Lease and leaseback of garage and petrol filling station — Petrol tie — Whether arrangements void as in restraint of trade, whether reasonable, whether liable to be set aside on equitable grounds — Appeal from decision of Peter Millett QC, sitting as a deputy judge — Appellants personal representatives of two of original three plaintiffs, a family garage company and the two directors and shareholders — The questions arose from lease and leaseback arrangements made between the family company, which owned the garage and station premises, and its directors and the respondents, a large concern engaged in petroleum production and petrol distribution — The appellants were in financial difficulties and asked the respondents for assistance — The arrangements made consisted of a lease by the appellants’ company of the garage and station premises to the respondents for 51 years, at a peppercorn rent in consideration of a premium of £3,500, and a leaseback to the two individual directors, not to the company, for 21 years with upward rent reviews, an absolute prohibition of assignment and a complete tie in regard to petrol supplies throughout the term — In the action brought by the appellants (plaintiffs) the deputy judge rejected a number of their allegations, but accepted that the petrol-tie provisions were void as unreasonable; however, he held that they were severable from the other provisions of the leaseback, which remained valid — On appeal the appellants claimed that the tie provisions were not severable and that the lease and leaseback, being one transaction, were wholly bad; alternatively that the arrangements should be set aside in equity on the ground of inequality of bargaining power — The respondents in a cross-appeal challenged the decision that the tie provisions were in restraint of trade, asserted that they were reasonable and submitted further that any claim was in any case barred by the appellants’ laches — The Court of Appeal held that the arrangements were in restraint of trade, but were reasonable; that the question of severance did not therefore arise; but that if the tie provisions had been invalid they would have been severable — The court rejected the appellants’ claim to set aside the lease and leaseback on the ground of inequality of bargaining power and held that in any case such a claim would have been barred by laches — Appellants’ appeal dismissed and respondents’ cross-appeal allowed — Discussion of doctrines of restraint of trade and of equitable relief on ground of inequality of bargaining power.
In this appeal
the personal representatives of Alec Thomas Lobb and of Bertha Alexandra Lobb,
his mother, appealed against the decision of Peter Millett QC, sitting as a
deputy judge of the Chancery Division, in an action brought by Alec Lobb
(Garages) Ltd, a company now in voluntary liquidation, and Mr and Mrs Lobb,
against Total Oil (Great Britain) Ltd, seeking orders that a lease and
leaseback, dated July 25 1969, should be declared to be in unreasonable
restraint of trade and be set aside, and asking for other relief. The action
related to a garage and filling station in South Street, Braintree, Essex. The
proceedings before the deputy judge were reported at [1983] 1 WLR 87. The judge
found the petrol tie clause in the leaseback invalid, as in unreasonable
restraint of trade, but severable, and held the remaining provisions valid. The
respondents cross-appealed against the finding in regard to the petrol tie.
T Cullen QC
and E W H Christie (instructed by Holmes & Hills, of Braintree) appeared on
behalf of the appellants; John Peppitt QC, Peter Creswell and Michael Kay
(instructed by Denton Hall & Burgin) represented the respondents.
Giving the
first judgment at the invitation of Waller LJ, DILLON LJ said: This is an
appeal from a decision of Mr Peter Millett QC, sitting as a deputy High Court
judge in the Chancery Division. There is also a cross-appeal. They raise
questions as to the validity of a lease/leaseback arrangement entered into in
July 1969 in relation to a garage and petrol filling station (‘the property’)
in South Street, Braintree, Essex. The facts are set out with admirable clarity
in the judgment of the learned deputy judge, which is reported, and I do not
need for the moment to do more than briefly summarise what happened in a very
general way in order to make the issues intelligible.
In 1968 a
company, Alec Lobb (Garages) Ltd (‘the company’) which was the first plaintiff
in the action as originally constituted, was the owner of the freehold of the
property and carried on the business of a garage and petrol filling station
there. It was the company’s only garage. The company was a private company
whose only directors and shareholders were Mr Alec Lobb and his mother Mrs
Bertha Lobb, the second and third plaintiffs in the action as originally
constituted. The company had since 1964 obtained its supplies of petrol
exclusively from the respondents (‘Total’). By the latter part of 1968 there
were a number of agreements outstanding between the company and Total including
mortgages on the property, guaranteed by Mr and Mrs Lobb personally, to secure
moneys advanced by Total to the company which were either interest-free or carried
interest at relatively low rates, and including also various hire or
hire-purchase agreements in respect of fuel tanks and other equipment, under
one of which certain underground petrol tanks provided by Total would at the
end of 20 years from 1964 become the property of the company without more than
nominal further payment. One effect of the mortgages was, as is not disputed,
to impose a valid petrol tie on the company in respect of the property,
obliging the company to take all petrol supplies for the property from Total
and to keep the filling station on the property open at all reasonable times
for the sale of petrol and to provide a proper and efficient service to the
public for a period of which some four years remained unexpired by the end of
1968.
The company
was seriously undercapitalised. Though it traded at a small profit in the six
months to November 30 1968, there had been substantial earlier losses. Cheques
given to Total for the supply of petrol had been dishonoured on presentation,
and Total very early in 1969 insisted that supplies could be continued only on
the basis of payment by banker’s draft for each load against delivery. Apart
from indebtedness to Total, by November 1968 the company was in serious
difficulties with its bankers, who also had a charge on the property, and was
under pressure to reduce its overdraft.
Against that
background, Mr Lobb wrote to Total on November 28 1968, proposing that in order
to solve the company’s financial difficulties the forecourt of the property
should, for a premium, be leased to Total for a number of years and leased back
to the company. Discussions followed. Separate solicitors were instructed by
each party, and ultimately on July 25 1969 a lease and leaseback were executed.
The lease was a lease of the whole of the property, and not merely the
forecourt, by the company to Total for a term of 51 years at a peppercorn rent
in consideration of a premium of £35,000 paid by Total. The leaseback was a
sublease granted by Total to Mr and Mrs Lobb, rather than to the company, for a
term of 21 years, with a right for either party to terminate the leaseback at
the end of the 7th or 14th years at an initial rent of £2,250 pa with
upwards-only rent reviews at the end of the 8th and 15th years of the term. The
leaseback also contained an absolute prohibition on assignment and tie
provisions throughout the term requiring the lessees to take all supplies of
petrol from Total exclusively and to keep the filling station open at all
reasonable times and provide a proper and efficient service to the public.
