Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd

[1968] A.C. 269

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(Judgment by: Lord Hodson)

Between: Esso Petroleum Co Ltd - Appellant
And: Harper's Garage (Stourport) Ltd - Respondent

Court:

Judges: Lord Reid
Lord Morris of Borth-y-Gest

Lord HodsonLord 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

Hearing date: 5-8, 12-15, 19-20 December 1966
Judgment date: 23 February 1967

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Judgment by:
Lord Hodson

My Lords, this appeal arises from two actions brought by the Esso Petroleum Co. Ltd. against Harper's Garage (Stourport) Ltd. The Esso Company had at first instance been granted injunctions against the garage company and the garage company's counterclaim for certain declarations had been dismissed, but the decision was reversed on appeal and the Esso Company now seek to restore the judgment of the trial judge.

The cases concern what have come to be known as "solus agreements" by which, in recent years, more and more garage stations in this country tied themselves to the big oil companies to buy all their petrol therefrom, to sell no other petrol and to sell at prices fixed by the oil companies. Your Lordships were informed that at the present time of 36,000 stations 35,000 were so tied.

In the cases now under consideration the tie imposed was in the one case (action 259) of four years and five months' duration and in the other (action 1249) of 21 years' duration. The first question is whether or not the doctrine of restraint of trade applies to these solus agreements and, if so, does it apply equally to a mortgage which was entered into in the second case in connection with the solus agreement but not in the first case.

The main contention on the part of the appellants is that these agreements relate to the use of land and that the doctrine of restraint of trade has no application to a restriction imposed on a piece of land as opposed to a restriction imposed on a person or corporation. Such a restriction is exemplified in contracts between master and servant, vendor and purchaser of a business and combinations to restrict output or fix prices or the like. This contention was accepted by the trial judge but has no direct authority to support it. It can be said that in many scores of cases relating, for example, to leases of land by brewers to publicans and, in one case, of a sale of the same sort it has been taken for granted that such restrictive covenants on the use of land are and have been from time immemorial imposed without objection or criticism; therefore, the doctrine has no application. Thus the authorities may be said to support the proposition sub silentio, for no attempt has been made as a rule to attack these covenants on the ground that they are in restraint of trade. An exception is to be found in the case of Catt v. Tourle ^[F37] where a brewer had sold a piece of land to the trustees of a freehold land society who covenanted with him that he, his heirs and assigns should have the exclusive right of supplying beer to any publichouse erected on the land. The defendant, also a brewer, acquired a piece of land with notice of the covenant and erected thereon a public-house which he supplied with his own beer. The covenant was held not an unreasonable restraint of trade although it was perpetual. Selwyn L.J. explained the reason in the following words: ^[F38]

"... a restraint preventing a person from carrying on trade within a certain limit of space, though unlimited as to time, may be good, and the limit of space may be according to the nature of the trade. ...

We should be introducing very great uncertainty and confusion into a very large and important trade if we were now to suggest any doubt as to the validity of a covenant so extremely common as this is. I think there is no ground for the distinction which has been contended for, viz., that such a covenant might be good in a lease for 21, 50 or 100 years, but is not good if entered into as part of a transaction where the fee simple of a property is conveyed."

It is to be observed that, if the appellants were right, the case could have been shortly disposed of by stating that the restriction related to the sale of a piece of land. Nevertheless, restraint of trade was dealt with by the court as if this simple answer was not available. Several cases involving indirectly, if not directly, the use of land have been decided after consideration of the doctrine of restraint of trade as being applicable. Examples are: McEllistrim v. Ballymacelligott Co-operative Agriculture and Dairy Society Ltd.; ^[F39] English Hop Growers Ltd. v. Dering ^[F40] and Foley v. Classique Coaches Ltd. ^[F41] Apart from authority, it would appear strange if the court, as it admittedly can, were to investigate reasonableness of a restraint of trade imposed on an area or within a radius but were to be precluded from investigating one imposed on a particular piece of land, for these two things are in substance the same in their effect in imposing a restraint of trade within a prescribed area.

One learned writer alone, the late Mr. F. A. Gare, laid down categorically (Covenants in Restraint of Trade (1935), p. 93) that:

"Restraints upon trade which arise upon a sale of land are of a totally different nature from those arising on a sale of goodwill or a partnership agreement."

He added that these restraints had never been treated by the courts as in any way dependent upon or governed by the same rule as the other forms of restraint of trade and, later, that there can be no question of public policy involved in such a covenant as that entered into by a purchaser restraining him from carrying on his trade on a piece of ground which he has newly acquired.

