Landlord and tenant — Tied public houses — Whether beer ties in leases and beer-supply agreements prohibited by Article 85 of European Community Treaty — Whether community law provides directly enforceable rights — Whether implied term in leases as to beer prices payable by tenants — Whether liability for sums payable for any breach of Article 85 or implied term can be set off against rent and other sums payable by tenants — Meaning and effect of block exemption
In each of these conjoined appeals (two of which
were only applications for permission to appeal) the appellants and applicants
were the tenants of public houses of which the respective respondents were the
landlords. In each case, the tenant held a lease subject to a beer tie. In Byrne
the issue on appeal concerned the meaning and effect of the block exemption
granted by the European Commission to brewer landlords in Regulation 1984/83 in
respect of beer ties; in each of the other cases, the tenant complained that
the supplier had sold beer to publicans who were not subject to a beer tie at
substantially lower prices than those charged to tenants who were. They alleged
infringements of Article 85 (now Article 81) of the European Community Treaty
and claimed the differences between the prices they paid and the prices they
would have paid in the absence of the ties. The principal issues in the appeals
and applications were: (a) whether the beer ties contained in the leases to
tied tenants were prohibited by Article 85 (the co-contractor point); (b)
whether the arrangements between a brewer and the landlord of tied houses, as
arose by virtue of an agreement in two of the cases, were prohibited by Article
85 (the concerted practices point); (c) if the answer to either question was in
the affirmative, whether the tenant was entitled to a directly enforceable
right under community law; (d) if the tenant were entitled to such a right, did
he have a pecuniary remedy for its infringement for either damages or
restitution under English law; (e)
but English law afforded him no such remedy, was the principle of English law
denying that right superseded by Community law that direct effect be given to
the right; (f)
prices at which beer was to be sold to a tied tenant; (g) may a tenant set off
any liability to him arising from the application of Article 85 or breach of
the implied term against his liability for rent due under his lease;
(h)
Article 177; and (i) whether the block exemption afforded by Regulation 1984/83
applied to the tie in Byrne.
the co-contractors point, and on a concession by the landlords that there were
infringements of Article 85, there would be referred to the European Court of
Justice the question of whether, assuming that a party to a prohibited
agreement may be someone who is given rights against the other party by virtue
of Article 85, which are protected under Community law, and assuming that such
a party has been damaged by actions taken under the agreement by the other
party, the national court is obliged as a matter of Community law to award
damages to the injured party. In respect of the concerted practices point, in
the Crehan appeal the tenant’s claim lacked any factual substance, and
in the Smith application the allegation of concerted practice was
entirely and utterly speculative. There were no grounds for implying terms into
leases against the charging of beer prices higher than those charged to
non-tied tenants. Until the European Court of Justice determines that Article
85 confers on the tenants a right to be directly enforced by the national
courts with remedies that include a pecuniary award, the tenants can have no
monetary cross-claim against the claims made against them for rent or the price
of beer sold and delivered. The claim to legal set-off failed. Equitable
set-off was denied because the connection between the claim under Article 85
and the claim for rent was so tenuous. That would be so even if the European
Court of Justice were to conclude that Article 85 conferred on a tenant of tied
premises a right for the breach of which he is entitled to damages from his
landlord. If set-off had been allowed, it was not necessary that there should
be some temporal connection between the period for which the rent is claimed
and the events giving rise to the cross-claim. The tie provisions of the lease
and business agreement in the Byrne appeal fell outside those allowed
under the block exemption.
The following cases are
referred to in this report.