In the action,
commenced on June 11 1979, the company and Mr and Mrs Lobb claimed to set aside
the lease and leaseback on a variety of allegations, including an allegation
that the 21-year-tie provision in the leaseback constituted an unreasonable
restraint of trade with, it was alleged, the result that the lease and
leaseback were wholly void. The learned deputy judge held that the tie
provisions in the leaseback were indeed void as an unreasonable restraint of
trade but that they were severable from the remaining provisions of the
leaseback. He rejected all the other allegations of the plaintiffs and
accordingly held that the lease and the remaining provisions of the leaseback,
other than the tie provisions which he identified, were valid.
I should at
this juncture mention certain changes among the plaintiffs in the action. In
the first place the company has been put into creditors’ voluntary liquidation.
In the next place, Mr Lobb died in July 1979; his personal representatives were
added as plaintiffs by order to carry on before the trial. Finally, Mrs Lobb
has died since the decision of the learned deputy judge. The appellants to this
court are her personal representatives, but no argument was advanced to the
effect that they have no locus standi to pursue an appeal which, if
successful, would enure to the benefit, primarily, of the company which has not
appealed.
Several
arguments which were pressed in the court below are not raised on this appeal.
In particular the appellants do not rely in this court on the tort of economic
duress or on any allegations of undue influence and they do not submit that the
lease and leaseback are, despite their form, in reality a mortgage and to be
treated as such. In addition the appellants have accepted the judge’s
identification of the provisions of the leaseback which are struck down if only
the tie provisions of the leaseback are invalid.
The appellants
therefore put their case in this court on two grounds only. They say firstly that
the tie provisions of the leaseback, which the judge held to be void as an
unreasonable restraint of trade, are not severable and that the lease and
leaseback, which have to be taken together as parts of one transaction, are
therefore wholly void. They say alternatively that the lease and leaseback,
taken together as one transaction, ought to be set aside in equity because at
the material time in 1969 there was inequality of bargaining power as between
Total on the one hand and the company and Mr and Mrs Lobb on the other hand,
and Total has not established that the terms of the transaction were, in point
of fact, fair, just, and reasonable.
Total disputes
both these contentions of the appellants. Total further submits that any claim
to set aside the lease and leaseback on equitable grounds ought to be held to
be barred by laches on the part of the company and Mr and Mrs Lobb. The learned
deputy judge held that a somewhat different formulation of the plaintiffs’
claim — that Total exercised coercive pressure on Mr Lobb and the company — was
indeed barred by laches and delay on the part of the plaintiffs. In addition,
however, by the cross-appeal Total challenges the findings of the learned
deputy judge that the tie provisions of the leaseback are void as an
unreasonable restraint of trade. Total advances three submissions on the
cross-appeal, viz:
(1) that the
leaseback is not an agreement in restraint of trade at all because the
restrictions on trading in the leaseback derive from the disposal by the company
of substantially all its interest in the property by the grant of the 51 years’
lease to Total;
(2) that the
leaseback is not an agreement in restraint of trade at all because the
leaseback was granted to Mr and Mrs Lobb and not to the company; and
(3) alternatively
that even if the leaseback is an agreement in restraint of trade the
restrictions on trading in the leaseback are, in all the circumstances,
reasonable and are therefore valid.
It is logical
to consider the cross-appeal first, and I can deal very shortly with the second
of the above arguments. In Esso Petroleum Co Ltd v Harper’s Garage
(Stourport) Ltd [1968] AC 269 it was held that the doctrine of restraint of
trade had no application to restraints imposed on persons who, before the
transaction by which the restraints were imposed, had no right whatsoever to
trade at all on the land in question. Their lordships had in mind in particular
the case where an owner of land grants a lease of the land to a person who had
no previous right to occupy the land, and imposes by the lease restraints on
the lessee’s power to trade as he likes on the land. Such a lease would
ordinarily not be regarded as an agreement in restraint of trade. In the
present case, however, the granting of the leaseback to Mr and Mrs Lobb rather
than to the company was a palpable device in an endeavour to evade the doctrine
of restraint in trade. Mr and Mrs Lobb were only selected as lessees because
they were the proprietors of the company previously in occupation. The court
has ample power to pierce the corporate veil, recognise a continued identity of
occupation and hold, as it should, that Total can be in no better position
quoad restraints of trade by granting the leaseback to Mr and Mrs Lobb than if
it had granted the leaseback to the company. See generally: Gilford Motor Co
Ltd v Horne [1933] Ch 935 at 961-2, and DHN Food Distributors Ltd
v Tower Hamlets London Borough Council [1976] 1 WLR 852.
As for the
argument that the leaseback is not an agreement in restraint of trade because
the restrictions in the leaseback derive from a disposal by the company of a
large part of its interest in the property, I have had considerable difficulty
in understanding the argument. It is of course clear that there is no agreement
in restraint of trade where a person deprives himself of all right to trade as
he wishes on land by selling all his interest in that land. In the present
case, however, that is not what the company did and the whole object was that
trade should continue in the property. The lease and leaseback have to be taken
together as two essential parts of one transaction, and in my judgment it
follows from the reasoning of their Lordships in Esso v Harper’s
Garage that the agreement constituted by the lease and leaseback is an
agreement in restraint of trade in as much as it subjects the company to a
continuation for a longer period of the restraints on trading which had validly
been imposed for a much shorter period before July 25 1969.
I turn then to
consider the third argument on the cross-appeal, that the restrictions on
trading in the leaseback are reasonable since it is clear law that a term in
restraint of trade will not be enforced unless it is reasonable.
The decision
in Esso v Harper’s Garage has been generally taken as laying down
a rule of thumb that a petrol supply restraint, requiring a dealer to take all
his petrol from one petrol company, is reasonable and valid if it will last for
no more than five years, but if it will last for significantly more than five
years, eg for 21 years, it is unreasonable and invalid unless the petrol
company can prove that a tie for the longer period is an economic necessity for
it. No such evidence of economic necessity has been put forward by Total in the
present case, but the contention that the longer tie is in all the
circumstances reasonable has been urged on a different ground.
