Esso Petroleum Company Ltd v Harper's Garage (Stourport) Ltd
| Jurisdiction | England & Wales |
| Judge | THE MASTER OF THE ROLLS,LORD JUSTICE HARMAN,LORD JUSTICE DIPLOCK |
| Judgment Date | 23 February 1966 |
| Judgment citation (vLex) | [1966] EWCA Civ J0223-4 |
| Date | 23 February 1966 |
| Court | Court of Appeal |
[1966] EWCA Civ J0223-4
The Master of the Rolls
(Lord Denning)
Lord Justice Harman and
Lord Justice Diplock
In The Supreme Court of Judicature
Court of Appeal
From Mr Justice Mocatta
MR S. W. TEMPLEMAN, Q.C. and MR J. YAHUDA (instructed by Messrs Field Rescoe & Co., Agents for Mr Frederick L. Glover, Stourporton-Severn) appeared as Counsel for the Appellants.
W. A. BAGNALL, Q. C. and MR ANDREW P. LEGGATT (instructed by Messrs Piesse & Sons) appeared as Counsel for the Respondents.
In the recent Petrofina case we left several points undetermined. WE have to decide some of them now. The facts are fully stated in the report of the Court below in 1965, 3 Weekly Law Reports, p. 465, and I need only state a few.
Mr and Mrs Harper control a private company, Harper'S Garage (Stourport) Ltd., which they formed in 1959. They have two garages, one at Mustow Green near Kidderminster; the other, known as the Corner Garage, at Stourport -on-Severn. In 1963 they were taking all their supplies of petrol for both garages from the Esso Petroleum Company under solus agreements which contained price maintenance provisions. On 3rd December, 1963, the Esso Company decided no longer to insist on their policy of price maintenance. This meant that other Esso dealers might undercut the Harpers. In consequence on 4th December, 1963, the Harpers wrote to Esso in these terms: "Resulting from your Company'S notice of removal of the price maintenance clause from dealer contracts, we now deem those contracts null and void". Soon afterwards Harpers at the Mustow Green Garage turned over two pumps to V.I.P. petrol, retaining two on Esso, and three months later turned over the remaining two to V.I.P. petrol. At the Corner Garage Harpers continued for a while on Esso. They had borrowed £7,000 from Esso for that garage and were still indebted to Esso. In August 1964 Harpers offered to pay off the loan: but Esso refused to accept it. Harpers then turned over all four pumps at the Corner Garage to V.I.P. petrol. At both garages Harpers now sell V.I.P. petrol at 3d. to 4d. a gallon less than they sold Esso petrol. They can sell at that price because they pay less for it. They sell much more V.I.P. petrol than they did Esso. Esso now seek an injunction to restrain Harpers from selling any patrol other than Esso at their two garages.
MUSTOW GREEN GARAGE
I will first consider the Mustow Green Garage where there was no loon agreement or mortgage. There was simply a solusagreement on Esso'S standard printed form. According to our decision in the Petrofina case, this agreement is subject to the doctrine of restraint of trade. It is invalid unless it is reasonable as between the parties and not injurious to the public interest. The material terms are:
(1) The agreement was to commence on 1st July, 1963, and to remain in force for four years and five months, see Clauses 1 and 2. (In the Petrofina case the period was twelve years, and possibly more).
(2) There was the "tie clause" whereby Esso agreed "to sell to the dealer and the dealer agrees to buy from Esso at Esso'S wholesale schedule price to dealers ruling at the date of delivery the dealer'S total reguirements of motor fuels for resale" at the garage - see Clause 2. The dealer was to get a rebate of 1 1/4d. a gallon - see Clause 3.
(3) There was a " price maintenance clause" under which the dealer agreed not to resell motor fuels for use in private vehicles "except in accordance with Esso'S retail schedule prices" - see Clause 4(4). This clause is not now enforceable, see the Resale Price Act 1964. (There was a similar clause in the Petrofina case).
(4) There was a "continuity clause" under which Harpers, if they sold the garage, had to get the buyer to enter into another solus agreement with Esso to carry out all the Harpers' obligations. (There was a similar clause in the Petrofina case).
(5) There was a "keep open clause" under which the dealer was to keep the garage "open at all reasonable hours for the sale of Esso motor fuels". (There was a similar clause in the petrofina case).
(6) The dealer was "to give preference to the sale of Eseo motor oils". (This is not so stringent as the clause in the Petrofina case).