Aectra Refining & Manufacturing Inc v Exmar NV: The New Vanguard and The Pacifica [1994] 1 WLR
1634; [1995] 1 All ER 641; [1995] 1 Lloyd’s Rep 191
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1975] AC 561;
[1975] 2 WLR 779; [1975] 1 All ER 968
Axel Johnson Petroleum AB v MG Mineral Group [1992] 1 WLR 270; [1992] 2 All ER 163, CA
Banks (HJ) & Co Ltd v British Coal Corporation [1994] ECR I-1209
Belgische Radio en Televisie v SV SABAM [1974] ECR I-51
British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] QB 137;
[1979] 3 WLR 451; [1979] 2 All ER 1063; (1978) 39 P&CR 189; [1979] 1 EGLR
65; [1979] EGD 414; 250 EG 1183
Cabour SA v Automobilies
Peugeot SA [1998] 5 CMLR 679
Catt v Tourle
(1869) 4 Ch App 654
Century Textiles & Industry Ltd v Tomoe Shipping Co (Singapore) Pte Ltd: The Aditya Vaibhav (No
1) [1991] 1 Lloyd’s Rep 573
Chemidus Wavin Ltd v Société pour la Transformation et l’Exploitation des Resines
Industrielles SA [1978] 3 CMLR 514; [1977] 5 WWR 155, Saskatchewan, CA
Chiron Corporation v Murex Diagnostics Ltd (No 8) [1995] All ER (EC) 88
CILFIT and Lanificio di Gavarda SpA v Minister of Health of Italy (Case 283/81) [1982] ECR
III-3415; [1983] 1 CMLR 472, European Ct
Clegg v Hands
(1890) 44 ChD 503
Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501; [1993] 2 EGLR 108;
[1993] 46 EG 184, CA
Courage & Co Ltd v Carpenter [1910] 1 Ch 262; (1910) 26 TLR 193
Courage Ltd (now known as Inntrepreneur Beer
Supply Co Ltd) v Crehan [1998] EGCS 171
Crawford v Stirling
(1802) 4 Esp 207
Delimitis v Henninger
Bräu AG [1991] ECR I-935; [1992] 5 CMLR 210
Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1966] 2 QB 514; [1966] 2
WLR 1043; [1966] 1 All ER 725, CA
Esso Petroleum Co Ltd v Milton [1997] 1 WLR 938; [1997] 2 All ER 593, CA
Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1978] QB 927; [1978] 3 WLR 309; [1978] 3
All ER 1066, CA
Foley v Classique
Coaches Ltd [1934] 2 KB 1; [1934] All ER Rep 88, CA
Fuji Finance Inc
v Aetna Life Insurance Co Ltd [1997] Ch 173; [1996] 3 WLR 871; [1996] 4
All ER 608, CA
Garden Cottage Foods Ltd v Milk Marketing Board [1984] AC 130; [1983] 3 WLR 143;
[1983] 2 All ER 770, HL
Gibbs Mew plc v Gemmell
[1999] 1 EGLR 43; [1999] 01 EG 117; [1998] EuLR 588, CA
Grant v NZMC
Ltd [1989] 1 NZLR 8
Greenalls Management Ltd v Canavan (No 2) [1998] EuLR 507
Guinness Mahon & Co Ltd v Kensington and Chelsea Royal London Borough Council [1998]
3 WLR 829; [1998] 2 All ER 272
Hanak v Green
[1958] 2 QB 9; [1958] 2 WLR 755; [1958] 2 All ER 141, CA
Holleran v Daniel
Thwaites plc [1989] 2 CMLR 917
Hydrotherm Gerätebau GmbH v Compact de Dott Ing Mario Andredi [1984] ECR III-2999;
[1985] 3 CMLR 224
Inntrepreneur Estates (GL) Ltd v Boyes (1993) 68 P&CR 77; [1993] 2 EGLR 112; [1993] 47
EG 140, CA
Kleinwort Benson Ltd v Birmingham City Council [1997] QB 380; [1996] 3 WLR 1139;
[1996] 4 All ER 733, CA
Kleinwort Benson Ltd v Lincoln City Council [1998] 3 WLR 1095; [1998] 4 All ER
513; [1998] Lloyd’s Rep Bank 387, HL
Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548; [1991] 3 WLR 10; [1992] 4
All ER 512, HL
Little v Courage
Ltd (1995) 70 P&CR 469
Lobb (Alec) (Garages) Ltd v Total Oil (Great Britain) Ltd [1985] 1 WLR 173; [1985] 1
All ER 303; [1985] 1 EGLR 33; (1985) 273 EG 659, CA
Marchant & Eliot Underwriting Ltd v Higgins [1996] 1 Lloyd’s Rep 313; [1996] 2 Lloyd’s Rep 31,
CA
Marshall v NM
Financial Management Ltd [1997] 1 WLR 1527