In Esso
v Harper’s Garage both Lord Reid at p 300 and Lord Pearce at p 323
referred with approval to the statement of Lord Macnaghten in the Nordenfelt
case [1894] AC 535 that ‘of course the quantum of consideration may enter
into the question of the reasonableness of the contract’. Moreover, in Amoco
Australia Pty Ltd v Rocca Brothers Motor Engineering Co Pty Ltd [1975]
AC 561, Lord Cross commented at p 579 that the fact that a covenantor had
obtained and would continue to enjoy benefits under the relevant agreement
which he claimed to be unenforceable was pro tanto a reason for holding
that the covenant was not in unreasonable restraint of trade.
In the present
case the consideration for the grant of the lease and thus the consideration
for the restraint, since the leaseback was part of the same transaction as the
lease, was the payment by Total to the company of the premium of £35,000. That
figure was arrived at by a professional valuation as being the value of the
51-year lease, subject to the leaseback, the initial rent under which, of
£2,250 pa, was significantly below a full market rent. The leaseback thus had a
capital value, but the real value of the property was in the value of the
lease, and, because the lease was for such a long term at a peppercorn rent,
the value of the reversion on the lease, the company’s underlying freehold
interest subject to the lease, was of the very slight value of some £600 to
£1,000 only.
The choice of
51 years as the term of the lease came about originally because it was common
ground that if the term of the lease had not exceeded 50 years the premium of
£35,000 would have been taxable as income in the company’s hands, and that
would have defeated the object of the whole transaction, viz recapitalising the
business of the company in an endeavour to keep it afloat. But despite its
provenance the 51-year length of the term is a very real factor in the case,
firstly because that is what Total paid for by the premium and secondly
because, despite some pressure, Total refused to grant the leaseback for more
than 21 years with the mutual breaks which I have mentioned.
Against this
background certain factors are clear. The first is that for planning reasons
the property is most unlikely to be used, during the 21-year term of the
leaseback, for any purpose other than that of a garage and filling station. The
next is that it can make no significant difference to the public at large
whether the petrol sold there comes from Total or from Esso or Shell or any
other major oil company. The next point is that the lessees under the leaseback
are not locked into trading in Total’s products from the property for 21 years.
If they find this unattractive, they are free to exercise the break clause
under the leaseback at the end of the 7th or 14th year of the term and leave;
if it seems harsh that the company may be compelled by adverse conditions to
leave the property which it formerly owned the answer is that it has already
received the substantial value of the property in the shape of the premium of
£35,000 for the grant to Total of the 51-year lease of the property at a
peppercorn rent.
Finally if the
leaseback had been granted for five years only, with the result that the tie in
it would have been unquestionably valid the lessees would have been left at the
end of the five years with the choice of either leaving the property or
applying for a new tenancy under the Landlord and Tenant Act 1954. But any new
tenancy would, like any new tenancy which might be granted under the Act at the
end of the 21-year term of the leaseback, have been likely to have been for a
maximum of five or seven years only (subject to the possibility of application
for a further new tenancy under the Act) subject to the same tie provisions as
are to be found in the leaseback. It was the lessees’ interest that required
that the lease and leaseback arrangement should be for a significantly long
term, since the premium payable by Total for a short term, such as a mere
five-year term, could not conceivably have been enough to recapitalise the
company and solve the company’s financial difficulties.
In the
circumstances of this case, and not least because at the time of the grant of
the lease and leaseback the company was subject to a valid tie for a term of
three to four years, I can see no real significance in the difference between a
tie for five years and the term of seven years to the first break under the
leaseback.
In the light
of these factors the restraints on trading in the leaseback were in my judgment
reasonable. Accordingly I would allow the cross-appeal.
It follows
that the question of severance which is sought to be raised by the appellants’
first ground of appeal does not arise. None the less, in deference to the
argument and in case this dispute goes further it may be appropriate that I
should express my view. The appellants support their case by reference to the Amoco
case, a petrol case where because of the restraints by way of tie to Amoco
in the leaseback the whole of a lease/leaseback transaction was held to be
void. The case is the less helpful, however, in that Lord Cross did not find it
necessary to lay down any clear test for whether invalid covenants in restraint
of trade could be severed from the rest of the agreement or composite agreement
in which they appeared; he merely referred to several possible tests and held
that by any of them the whole of the lease/leaseback arrangement in the Amoco
case was void.
In the Amoco
case, however, the invalid tie was the sole object or subject matter of the
contract, as was also the case in Vancouver Malt & Sake Brewing Co Ltd
v Vancouver Breweries Ltd [1934] AC 181. In such a case the whole
contract, or in the case of a lease/leaseback the whole of the composite
contract, must fall with the tie. That is not, however, the present case. I
find the most helpful test in the judgments of Somervell LJ in Bennett v
Bennett [1952] 1 KB 249 and Goodinson v Goodinson [1954] 2
QB 118. In the former case at p 254 he posed the question whether the invalid
promise was the whole or main consideration for the agreement moving from the
plaintiff, and, finding that it was, he held the whole agreement void. In the
latter case he held at pp 123-4, that there was ample consideration to support
the agreement apart from the void covenant and so other covenants in the
agreement could be enforced. The judgment of Goff LJ in Chemidus Wavin Ltd
v Societe pour la Transformation et L’ exploitation des Resines
Industrielles SA (1978) 3 CMLR 514 at p 523 approves a test to the same
effect.
In the present
case, in July 1969 Total had no particular need to impose a petrol tie on the
property, since they already held a valid tie with, as I have mentioned,
several years unexpired. The main object of the lease/leaseback transaction was
to refinance the company by the payment of the £35,000. The tie provisions
were, no doubt, in the eyes of Total an inevitable consequence, but they were
not either the sole consideration for the tie or the sole object of the
transaction. The important consideration for Total was the grant of the 51-year
lease, on the value of which the amount of the premium had been calculated, and
with this went the agreement to pay rent under the leaseback which provided
Total with an essential financial return on its outlay. I have no doubt,
therefore, that in this case the tie provisions, if invalid, would, as the
learned deputy judge held, be severable from the remaining provisions of the
leaseback; these remaining provisions and the lease itself remain valid.