In considering whether that agreement is reasonable, we have to look at it as at July 1963 when it was made. One ofthe striking features about it (different dram the Petrofina case) is that Esso, whilst price maintenance was lawful, took unto themselves a power to fix the "wholesale price" and the "retail price". If they wished to increase their own profit, Esso could increase the wholesale price payable by their dealers. If they wished to undercut their rivals, Esso could direct their dealers to sell at a lower retail price. In short, they could squeeze the "profit margin" of the dealers at their pleasure. Such a power may be tolerable in an agreement for a short term, but it may become intolerable if it is contained in an agreement for a considerable period from which the dealer has no escape. Further more there was nothing which required Esso to fix retail prices. They could leave each dealer free to fix his own retail price. That meant that the burden of meeting competition could be thrust on to the dealer. Esso could charge him their wholesale price (so they got their own profit) and leave him to reduce his retail price to meet the competition of cut price petrol.
Another feature worthy of mention is that Esso were not under any restriction on their own sales to other persons. They can and do supply petrol direct to three independent suppliers at less than their schedule wholesale prices: who can then resell to the public at cut prices. Esso also can and do supply farmers and traders at a lower price direct to their bulk tanks, who can thus get their petrol cheaper than from a dealer. This power may be reasonable over a short term, but it would not seem right if it were to continue over a considerable period, for Esso could undermine a dealer'S trade by such means.
In these circumstances the period of four years and five months (coupled as it is with a "continuity" clause and a "keep open" clause) is too long to be reasonable. I think that the dealer ought to be allowed to free himself on giving reasonable notice - see McEllistrom v. Ballymacelligott Dairy, 1919 Appeal Cases, pp. 548, 572, 582. On the other hand, Esso ought to have reasonable protection for their outlet for petrol. They have tomake many arrangements when they start supplying garages, and in case the dealer gives notice, they ought to have time to find an alternative outlet. On the whole, I should have thought that this solus agreement would be reasonable if it were made for three years certain, and thereafter subject to two years' notice given at any time before or after the three years. But four years and five months certain, without the option of determining it earlier, was too long. I hold, therefore, that it was an unreasonable restraint of trade and is unenforceable.
THE CORNER GARAGE
In the Corner Garage there was a solus agreement, a loan agreement and a mortgage. All three were part and parcel of one transaction whereby Esso were to lend Harpers £7,000 to assist them in buying the Corner Garage and making improvements to it. It was repayable over a period of twenty-one years. The solus agreement was dated 5th July, 1962. It was on Esso'S standard printed form (the same as in the Mustoe Green case) but it was for twenty-one years from 1st July, 1962. The loan agreement was dated 12th July, 1962. It contained an express agreement by Harpers to purchase their total requirements of motor fuels from Esso until the loan and interest had been repaid, and as security for the loan Harpers were to grant a mortgage to Esso. The mortgage (the important document for our purposes) was dated 6th October, 1962. It contained express provision for the loan and interest at 3 1/4 per cent. or 3 1/2 per cent. to be paid off by instalments over a period of twenty-one years: and during this period Harpers agreed to clauses similar to those in the solus agreement, including the "tie clause" and the "keep open clause". It was expressly provided that "neither the company nor the sureties or any of them shall be entitled to redeem this security otherwise than in accordance with the covenant as to repayment hereinbefore contained". That meant it could not be redeemed for twenty-one years.
If Esso had to rely on the solus agreement only, theCorner Garage would be covered by the Petrofine case. Twenty-one years is far too long to be reasonable. They rely, therefore, on the mortgage. They claim that the doctrine of restraint of trade does not apply to ties contained in a mortgage. Mr Begnall submitted that when there has been a sale, lease or mortgage of land, the Nordenfelt doctrine (of restraint of trade) does not apply to covenants relating to the user of that land, or, in the case of a sale or a lease, to the use of other land retained by the vendor or lessor.
I propose to put on one side the case of sale or lease: though I note in passing that Foley v. Classioue Coaches, 1934, 2 King'S Bench, p. 1%, was a case of sale. I will consider only the case of a mortgage. I can see no reason in principle why the doctrine of restraint of trade should not apply to covenants in a mortgage. See how the matter stands. Suppose a trader who owns his shop is in need of capital to expand his business. His rival says to him: "I will lend you the money if you will bind yourself for twenty-one years not to sell your goods at a lower price than mine". Such a restraint is obviously bad if contained in a loan agreement - see the Vancouver case, 1934 Appeal...
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