for a period of 21 years was not in the circumstances reasonable, I would dismiss the appeal in respect of the Corner Garage.