My Lords, I do not think it is possible to accept this general proposition. All dealings with land are not in the same category; the purchaser of land who promises not to deal with the land he buys in a particular way is not derogating from any right he has, but is acquiring a new right by virtue of his purchase. The same consideration may apply to a lessee who accepts restraints upon his use of land; on the other hand, if you subject yourself to restrictions as to the use to be made of your own land so that you can no longer do what you were doing before, you are restraining trade and there is no reason why the doctrine should not apply.

It is difficult to devise a formula relating to land which covers all cases in which the doctrine should be excluded. Counsel for the respondents submitted that the solution might be that the doctrine only applied to covenants for the benefit of the trade of the covenantee which either forbids the covenantor to carry on his trade or restricts the manner in which he does so. This solution serves the property cases to which I have referred where restrictive covenants are given to protect property, not trade, but as was pointed out in argument, does itself lead to anomalies in practice as between one property and another.

One has to remember always what is meant by restraint of trade and whence this doctrine derives. It has been said to have its origin in Magna Carta, where words are to be found wide enough to extend to freedom of trade:

"Nullus liber homo ... disseisiatur de libero tenemento suo, vel libertatibus, vel liberis consuetudinibus suis," etc.

These words were quoted by Lord Macclesfield L.C. in Mitchel v. Reynolds. ^[F42] He ended his judgment by saying: ^[F43]

"To conclude: In all restraints of trade, where nothing more appears, the law presumes them bad; but if the circumstances are set forth, that presumption is excluded, and the court is to judge of those circumstances, and determine accordingly; and if upon them it appears to be a just and honest contract, it ought to be maintained."

This introduced the conception of reasonableness. Lord Macclesfield had already drawn the distinction between contracts made upon good consideration and those which were merely injurious and oppressive.

Before turning to reasonableness, however, I would adopt the language of Diplock L.J. in the Petrofina case ^[F44] where he said:

"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 parties not parties to the contract in such manner as he chooses."

The learned Lord Justice was adapting his definition from the opinion of Lord Parker of Waddington in Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd. ^[F45] He summarised the principle thus:

"At common law 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, and ... no one can lawfully interfere with another in the free exercise of his trade or business unless there exist some just cause or excuse for such interference."

When one remembers that the basis of the doctrine of restraint of trade is the protection of the public interest, it is not difficult to see how the law developed in its conception of reasonableness as the test which must be passed in order to save a contract in restraint of trade from unenforceability.

The law has developed since the day of Mitchel v. Reynolds, ^[F46] and many disputatious matters have been cleared up. For example, as Lord Macnaghten pointed out in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., ^[F47] adequate consideration was formerly thought to be essential. He said:

"It was laid down in Mitchel v. Reynolds ^[F48] that the court was to see that the restriction was made upon a good and adequate consideration, so as to be a proper and useful contract. But in time it was found that the parties themselves were better judges of that matter than the court, and it was held to be sufficient if there was legal consideration of value; though of course the quantum of consideration may enter into the question of the reasonableness of the contract."

Thus, a restriction as to time may be reasonable or unreasonable according to whether sufficient compensation has been given to the person restrained. The distinction between partial and general restraint is no longer alive and the courts are today left, I think, in the position described by Lord Macnaghten earlier on the same page, where he said: ^[F49]

"The true view at the present time I think, is this: 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. 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."

What Lord Parker of Waddington said in the Adelaide Steamship Co. case ^[F50] follows naturally from this passage which puts into prominence the interests of the public. These are mentioned before those of the individual. True it is that the interests of the individual are much discussed in the cases on restraint of trade, which seldom, if ever, have been expressly decided on public grounds. An interesting example of such a case is Kores Manufacturing Co. Ltd. v. Kolak Manufacturing Co. Ltd., ^[F51] in which the discussion turned on whether or not the agreement in question was reasonable as between the parties whereas it could have been, perhaps, more readily based on the public interest involved in a commercial dispute. I should add that it has been established that a covenant against competition per se will never be regarded as reasonable. (See the speech of Lord Birkenhead L.C. in the McEllistrim case. ^[F52]

It has been authoritatively said that the onus of establishing that an agreement is reasonable as between the parties is upon the person who puts forward the agreement, while the onus of establishing that it is contrary to the public interest, being reasonable between the parties, is on the person so alleging: see Herbert Morris Ltd. v. Saxelby, ^[F53] per Lord Atkinson and Lord Parker. The reason for the distinction may be obscure, but it will seldom arise since once the agreement is before the court it is open to the scrutiny of the court in all its surrounding circumstances as a question of law.