May & Butcher
v King [1934] 2 KB 17
MTV Europe v BMG
Record (UK) Ltd [1997] EuLR 100
Mulder v Council
of the European Communities and Commission of the European Communities
[1992] ECR I-3061
Nokes & Co Ltd v Day [1910] 1 Ch 270
Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713; [1977] 2 All ER
463; [1977] 1 Lloyd’s Rep 463, HL
Perma Life Mufflers Inc v International Parts Corporation (1967) 392 US 134
Petrofina (GB) Ltd v Martin [1966] Ch 146; [1966] 2 WLR 318; [1966] 1 All ER
126, CA
Richard Cound Ltd
v BMW (GB) Ltd [1997] EuLR 277
Schroeder (A) Music Publishing Co Ltd v Macaulay (formerly Instone) [1974] 1 WLR 1308; [1974] 3
All ER 616, HL
Shell UK Ltd v Lostock
Garage Ltd [1976] 1 WLR 1187; [1977] 1 All ER 481, CA
Société de Vente de Ciments et Bétons de
l’Est SA v Kerpen & Kerpen GmbH & Co
[1983] ECR 4173
Star Rider Ltd v Inntrepreneur
Pub Co [1998] 1 EGLR 53; [1998] 16 EG 140
Thomas Witter Ltd
v TBP Industries Ltd [1996] 2 All ER 573
Tinsley v Milligan
[1994] 1 AC 340; [1993] 3 WLR 126; [1993] 3 All ER 65, HL
Trent Taverns Ltd
v Sykes The Times 5 March 1999
VAG France AG v Établissements
Magne SA [1986] ECRV-4071
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1994] 1 WLR 938; [1994]
4 All ER 890; (1994) 92 LGR 405, CA
Whitbread [1999]
OJ L88/26
Wyatt v Kreglinger
& Furnau [1933] 1 KB 793
Courage Ltd v Crehan
This was an appeal by the defendant, Mr Crehan,
from decisions of Cranwath J, who had given judgment to the claimant, Courage
Ltd, on its claim from arrears of rent and dismissed Mr Crehan’s counterclaim.
The question set out above was referred to the European Court of Justice.
Byrne v Inntrepreneur Beer Supply Co Ltd
This was an appeal by the claimant, Mr Byrne, and
a cross-appeal by the defendant, Inntrepreneur Beer Supply Co Ltd, from
decisions of Neuberger J to dismiss the claimant’s application to amend his
claim and the defendant’s application that the claim should be dismissed, in
the claimant’s claim for damages for an anticipatory breach of an option in a
surrendered lease and for misrepresentation in relation to a new lease. The
appeal and, in part, the cross-appeal, were allowed.
Inntrepreneur Beer Supply Co Ltd v Langton
This was an appeal by the defendant, Mrs Langton,
from a decision of Jacob J, who had given judgment to the claimant,
Inntrepreneur Beer Supply Co Ltd, on a summons under RSC Ord 14 for possession
of premises and arrears of rent. The appeal was dismissed.
Greenalls Management Ltd v Smith
This was an application by the defendant, Mr
Smith, for leave to appeal and an extension of time within which to do so from
orders made by Jacob J for possession of premises and a judgment for arrears of
rent on claims made by the claimant, Greenalls Management Ltd. The application
was dismissed.
Walker Cain Ltd v McCaughey
This was an application for leave to appeal, and
for stay of execution, by the defendant, Mr McCaughey, from a decision of
Mr
Division, dismissing the defendant’s appeal from orders made by Master
Moncaster giving summary judgment for possession and arrears of rent in a claim
by the claimants, Walker Cain Ltd and Ind Coope (Oxford & West Ltd). The
application was dismissed.
David Vaughan QC and Mark Brealey (instructed by
Charles Russell) appeared for Mr Crehan; Richard Field QC and Nicholas Green
QC, Martin Rodger and Aidan Robertson (instructed by Masons) appeared for
Courage Ltd.