The contract
is of course changed by the excision of the tie, and obviously Total would not
have granted a leaseback which did not contain such a tie. But I do not think
that is good enough to prevent severance and lead to the conclusion that the
whole of the lease and leaseback is void. A mortgage to a petrol company
containing a tie would, in my judgment, remain in all other respects valid
despite the invalidity of the tie as an unreasonable restraint of trade,
although the petrol company would not have contemplated making any advance on
mortgage to a dealer without a tie.
I turn
therefore to the appellants’ case on equitable grounds. The basis of the
contention that the transaction of the lease and leaseback ought to be set
aside in equity is that it is submitted, and in the court below was accepted on
behalf of Total, that during the negotiations for the lease and leaseback the
parties did not have equal bargaining power, and it is therefore further
submitted that a contract between parties who had unequal bargaining power can
only stand and be enforced by the stronger if he can prove that the contract
was, in point of fact, fair, just and reasonable. The concept of unequal
bargaining power is taken particularly from the judgment of Lord Denning MR in Lloyd’s
Bank v Bundy [1975] QB 326. The reference to a contract only
standing if it is proved to have been in point of fact fair, just and
reasonable is taken from the judgment of Lord Selborne LC in Earl of
Aylesbury v Morris (1873) LR 8 Ch App 484 at pp 490-491. Lord
Selborne was not there seeking to generalise; he was dealing only with what he
regarded as one of the oldest heads of equity, relieving against fraud
practised on heirs or expectants, particularly fraud practised on young
noblemen of great expectations, considerable extravagance and no ready money.
It is none the less submitted that the logic of the development of the law
leads to the conclusion that Lord Selborne’s test should now be applied
generally to any contract entered into between parties who did not have equal
bargaining power.
In fact Lord
Denning’s judgment in Lloyd’s Bank v Bundy merely laid down the
proposition that where there was unequal bargaining power the contract could
not stand if the weaker did not have separate legal advice. In the present case
Mr Lobb and the company did have separate advice from their own solicitor. On
the facts of this case, however, that does not weaken the appellants’ case if
the general proposition of law which they put forward is valid. Total refusal
to accept any of the modifications of the transaction as put forward by Total
which the company’s and Mr Lobb’s solicitor suggested, and in the end the
solicitor advised them not to proceed. Mr Lobb declined to accept that advice
because his and the company’s financial difficulties were so great, and, it may
be said, their bargaining power was so small, that he felt he had no
alternative but to accept Total’s terms. Because of the existing valid tie to
Total which had, as I have said, three to four years to run, he had no prospect
at all of raising finance on the scale he required from any source other than
Total. There is no suggestion that there was any other dealer readily available
who could have bought the property from him subject to the tie. The only
practical solutions open to him were to accept the terms of the lease and
leaseback as put forward by
the property to Total and cease trading. In these circumstances, it would be
unreal, in my judgment, to hold that if the transaction is otherwise tainted it
is cured merely because Mr Lobb and the company had independent advice.
But on the
learned deputy judge’s findings can it be said that the transaction is tainted?
Lord Selborne dealt with the case before him as a case of fraud. He said at pp
490-1:
The usury
laws, however, proved to be an inconvenient fetter upon the liberty of
commercial transactions; and the arbitrary rule of equity as to sales of
reversions was an impediment to fair and reasonable, as well as to
unconscionable, bargains. Both have been abolished by the Legislature; but the
abolition of the usury laws still leaves the nature of the bargain capable of
being a note of fraud in the estimation of this court; and the Act as to sales
of reversions (31 Vict c 4) is carefully limited to purchases ‘made bona fide
and without fraud or unfair dealing’, and leaves under-value still a material
element in cases in which it is not the sole equitable ground for relief. These
changes of the law have in no degree whatever altered the onus probandi
in those cases, which, according to the language of Lord Hardwicke, arise ‘from
the circumstances or conditions of the parties contracting — weakness on one
side, usury on the other, or extortion, or advantage taken of that weakness’ —
a presumption of fraud. Fraud does not here mean deceit or circumvention; it
means an unconscientious use of the power arising out of these circumstances
and conditions; and when the relative position of the parties is such as prima
facie to raise this presumption, the transaction cannot stand unless the
person claiming the benefit of it is able to repel the presumption by contrary
evidence, proving it to have been in point of fact fair, just, and reasonable.
The whole
emphasis is on extortion, or undue advantage taken of weakness, an
unconscientious use of the power rising out of the inequality of the parties’
circumstances, and an unconscientious use of power which the court might in
certain circumstances be entitled to infer from a particular — and in these
days notorious — relationship unless the contract is proved to have been in
fact fair, just and reasonable. Nothing leads me to suppose that the course of
the development of the law over the last 100 years has been such that the
emphasis on unconscionable conduct or unconscientious use of power has gone and
relief will now be granted in equity in a case such as the present if there has
been unequal bargaining power, even if the stronger has not used his strength
unconscionably. I agree with the judgment of Browne-Wilkinson J in Multiservice
Bookbinding Ltd v Marden [1979] Ch 84 which sets out that to
establish that a term is unfair and unconscionable it is not enough to show
that it is, objectively, unreasonable.
In the present
case there are findings of fact by the learned deputy judge that the conduct of
Total was not unconscionable, coercive or oppressive. There is ample evidence
to support those findings and they are not challenged by the appellants. Their
case is that the judge applied the wrong test; where there is unequal
bargaining power, the test is, they say, whether its terms are fair, just and
reasonable and it is unnecessary to consider whether the conduct of the
stronger party was oppressive or unconscionable. I do not accept the
appellants’ proposition of law. In my judgment the findings of the learned
judge conclude this ground of appeal against the appellants.