Having rejected, as I do, the argument that there is a special class of contract relating to land which is outside the scope of the doctrine of restraint of trade, I come now to the question whether the covenants in question here are reasonable either in the private interests of the contracting parties or in the public interest. There might be thought to be some risk of proceedings being taken in certain cases of a nuisance character where the restraint of trade is readily justifiable on the basis of long established practice in a particular sphere, such as the brewery cases upon which the appellants rely, but I cannot see any practical way of hedging about the right of a party to a contract to attack it on the ground that it has been entered into in unreasonable restraint of trade. After all, a man who freely enters into a bargain will, normally, expect to be held bound by it, and I do not anticipate a spate of litigation in which contracts of, say, "sole agency" will be assailed. In the case of agreements between commercial companies for regulating their trade relations the parties are usually the best judges of what is reasonable. In such a case, as Lord Haldane said in North Western Salt Co. Ltd. v. Electrolytic Alkali Co. Ltd., ^[F54] the law "still looks carefully to the interest of the public, but it regards the parties as the best judges of what is reasonable as between themselves."

My Lords, so far as the tie in the Mustow Green Garage is concerned, I am in agreement with the judgments given in the Court of Appeal, that the vital question is whether the length of the period for which the agreement is to last is unreasonable. There is a need for the protection of continuity of outlets for the company's petrol in the area in which the station is. This is a justification of the tying covenant to which the compulsory trading and the continuity covenants are complementary, as Diplock L.J. pointed out. Without them the tying covenant would be insufficient for its purpose. They, therefore, stand together. I should add that I reject the argument of the appellants that the "keep open" clause in the agreement falls short of a compulsory trading clause.

I have, however, reached the conclusion that the five-year tie is not unreasonable. It is true that there does not appear to have been evidence specifically directed to this question, but I have been influenced by the number of reported cases of like nature to these, particularly from Commonwealth courts, when five years has been considered reasonable, compare also Biggs v. Hoddinott ^[F55] where a five-year tie was contained in a mortgage deed. The recommendation of the Monopolies Commission, in a report on petrol ordered to be printed on July 22, 1965, was that solus agreements should not normally exceed five years (p. 143, para. 383). Harman L.J. pointed out that the period of four years and five months in action 259 was reached, as it were, by accident without the parties directing their minds to the reasonableness of the period, but I am not deterred by that feature of the case from reaching the conclusion that the period chosen, being less than five years, is not unreasonable. I would, therefore, reverse the order of the Court of Appeal so far as the Mustow Green Garage is concerned.

In the Corner Garage there was not only a solus agreement but also a mortgage as security for a loan granted by the appellants to the respondents. The mortgage was irredeemable for 21 years and was part and parcel of the tying agreement and the compulsory trading agreement, so that unless ties contained in a mortgage are outside the doctrine of restraint of trade the period of 21 years is so long as to be unreasonable in the absence of evidence to justify it. I see no reason why a tie in a mortgage is to be treated in a special way. The point was considered in Horwood v. Millar's Timber & Trading Co. Ltd. ^[F56] although this was not a case of mortgage of land, and the court held that a covenant in restraint of trade contained in a mortgage deed was bad. Reliance was placed on Knightsbridge Estates Trust Ltd. v. Byrne ^[F57] for the proposition of Sir Wilfrid Greene M.R. that "equity does not reform mortgage transactions because they are unreasonable. It is concerned to see ... that oppressive or unconscionable terms are not enforced." The Master of the Rolls was not dealing with covenants in restraint of trade. These must be tested by the same criterion, whether they are contained in mortgages or not, unless there is some exception in relation to land. I have already expressed the view that there is no such exception. I agree, therefore, with the opinion of the Court of Appeal that the tying covenant and the compulsory trading covenant are unenforceable. These are so closely linked with the provision that the mortgage is to be irredeemable for 21 years that I would hold that they all fall together, so that the respondents are entitled to redeem. Finally, I should add that I do not accept the special argument based on section 85 of the Law of Property Act, 1925, which is based on the conception that under the Act, for conveyancing purposes, a mortgage is treated as if it were a lease.

I would rest my decision on the public interest rather than on that of the parties, public interest being a surer foundation than the interest of private persons or corporations when widespread commercial activities such as these are concerned.

So far as the Corner Garage is concerned I would affirm the order of the Court of Appeal.