Mark Brealey (instructed by Phillip Ross) appeared
for Mr Byrne; Nicholas Green QC and Martin Rodger (instructed by Masons)
appeared for Inntrepreneur Beer Supply Co Ltd.
Jonathan Brock QC and Michael Swainston
(instructed by Maitland Walker) appeared for Mrs Langton; Richard Field QC,
Nicholas Green
Inntrepreneur Beer Supply Co Ltd.
Alan Tyrell QC and Becket Bedford (instructed by
Matthew Arnold & Baldwin) appeared for Mr Smith; Aidan Robertson and Andrew
Myers (solicitor) (instructed by Travers Smith Braithwaite) appeared for
Greenalls Management Ltd.
Becket Bedford (instructed by Barnetts, of
Southport) appeared for Mr McCaughey; Andrew Walker (instructed by Linklaters)
appeared for Walker Cain Ltd.
Giving judgment, MORRITT LJ said: This is the judgment of the court to
which the members have contributed equally. It deals with three appeals (Crehan,
Langton and Byrne) and two applications for permission to appeal
(Smith and McCaughey). All five concern the validity of
provisions known as beer ties, whereby the tenant of a public house is required
by the terms of his lease to purchase all or most of the beer required for sale
in such premises from the landlord or a brewer nominated by him at the prices
prescribed by the supplier. Such provisions have existed in the United Kingdom
for well over a century. From time to time their validity has been challenged.
In June 1983 the European Commission granted a block exemption under Article
85(3) of the EC Treaty on the terms contained in Commission Regulation No
1984/83 in respect of exclusive purchasing agreements, which specifically
included such ties. The appeal in Byrne raises questions as to the
proper construction and application of the block exemption. In each of the
other cases the tenant (Mr Crehan, Mrs Langton, Mr Smith
publicans who are not subject to a beer tie at substantially lower prices than
those charged to tenants who are. The tenants seek, in effect, to recover from
the landlord and/or the supplier the difference between the prices paid and
those that would have been payable if he or she had not been subject to the
tie. They claim, in broad terms, to be entitled so to do because either the tie
or the events leading up to its imposition, said to amount to concerted
practices, constitute infringements of Article 85 (now Article 81) of the EC
Treaty or because the higher prices charged to the tied tenant, when compared
with those charged to an untied tenant, were a breach of a term to be implied
in the lease to the tied tenant.
The appeals in Crehan and Langton
arise out of leases in common form granted (or agreed to be granted) by
Inntrepreneur Estates (CPC) plc (IEL) to the respective tenants or their
predecessors in title in the period July 1991 to June 1992. They arose out of
the merger of the brewing and public house estates of Courage Ltd (Courage) and
Grand Metropolitan plc (Grand Met) concluded in 1990. As both the facts and
legal issues arising on those appeals cover a wider area than those arising on
the two applications we will consider them first. Accordingly, this judgment is
divided into the following parts:
1. an introduction to the issues by reference to
the facts of the appeals in Crehan and Langton;
2. a general consideration of the relevant
principles of Community law (including associated issues of English law)
arising under Article 85;
3. a general consideration of relevant principles
of English law not involving Community law;
4. the application of those principles to the
facts of the appeals in Crehan and Langton and the applications
in Smith and McCaughey;
5. the appeal in Byrne; and
6. a summary of our conclusions.
Introduction
In March 1990 Grand Met and Elders, the holding
company of Courage, announced that they had reached agreement concerning the
United Kingdom brewing, retailing and related property interests of Courage and
Grand Met. That transaction included a number of elements. First, Grand Met was
to sell its brewing interests to Courage. Second, the public house estates of
both Courage and Grand Met were to be merged into Inntrepreneur Estates Ltd,
which was to be owned by Courage and Grand Met equally. Third, Grand Met was to
enter into a 10-year beer supply agreement with Courage. Fourth, IEL was to
enter into a 10-year beer procurement agreement (BPA) with Courage, whereunder
all tied lessees of IEL would be required by IEL to purchase the whole of their
beer requirements, with certain exceptions, from Courage at the relevant
wholesale list price. In return, Courage would pay to IEL sums ascertained in
accordance with a formula to compensate it for the shortfall in the rents
received for its tied public houses compared with the open market rents for
such houses if not subject to the tie.