Inequality of
bargaining power must anyhow be a relative concept. It is seldom in any
negotiation that the bargaining powers of the parties are absolutely equal. Any
individual wanting to borrow money from a bank, building society or other
financial institution in order to pay his liabilities or buy some property he
urgently wants to acquire will have virtually no bargaining power; he will have
to take or leave the terms offered to him. So, with house property in a
seller’s market, the purchaser will not have equal bargaining power with the
vendor. But Lord Denning did not envisage that any contract entered into in
such circumstances would, without more, be reviewed by the courts by the
objective criterion of what was reasonable. See Lloyd’s Bank v Bundy
supra at p 336. The courts would only interfere in exceptional cases where
as a matter of common fairness it was not right that the strong should be
allowed to push the weak to the wall. The concepts of unconscionable conduct
and of the exercise by the stronger of coercive power are thus brought in, and
in the present case they are negatived by the deputy judge’s findings.
Even if,
contrary to my view just expressed, the company and Mr and Mrs Lobb had
initially in 1969 a valid claim in equity to have the lease and leaseback set
aside as a result of the inequality of bargaining power, that claim was, in my
judgment, barred by laches well before the issue of the writ in this action.
The rescue
operation by way of recapitalisation of the company was never successfully
achieved. The £35,000 paid by Total was almost entirely absorbed in satisfying
the company’s existing liabilities, and the company was left still without
working capital. Moreover Mr Lobb did not take into account, and was not
advised, that the grant of the 51-year lease to Total at a premium was likely
to amount to a disposal of the property for capital gains tax purposes and to
involve liability for that tax. That the premium did not go far enough was
partly due to the actions of other creditors; the company’s bankers insisted on
the company’s secured overdraft being cleared and on its account being kept in
credit thereafter, without overdraft facilities, and United Dominions Trust Ltd
insisted on a stocking loan being reduced to within its agreed limit. Total
contributed to these difficulties partly because Total did not proceed very
expeditiously to completion (primarily because Total was reluctant to enter
into a transaction which it never found particularly attractive) and partly
because Total insisted on deducting from the premium the full amount required
to clear all subsisting hire purchase agreements on plant and equipment
including a capital sum in respect of the underground tanks. The judge regarded
this insistence as unreasonable, though not oppressive.
All this,
however, apart from the substantial capital gains tax liability, became known
to the company and Mr and Mrs Lobb in 1969 very soon after the grant of the
lease and leaseback. But the writ was not issued until June 1979, and the first
intimation of a possible claim that the lease could, on unspecified grounds, be
set aside on repayment of the premium was not given to Total until July 22
1976.
In the
meantime, however, trading from the property had continued and in 1973 Total,
with the concurrence of the company and Mr Lobb, had spent £19,000 on the
property in converting it to a self-service filling station. The rent under the
leaseback was consequently increased, but Total would of course never have
spent that money on the property if it had previously been made clear that the
validity of the lease/leaseback arrangement was to be disputed. Even after the
intimation of a possible claim on July 22 1976 the Lobbs continued to negotiate
with Total and alternative terms were put forward by Total which are described
by the learned deputy judge in his judgment, but no writ was issued for nearly
three years.
Mr Cullen
submits on behalf of the appellants that there can be no laches so long as the
company’s and Mr Lobb’s financial difficulties continued, and they did continue
up to the issue of the writ and afterwards. I do not accept this. Even though
the company’s cheques were again being dishonoured by December 1969, the
immediate pressure was removed in July. Apart from that the company and Mr and
Mrs Lobb were at all times free to consult solicitors and accountants. This is
a clear case of laches.
I would
dismiss the appeal and allow the cross-appeal.
Agreeing, DUNN
LJ said: The following questions appear to arise for decision in this appeal
and cross-appeal.
1. Did the underlease contain covenants in
unreasonable restraint of trade?
2. If so, are both the lease and the
underlease to be regarded as unenforceable, or can the offending covenants be
severed leaving the lease, and so much of the underlease as is valid, to stand?
3. In any event can both lease and underlease
be set aside in equity?
4. If so, are the plaintiffs barred from
relief by laches?
The judge
answered question 1 in the affirmative. He held that the offending covenants
could be severed, and answered question 3 in the negative. He did not find it
necessary to deal with question 4. Questions 1 and 4 accordingly arise on the
cross-appeal, and questions 2 and 3 on the appeal.
Unreasonable
restraint of trade
The judge
held:
1. That the lease and underlease formed the
component elements of a single transaction.
2. That in the circumstances of this case the
doctrine of restraint of trade applied to such a transaction since, although
the underlessees were not the original lessors of the lease, the reality of the
transaction was that the plaintiff company raised finance on its land by a
lease and underlease rather than by a mortgage, and that the business continued
to be carried on by and for the benefit of Mr and Mrs Lobb who were the sole
proprietors of the company. The underlease to Mr and Mrs Lobb was no more than
a device to avoid the application of the restraint of trade.
3. That the doctrine of restraint of trade was
applicable when the restraint was imposed as a term of the rescue of an
insolvent
Breweries [1934] AC 181 per Lord MacMillan at p 191.
With respect
to the arguments of Mr Peppitt to the contrary, in my judgment the judge was
right to come to the conclusion which he did on those matters in holding that
the doctrine of restraint of trade applied to the transaction. The remaining
question on the cross-appeal is whether the defendants, on whom the onus lies,
have proved that the restraint was reasonable.
The judge felt
unable to distinguish the case from Esso Petroleum Co Ltd v Harpers
Garage (Stourport) Ltd [1968] AC 269. He held:
In the
present case, the defendants have not attempted to call evidence to justify the
length of the tie; nor have they relied on the existence of the mutual break
clause to argue that the tie was only for a period of seven years. Mr and Mrs
Lobb could of course have freed themselves from the tie after the expiry of
that period, but only by ridding themselves of the underlease and losing the
right to trade altogether from the site.
