North-Western Salt Company v Electrolytic Alkali Company

JurisdictionUK Non-devolved
CourtHouse of Lords

Contract - Restraint of Trade - Trade Combination - Public Policy - Illegality - Surrounding Circumstances - Evidence - Pleading.

Where an action is brought on a contract which is ex facie illegal as being in unreasonable restraint of trade, the Court will decline to enforce the contract, irrespective of whether illegality is pleaded or not; but, where the question of illegality depends upon the surrounding circumstances, as a general rule, the Court will not entertain the question unless it is raised by the pleadings.

The plaintiff company was a combination of salt manufacturers formed for the purpose of regulating supply and keeping up prices, and it had the practical control of the inland salt market. The members of the company were entitled to be appointed as its distributors, i.e., agents to sell on behalf of the company the salt which it had purchased from them. The defendants, who had not joined the combination, agreed to sell to the company for four years 18,000 tons of salt per annum, of which a certain proportion was to be table salt, at a fixed uniform price per ton, and undertook not to make any other salt for sale. They were to have the option of buying back the whole or a part of their table salt in each year at the plaintiff company's current selling price and were to be appointed distributors on the same terms as the company's other distributors. The defendants having sold salt in violation of this agreement, the plaintiff company sued them for breach of contract. The defendants did not by their defence raise the issue of illegality, but they sought to rely on certain facts and documents admitted in evidence at the trial upon other issues as shewing that the agreement was illegal as against public policy:—

Held that, having regard to the form of the pleadings, the surrounding circumstances could not be looked at for the purpose of determining the illegality of the agreement, and that the agreement was not ex facie illegal.

Decision of the Court of Appeal [1913] 3 K. B. 422 reversed.

APPEAL from a decision of the Court of Appeal reversing a decision of Scrutton J.F1

The following statement of facts is taken from the judgment of the Lord Chancellor.

“The appellant company are a combination of salt manufacturers, and they are alleged to include substantially the whole of the salt manufacturers in the north-west of England, and to have obtained the practical control of the inland market in England for the sale of vacuum salt, stoved and unstoved. Stoved salt is salt which is used for household purposes and which has been subjected to special drying processes to fit it for such purposes. Vacuum salt is salt, whether afterwards stoved or not, which has been prepared by a process in which the waste steam from the works is carried under the salt pans, instead of fires being put under these salt pans.

“The contract between the appellants and the respondents, who were salt manufacturers, was made on November 9, 1907. By its terms the respondents agreed to sell to the appellants 72,000 tons of vacuum salt, of which 12,000 were to be stoved salt. Delivery was to be spread over the four years between January 1, 1908, and December 31, 1911, in about equal monthly quantities. These quantities represented 18,000 tons a year, of which 3000 were to be of stoved salt, unless the respondents in November in any year exercised an option to deliver unstoved salt only in the following year. The price was to be 8s. a ton for both kinds of salt, delivered into trucks at the sellers' works or into craft at their canal wharf. Stoved salt was to be loaded in bags, to be provided by the buyers, but to be filled and stitched at the expense of the sellers. The sellers were to be free to manufacture other salt for their own use, but not for sale, excepting so much as was required to satisfy a certain current contract. The sellers were to have the option of repurchasing from the buyers the stoved vacuum salt manufactured by themselves to the extent of 3000 tons annually at the buyers' current prices. If the sellers made stoved vacuum salt they were to be elected distributors in respect of 3000 tons annually, on the same terms and conditions as the buyers' other distributors. The sellers agreed not to lease or sell any of their land during the contract for salt making or boring for brine for salt making, but they might sell brine for other purposes than salt making. They were to be free to reduce or cease their making of salt. The agreement was to be taken as a settlement of all questions arising out of a previous agreement of August 25, 1906.

“There were, of course, other salt manufacturers, and these were also under contract to sell salt to the appellants, and they acted as distributors of salt for the appellants under an agreement for distribution, the terms of which did not substantially vary during the period covered by the contract sued on. The effect of these terms was that if the salt manufacturers exercised their option to repurchase the stoved salt, and then resold it, they would have to pay out of the price they received, not only the current selling prices, but certain amounts which they might receive for putting the salt into bags and stitching them, and the amount of these charges could be claimed by the appellants as additions to their current selling price. There were also loading and other charges, the amounts of which might be similarly claimed.

“The appellants' current price for table salt, apart from all additions, – the naked price as it was called — was fixed on March 30, 1908, at 18s., and the respondents intimated their exercise of the option to repurchase. Controversy arose as to the terms and effect of the option when exercised, and as to whether the respondents were bound to sign a distributors' agreement, and in what terms. Meantime the respondents began, in breach of their contract, to sell stoved salt to customers. They appear to have concealed these sales from the appellants. The latter, however, discovered what had been done and claimed damages.

“In the event the present action was brought. In their points of claim the appellants simply stated the contract of November 9, 1907, alleged breaches, and claimed damages. They set out particulars of the sales alleged to have been made in breach by the respondents, and stated the character of the dispute which had arisen as to the measure of damages. The respondents' points of defence were confined to a denial of the alleged breaches as regards the bulk of the stoved salt in question. The case made was that they had in substance repurchased and properly sold the stoved salt in question, and that they had duly paid or brought into Court all the money the appellants were entitled to. As to another and smaller quantity of the salt in controversy, they admitted sales in breach of contract, but disputed the measure and amount of the damages claimed, and they brought into Court sums which they alleged were sufficient to satisfy all proper claims. In their reply the appellants joined issue generally, and alleged that the respondents were only entitled to sell salt repurchased on the terms contained in the distributors' agreement, under which they ought, as a preliminary to such resale, to have lodged with the appellants the contracts for sale. This it was alleged that the respondents had not done, and the appellants further relied on certain inland conditions which were issued in accordance with the distributors' agreement, and with which it was said that the respondents had not complied.

“The respondents did not in their points of defence set up the invalidity or non-enforceability of the contract of November 9, 1907, and it was admitted at the Bar that it was through no slip but after consideration, that this was not done. The only questions raised by the pleadings were, firstly, whether the respondents had not in substance repurchased under the option in the contract and then properly resold, and, secondly, as to the measure of damages.

“The action was tried in the Commercial Court before Scrutton J. The learned counsel for the respondents, in the course of cross-examining one of the appellants' witnesses, raised the point as to the legality of the agreement. Counsel for the appellants objected that no such point had been pleaded. Scrutton J. sustained the objection. He held that unless illegality appeared on the face of the plaintiffs' case the point could not be put in cross-examination, having regard to the fact that no such point was raised by the pleadings, pursuant to what was required by the Rules of the Supreme Court. He refused leave to amend, but he said that if, after hearing the plaintiffs' case, he was satisfied that the claim was as matter of law illegal or unenforceable, he would be bound to take judicial notice of this and to disallow the claim. He finally gave a judgment for the plaintiffs on the question of validity, and for the rest, confined it to the other questions which I have indicated. It dealt mainly with the measure of damages.

“The case went to the Court of Appeal, where a majority of the Court, consisting of Vaughan Williams and Farwell L.JJ., held that the contract was in restraint of trade and bad, and that the action should be dismissed with costs. Kennedy L.J. dissented. The Court was willing to grant a new trial, if both parties desired it, in which further evidence as to the circumstances could be brought forward, but the defendants elected to take a final judgment. The majority of the learned judges in the Court of Appeal held that the contract sued on must be read in connection with the distributors' agreement, and that this agreement must be read as connected with another agreement dated September...

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