The transaction was approved by the Monopolies
& Mergers Commission in August 1990, and the BPA was concluded on
29
is sufficient merely to record some of its material provisions. The recitals
indicated the wish of the parties that Courage should supply the tied houses
owned by IEL with high-quality beer on a long-term basis and in a competitive
manner. To that end, IEL was to procure that, within a period, its tied houses
should be let on a standard 20-year lease containing a tie, which it was
subsequently to enforce, requiring the tenant to buy all the beer he required
for that house, with certain limited exceptions, from Courage. Courage was to
supply such beer at the price specified in Courage’s price list appropriate to
that house, such list price being generally competitive with those of other
brewers supplying the same area when judged over a period of at least one year.
There was no provision enabling IEL to stipulate or control the prices to be
specified by Courage in its list. The formula for calculating the compensatory
payments to be made by Courage to IEL were contained in clause 3 and schedule
5. The amount to be paid was called ‘the annual amount’ and was the aggregate
of ‘the principal annual amount’ and ‘the residual annual amount’ as defined.
The definition and calculation of the principal and residual annual amounts are
complicated. The details are not relevant; it is sufficient to record that
neither of them was variable according to the price of beer charged by Courage,
and only the latter depended on the quantity of beer supplied to the tied
houses owned by IEL.
As we have already mentioned, the leases granted,
or agreed to be granted, by IEL to Mr Crehan and Mrs Langton were concluded in
the period July 1991 to June 1992. For present purposes they were in common
form. They provided for a demise of the public house for a period of 20 years
at a specified rent subject to a five-year upward-only rent review to the
higher of the rent for the immediately preceding period or the best open-market
rent obtainable for the residue of the term on the other terms of the lease.
Those other terms included the tie contained in the terms of trading, which, by
clause 4(34), the tenant covenanted to observe. Those terms required the tenant
to purchase all his requirements for sale in the premises of specified beers
from IEL or its nominee, then Courage, and from no one else. Specified beers
were, in the event, defined by reference to the price list of Courage. The
tenant was required to purchase not less than a specified minimum amount of
specified beer, and IEL agreed to procure the supply of specified beer to the
tenant by Courage at the prices shown in the Courage price list.
On 17 July 1992 Courage, Grand Met, IEL and their
various subsidiaries notified the standard form of lease of a tied house to the
European Commission under Council Regulation 17. They sought negative
clearance, that is to say a declaration by the Commission that Article 85(1)
did not apply to the leases; failing such confirmation that they were entitled
to the benefit of the block exemption provided for by Article 85(3) and
Regulation (EEC) No 1984/83; and, failing that, that an individual exemption
pursuant to Article 85(3) be granted. By a notice issued pursuant to Article
19(3) on 30 July 1993 the Commission indicated that it intended to take a
favourable view of the standard form of lease by granting a retroactive
exemption pursuant to Article 85(3), but, before doing so, invited all
interested parties to submit their observations to the Commission.
Thereafter, a number of tenants of IEL tied houses
did submit observations opposing the grant of such an exemption. In August 1994
Mr Crehan, among others, complained that IEL was infringing Article 85. In
February 1997 IEL introduced a new standard form of lease incorporating a
purchasing agreement and deed of variation designed to implement a new form of
tie called ‘RetailLink’. On 14 October 1997 IEL and others withdrew the
notification made on 17 July 1992 in respect of the first form of lease
containing the earlier version of the tie. On 24 November 1997 the solicitors
for Mr Crehan were informed by the Commission that there were insufficient
grounds for granting his application because the request for exemption of the
old lease had been withdrawn. Thus, the question of whether Article 85(1)
applied to the old lease was one that the national court was in a position to
decide. The Commission observed that if the national court found that Article
85(1) did apply, then it could determine the civil law effect of the
prohibition set out in Article 85(2), including the award of compensation for
loss suffered as a result of the infringement of Article 85.