Mr Peppitt
agreed that he had not attempted to justify the length of the tie as such, but
said that he had submitted that there were special circumstances in this case
upon which the restrictions could be justified, and which distinguished the
case from Harper’s case supra. In Harper’s case the House
of Lords was careful not to find that a 21-year tie was unreasonable in all
circumstances. Each case depended on its own facts, and all their Lordships
emphasised that it was ultimately public policy which prohibited the
enforcement of covenants in restraint of trade (see especially Lord Pearce at
pp 323 to 324). In Amoco Australia Pty Ltd v Rocca Bros Motor
Engineering Co Pty Ltd [1975] AC 561 Lord Cross, giving the advice of the
Board, emphasised at p 579 that the adequacy of the consideration received by
the covenantor for the benefits which he obtained from the agreement was
relevant to the question of the reasonableness of a restraint imposed by the
agreement. In Foley v Classique Coaches Ltd [1934] 2 KB 1 the
fact that the petrol was to be purchased by the covenantor at a reasonable
price was held to be relevant to the question of the reasonableness of the
covenant.
The special
circumstances relied on by Mr Peppitt as justifying the covenants in restraint
of trade may be summarised as follows. The defendants had paid the market price
for a 51-year lease, which was for all practical purposes equivalent to a
freehold. The plaintiff company was insolvent, and the sum of £35,000 was
designed to enable it to pay its debts, and to save the Lobbs from personal
bankruptcy. Fifty-one years was the shortest term which would justify a payment
sufficient to discharge the debts of the company. Without such a sum there was
no realistic prospect that the company would be able to continue in business for
any length of time. The company was independently advised with regard to the
transaction by its solicitors and accountants, and insisted on proceeding
contrary to their advice. By reason of the underlease, Mr and Mrs Lobb were
able to continue to trade and to pass on the business to their sons. In July
1969, by reason of the terms of certain mortgages the plaintiff company was
already bound to buy all its petrol from the defendants for a number of years.
Hence the company’s freedom to trade was already restricted, and the further
restrictions imposed by the underlease were illusory. The term of 21 years was
the maximum term the plaintiffs were prepared to grant, although Mr Lobb would
have preferred a longer underlease.
In my judgment
the transaction in question amounted to a rescue operation for the benefit of
the company and the Lobbs which the defendants were reluctant to undertake, but
which they undertook in order to preserve the site as an outlet for their
petrol. The break clauses in the underlease enabled the company to cease to
trade if the rescue operation should fail. The transaction was of advantage to
the plaintiffs, since it enabled the company to continue to trade from the
site, which it did for another 10 years, and was of advantage to the defendants,
since it preserved an outlet.
In Harper’s
case none of these circumstances existed. There was a loan to the dealer of
£7,000 secured by a mortgage, and there was no special reason for a tie as long
as 21 years. In the instant case the defendants paid a fair price for the
51-year lease and the covenants in restraint of trade only lasted for 21 years.
There was ample consideration for the grant of the lease, and the underlease
was necessary if the Lobbs were to continue trading from the site. In my judgment
public policy does not require that such arrangements should be unenforceable.
On the contrary, it seems to me that public policy should encourage a
transaction which enabled trading by the plaintiff to continue, and preserved
an outlet for the defendant’s products. I would hold that in the special
circumstances of this case the defendants have established that the covenants
in restraint of trade were reasonable.
Severance
On the view
that I have formed of the reasonableness of the covenants, the question of
severance does not arise for decision. But since the question was fully argued,
and since the cases on the subject are not easily reconcilable, I will state my
views upon it on the basis that the covenants were, as the judge held, in
unreasonable restraint of trade.
We are not
here concerned with severance in the sense of the reduction or modification of
an objectionable covenant, as in such cases as Mason v Provident
Clothing & Supply Co Ltd [1913] AC 724; Goldsoll v Goldman
[1915] Ch 292; or Attwood v Lamont [1920] 3 KB 571. We are
concerned here with the question whether the objectionable covenants can be cut
out altogether from the underlease, leaving the lease and the rest of the
underlease valid and enforceable. As Lord Denning MR said in Kingsway
Investments (Kent) Ltd v Kent CC [1969] 2 QB 332 at p 354: ‘This
question of severance has vexed the law for centuries.’ He followed the notes
to Pigot’s case (1614) 77 ER 1179: ‘The general principle is, that if
any clause etc void by statute or by the common law, be mixed up with good
matter which is entirely independent of it, the good part stands, the rest is
void; . . . but if the part which is good depends on that which is bad, the
whole instrument is void.’ In Kearney v Whitehaven Colliery Co (1893)
1 QB 700 Lopes LJ held at p 713: ‘Where there is no illegality in the
consideration, and some of the provisions are legal and others illegal, the
illegality of those which are bad does not communicate itself to, or
contaminate, those which are good, unless they are inseparable from and
dependent upon one another.’ In Horwood v Millars Timber &
Trading Co Ltd [1917] 1 KB 305, the Court of Appeal held that the good and
bad obligations were so closely linked that there could be no severance. In Bennett
v Bennett [1952] 1 KB 249 Somervell LJ held that where the main
consideration for the deed was an illegal covenant the whole deed was void.
Denning LJ said at p 261:
If the void
covenant goes only to part of the consideration, so that it can be ignored and
yet leave the rest of the deed a reasonable arrangement between the parties,
then the deed stands and can be enforced in every respect save in regard to the
void covenant.
In Goodinson
v Goodinson [1954] 2 QB 118 Somervell LJ held at p 124 that there was ample
consideration to support the agreement apart from the illegal covenant. Romer
LJ also decided the question as being one of consideration. In Stenhouse
Australia Ltd v Phillips [1974] AC 391 Lord Wilberforce said at p
403:
Clause 4 is
in no way dependent upon other clauses declared to be unenforceable, and since
the effect of a holding that a contractual provision is in unreasonable
restraint of trade is merely to render that provision unenforceable, without
destroying the rest of the contract, there is no reason against enforcement of
clause 4 alone.
In the Amoco
case supra, Lord Cross, at p 578, having referred to various tests as to
severability which might not in every case lead to the same result, said:
Whatever test
be applied the answer must, their lordships think, be the same in this case. It
is inconceivable that any petrol company would grant a dealer a lease at a
nominal rent of a site on which it had spent a substantial sum in installing
pumps and other equipment without imposing on the dealer any obligation to buy
petrol from it, or even to carry on the business of a petrol station on the
demised premises.
[The
restrictive clauses]
were the
heart and soul of the underlease.
Hence no
severance. In the case of Chemidus Wavin Ltd (1978) CMLR 514, Buckley LJ
said at p 520:
Applying
article 85 to an English contract, one may well have to consider whether, after
the excisions required by the Article of the Treaty had been made from the
contract, the contract could be said to fail from lack of consideration, or any
other ground, or whether the contract would be so changed in its character as
not to be the sort of contract that the parties intended to enter into at all.
Goff LJ said
at p 523:
If a promisee
claims the enforcement of a promise, and the promise is a valid promise and
supported by consideration, the court will enforce the promise notwithstanding
the fact that the promisor has made other promises supported by the same
consideration, which are void, and has included valid and invalid promises in
one document.
The judge in
the instant case held that since, even without the
commercially intelligible transaction’ severance of the restrictive covenant
was permissible, leaving the lease and the remainder of the underlease valid.
In adopting that test he followed the US case of Kelly v Kosuga
(1959) 358 US 516 at p 521. With respect to the judge, although the case was
referred to as providing a possible test by Lord Cross in the Amoco
case, I do not think its adoption is warranted by the English authorities to
which I have referred.
The
preponderance of these authorities seems to me to indicate that if the valid
promises are supported by sufficient consideration, then the invalid promises
can be severed from the valid even though the consideration also supports the
invalid promises. On the other hand if the invalid promise is substantially the
whole or main consideration for the agreement then there will be no severance.
In the Amoco
case the lease and underlease were coterminous at a nominal rent. In the
instant case a premium representing full consideration was paid for the lease.
There remained a reversion of 29 years in the lessor. The underlease was near a
rack rent and, because of the break and rent review clauses, a full rack rent
was payable after eight years. Ample consideration was given for the
transaction as a whole, though no doubt part of the consideration was
applicable to the restrictive covenants. But the main consideration was that
given for the lease, and the transaction was not dependent on the unenforceable
clauses in the underlease. For those reasons, in my judgment the judge was
right to sever the unobjectionable clauses from the underlease.
Equitable
relief
Mr Cullen
conceded that he could not bring himself within any of the established
categories of equitable relief, but relied on the dictum of Lord Denning MR in Lloyds
Bank v Bundy [1975] QB 326 at p 339 and submitted that the
circumstances of this case disclosed a classic case of inequality of bargaining
power of which the defendants had taken advantage by entering into the
transaction, although he did not suggest any pressure or other misconduct on
their part. He submitted that if it was necessary to categorise the grant of
relief sought, it was an unconscionable bargain. He reminded us that the
categories of unconscionable bargains are not closed (per Browne-Wilkinson J in
Multiservice Bookbinding Ltd v Marden [1979] Ch 84 at p 110) and
sought to distinguish the instant case from that case by submitting that here
the plaintiffs were under a compelling necessity to accept the loan, so that
misconduct by the defendants was unnecessary. The fact of their impecuniosity,
that they were already tied to the defendants by mortgages, that there was no
other source of finance, and that they could not sell the equities of
redemption under the mortgages without giving up trading, coupled with the
knowledge of the defendants of those facts rendered the transaction
unconscionable, and placed the onus upon the defendants to show that its terms
were fair and reasonable.
I find myself
unable to accept those arguments. Mere impecuniosity has never been held a
ground for equitable relief. In this case no pressure was placed upon the
plaintiffs. On the contrary the defendants were reluctant to enter into the
transaction. The plaintiffs took independent advice from their solicitors and
accountants. They went into the transaction with their eyes open, and it was of
benefit to them because they were enabled to continue trade from the site for a
number of years. In my view the judge was right to refuse equitable relief.
Laches
If I am wrong,
and the plaintiffs are entitled to equitable relief, I would hold that they are
barred by laches for the reasons given by Dillon LJ.
Accordingly I
would allow the cross-appeal and dismiss the appeal.
Also agreeing,
WALLER LJ said: I will briefly express my own view of the two main issues. The
first is whether or not there was an unreasonable restraint of trade in the
agreements made between the parties and the second one is whether or not, if
there was unreasonable restraint of trade, the tie provisions can be severed
from the rest of the contract.
In this case
one of the parties to the lease was different from one of the parties to the
sublease. The effect is that the subtenants are strictly not giving up any
right which they had enjoyed before. But since they controlled the company
which had enjoyed unrestrained rights of trade, in my opinion the lease and the
leaseback have to be considered as though they were made between the same
parties. I say this reluctantly because it is the party which is not before the
court that would benefit if the court came to the conclusion that the tie for
21 years was an unreasonable restraint of trade. However, Mr Cullen sought to
meet this by giving certain undertakings to the respondents.
The learned
deputy judge found in favour of Total save in respect of the length of the tie
in the leaseback. He came to the conclusion that, having regard to the fact
that the defendants Total did not call evidence to justify the length of the
tie and the decision in Esso Petroleum v Harper, he had to find
that the tie in this case was an unreasonable restraint of trade. Mr Peppitt
accepted that he did not call evidence to justify the length of the tie. He
relied on the 51-year lease which granted to Total an outlet for 51 years. The
21 years with a tie and break at 8 and 15 years was the most Total were
prepared to grant and it did not require evidence to justify this. Mr Peppitt
further submitted that the facts in this case were very different from either
the Cleveland case or the Harper case. In Esso Petroleum Co Ltd v
Harper’s Garage (Stourport) Ltd [1968] AC 269 Lord Reid said:
It is now
generally accepted that a provison 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. 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: ‘. . . of course the quantum of
consideration may enter into the question of the reasonableness of the
contract.’