The new form of lease was duly notified to the
Commission on 27
Commission indicated that it intended to take a favourable view and grant an
exemption under Article 85(3) from the date of the introduction of the new
form, and it invited the observations of interested parties. So far as we are
aware, no exemption has yet been granted. But, as the questions before us
concern only the old form of tied lease, the absence of an individual exemption
for the new one is immaterial.
By December 1997 proceedings had been commenced by
IEL or its tenants holding under the old form of lease in several hundred
cases, and many further such proceedings have been started since. The
proceedings take a number of different forms, but in many of them the tenants
have withheld rent due to IEL or refused to pay for supplies of beer by
Courage. The tied tenants have formed an action group called
selling its beer to such of its customers as are not subject to the tie at
substantially lower prices than the list prices charged to its tied tenants. It
is alleged that a consequence of the difference in price has been to reduce the
profitability of tied tenancies and to drive tied tenants out of business. It
is asserted that the profit made by Courage from the higher prices charged on
supplies to tied tenants compared with supplies to untied tenants has been
shared out between IEL and its two owners, Fosters and Grand Met, in agreed
proportions.
Proceedings involving IEL are now regulated by
orders of Master Moncaster made on 13 March 1998 and subsequently, whereby he
stayed them all on terms pending the determination in the Court of Appeal of an
intended test case. In fact, there are two such intended test cases, Crehan,
and, following a last-minute substitution, Langton.
But the same or similar allegations have been made
by tied tenants of other brewers or wholesalers of beer. The latter include
Gibbs Mew and Trent Taverns Ltd, which were involved in the decisions of this
court on 22 July 1998 in Gibbs Mew plc v Gemmell [1998] EuLR
588* and on 22 January 1999 in Trent
Taverns Ltd v Sykes The Times 5
are the applications for permission to appeal concerning Greenalls Management
Ltd and Walker Cain Ltd in Smith and McCaughey. We were informed
that similar points have been raised in various cases concerning tied filling
stations.
*Editor’s note: Also reported at [1999] 1 EGLR
43; [1999] 01 EG 117
As the decisions of this court in Gibbs Mew
and Trent Taverns Ltd v Sykes pervaded so much of the argument on
so many different points, it will be convenient to summarise them at this
stage. In Gibbs Mew the tenant had concluded a lease in 1994 (the first
tenancy) with the landlord. In 1996 he concluded a tenancy at will (the second
tenancy) with the same landlord in respect of the same premises. The landlord
brought an action (the first action) based on the second tenancy, in which the
landlord claimed possession. The tenant counterclaimed in the first action
asserting that the first tenancy was still in existence. It does not appear
that this counterclaim included a claim for damages. Thereupon the landlord
brought a second action for possession based on the first tenancy. The tenant’s
defence to this second action was that: (a)
its inception because it was prohibited by Article 85; and (b) he had a defence
of set-off arising out of a cross‑claim under Article 85 for restitution
and damages caused to the tenant by the imposition of a beer tie. The effect of
the set-off would be to remove the basis upon which the landlord brought the
proceedings, namely arrears of rent. It does not appear that the tenant had in
the second action a counterclaim as opposed to a set-off.
The court held that, in 1996, the tenant’s claim
was to be judged on the basis that he had surrendered the first tenancy and
replaced it with the second tenancy. The court held that there was no defence
to the first action. Impliedly (and probably expressly, it does not appear from
the report) it dismissed the counterclaim in the first action. There was thus
no necessity to consider the landlord’s second action or the tenant’s defence
of set-off. The court went on to consider whether, if it were wrong in relation
to its conclusion in the first action, the tenant would have had a defence to
the second action. The court identified four issues between the parties: (1)
whether Article 85 applied at all to the first tenancy; if so, (2) whether the
block exemption granted under Article 85(3) applied; if not, (3) whether a
party to an agreement rendered void by Article 85(2) can obtain a remedy in
damages or restitution; and, if so, (4) what the consequences are for the claim
for rent arrears. The court decided: (1) the first tenancy did not infringe
Article 85(1); and (2) even if it had, the block exemption would have applied.