The
circumstances which existed in the months immediately before and at the time
when the lease and leaseback were executed were fully set out in the judgment
of the learned deputy judge and are set out in the judgment of Dillon LJ. I
will summarise those facts which are relevant when seeking to answer the three
questions posed by Lord Reid. Alec Lobb (Garages) Ltd was in serious financial
trouble. Not only had they borrowed £24,000 from Total, which had a charge with
a tie as security for the loan, but the company also had borrowed from the
bank. Furthermore its trading position was not satisfactory. Because of its
loans from Total the company was not in a position to raise money elsewhere. In
these circumstances Mr Lobb approached Total for help, suggesting lease and
leaseback of the forecourt. Mr Storey of Total was not enthusiastic. Total
suggested a purchase of the freehold, but Mr Lobb would not agree. Finally it
was agreed that there should be a lease of 51 years. This was at Mr Lobb’s
request to avoid income tax, but the premium of £35,000 was based on the market
value and anything less would not have begun to solve the company’s financial
difficulties. From Total’s point of view they were providing £35,000, which
would be sufficient to pay the debts which they knew about and leave Alec Lobb
Ltd with some spare capital. They knew he was advised by his solicitor and by
an accountant. They did not know what the advice was. They were acquiring an
outlet for 51 years at a price based on market value. The leaseback was for 21
years, which was the most Total would grant. No pressure whatever was put on by
Total. In fact, Mr Lobb had other debts unknown to Total and he was soon in
trouble again. Total were making a decision to help Lobb to save him from
bankruptcy, which would have been the almost certain alternative. Did the
restraint go further than to afford adequate protection to Total? The restraint
was for 21 years with a break at 8 and 15. As a result of the lease and
leaseback Total were virtually the freeholders, saving one of their customers
and one of their outlets which might be lost in the event of bankruptcy of the
company. In Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co
Pty Ltd [1975] AC 561, Lord Cross, at p 579, said:
The fact that
a covenantor has obtained and will continue to enjoy benefits under the
relevant agreement which formed part of the consideration for the covenant
which he claims to be unenforceable is no doubt pro tanto a reason
for holding that the covenant is not in unreasonable restraint of trade.
And Lord Reid,
in the passage I have cited, quotes Lord Macnaghten to the same effect. Having
regard to all the circumstances and in particular the amount of the
consideration, in my opinion the restraint did not go farther than was
necessary to afford adequate protection. Could this be justified in the
interests of Mr Lobb? The bargain has to be examined and judged at the time it
was struck and if the facts were only those known to Total they were saving Mr
Lobb from bankruptcy. There were, however, other circumstances, other
liabilities unknown to Total which produced a different result. These other
liabilities meant that although Mr Lobb was saved from immediate bankruptcy he
did not have the working capital which Total had expected. Judged by the facts
known to Total at the time of making the contract the existence of the tie can,
in my opinion, be justified in the interests of Mr Lobb. In the words of the
learned deputy judge, it was not ‘in any way unfair or unreasonable’. Without
it or some other arrangement the consequences would have been early trouble.
Must the
contract be held contrary to the public interest? In my judgment the answer is
‘No’. It is clearly in the public interest to save a firm from bankruptcy
provided that the terms are not unfair and that improper pressure has not been
exerted. No improper pressure, indeed no pressure, was exerted by Total. The
initiative came from Mr Lobb. When Total suggested a sale of the freehold and a
leaseback Mr Lobb said ‘No’. Total accepted his suggestion of a 51-year lease
and paid for it at market value. Total was then not prepared to grant more than
21 years with a break at 8 and 15. In my judgment, although it is unusual to
have a tie of this length, this tie was not contrary to the public interest.
Accordingly I am of opinion that the restraint of trade imposed was reasonable.
If I am wrong
in my conclusion that there was no unreasonable restraint of trade, it is
submitted by Mr Cullen that the learned deputy judge was in error in finding
that the clauses enforcing a restraint of trade were severable and that the
contract remained enforceable when those clauses were severed. When Dunn LJ
asked counsel what test had to be applied, we were not only referred to a
number of authorities setting out tests which varied in some degree the one
from the other but also certain textbooks (eg Cheshire and Fifoot 10th
ed, p 373, Treitel 6th ed p 382 et seq and Chitty 25th ed, p
644). I do not here set out these cases save to say that there is a clear
distinction between the severability of a covenant, ie whether a covenant
itself can be divided leaving part of it effective, and those cases where the
whole covenant is struck out and the decision then has to be made as to whether
that which is left is enforceable or not. The instant case is, of course, in
the latter category and in my opinion the test to be applied is best set out in
the judgment of Buckley LJ in a Common Market case in the English Court of
Appeal Chemidus Wavin Ltd v Societe pour la Transformation et
L’exploitation des Resines Industrielles SA (1978) CMLR 514 at p 519:
(18) So, the
position appears clearly to be this, that where in a contract there are certain
clauses which are annulled by reason of their being in contravention of Article
85, paragraph (1), of the Treaty, one must look at the contract with those
clauses struck out and see what the effect of that is in the light of the
domestic law which governs the particular contract. In the present case, we
have to consider what effect the invalidity, if any, of the clauses in the
licence agreement by reason of Article 85 would have upon that contract as a
whole. Whether it is right to regard the matter as one of severance of the
contract or not, I do not think it is necessary for us to consider now. I doubt
whether it is really a question of severance in the sense in which we in these
courts are accustomed to use that term in considering whether covenants
contained in contracts of employment and so forth are void as being in
restraint of trade, and, if they are to any extent void, whether those
covenants can be severed so as to save part of the covenant, although another
part may be bad. It seems to me that, in applying Article 85 to an English
contract, one may well have to consider whether, after the excisions required
by the Article of the Treaty have been made from the contract, the contract
could be said to fail for lack of consideration or on any other ground, or
whether the contract would be so changed in its character as not to be the sort
of contract that the parties intended to enter into at all.
Can this
contract be said to be so changed in its character as not to be the sort of
contract that the parties intended to enter into at all? In my judgment the
consideration was twofold. There was the 51-year term for which a sum based on
the market price was paid and there was the tie. If the tie is removed there is
a lease for which a substantial sum was paid and there is a leaseback at a rent
which is not nominal. While the purpose of the contract included a tie, the
contract was a contract for letting a petrol station. With the tie removed it
is still a contract for letting a petrol station. Even though Total would not
have entered into the contract without the tie, it remained a contract for letting
a petrol station and it was at a rent which was not nominal, therefore the sort
of contract which the parties intended to enter into.
The appeal by
the plaintiffs was dismissed and the cross-appeal by the defendants allowed.
Leave to appeal to the House of Lords was refused.