The court also considered that: (3) even if the agreement had been rendered
void by Article 85(2), no remedy in damages or restitution was available to a
party to that agreement. This was for two reasons: first, the duty implicit in
Article 85 (as opposed to Article 86) was not owed to such a party but only to
third parties; second, English law does not allow a party to an illegal
agreement to claim damages from the other party for loss caused to him by being
a party to the illegal agreement. The court determined: (4) that, in any event,
there was a valid clause expressly forbidding set-off so that even if the
tenant had had a claim for damages, this could not have been set off against
the claim for rent.
Gibbs Mew was
followed in this court in Trent Taverns Ltd v Sykes (Beldam,
Potter and Chadwick LJJ). The court considered that in Gibbs Mew there
was a counterclaim for damages — as opposed to a defence of an alleged set-off
— in the second action, and rejected the suggestion that the views expressed in
relation to the second action in Gibbs Mew were obiter. It went
on to say that, whether that be so or not, it intended to follow the guidance
there given. The real issue in Trent Taverns was a dispute as to whether
or not some points should be referred to the European Court of Justice under
Article 177 (now Article 234). The court decided that it was not opportune so
to do.
The appeals before us have been selected and heard
together in order to deal as comprehensively as possible with the issues that
arise in one or more of the hundreds of pending cases or appeals. They may be
summarised as follows:
(a) Are the beer ties contained in the leases to
tied tenants prohibited by Article 85 (the co-contractor point)?
(b) Are the arrangements between a brewer and the
landlord of tied houses, as exemplified by the BPA, prohibited by Article 85
(the concerted practices point)?
(c) If the answer to either of those questions is
in the affirmative, is the tenant entitled to a directly enforceable right
under Community law?
(d) If the tenant is entitled to such a right does
he, under English law, have a pecuniary remedy for its infringement for either
damages or restitution?
(e) If the tenant does have such a right but
English law affords him no such remedy, is the principle of English law that
denies it, for example illegality, displaced or superseded by the requirement
of Community law that direct effect be given to the right?
(f) Is any term to be implied in any of the leases
as to prices at which beer was to be supplied to a tied tenant and others?
(g) May a tenant set off any liability to him
arising from the application of Article 85 or breach of the implied term
against his liability for rent due under his lease?
(h) Should any, and, if so, which points of
Community law be referred to the European Court of Justice under Article 177?
(i) Does the block exemption afforded by
Regulation 1984/83 apply to the tie in Byrne?
There are, in addition, certain issues peculiar to
the particular appeal or application that we will deal with later.
Principles of Community law arising under
Article 85
Effect of infringements of Article 85
In each of these cases the tenants are parties to
one or more agreements whereunder they are tied to another party. They allege
that the agreements are prohibited under Article 85. They submit that the
effect of that prohibition is to give them, as a matter of Community law, a
right to damages against the other party to the agreement. In some of the cases
there is an alternative allegation that the landlords and the brewers are
parties to a concerted practice that has the effect of damaging the tenants.
Carnwath J ruled in the Crehan case* that because of the decision of
this court in Gibbs Mew, he was bound to decide against the tenant, both
in relation to the case based on agreement and in relation to the case based on
concerted practices.
*Editor’s note: Reported as Courage Ltd (now
known as Inntrepreneur Beer Supply Co Ltd) v Crehan [1998] EGCS 171
Counsel for the tenants conceded that, whatever
the position as to which part of the decision in Gibbs Mew was strictly
binding upon this court, in practice, this court was likely to follow it unless
persuaded to depart from it as a result of a judgment of the European Court of
Justice following a reference under Article 177. Gibbs Mew, however,
raised no point as to concerted practices. In so far as the tenants’ case is
based on an agreement, it is conceded by the landlord that it is arguable that
this agreement infringes Article 85. The landlord maintains that even if this
be so, the tenant is not entitled to recover damages from his
of parties to the prohibited agreement and because, as a matter of policy, a
party to a prohibited agreement cannot recover damages against another party to
that agreement for damage caused by the carrying out of that agreement.
Article 85 provides as follows:
1. The following shall be prohibited as
incompatible with the common market: all agreements between undertakings,
decisions by associations of undertakings and concerted practices which may
affect trade between Member States and which have as their object or effect the
prevention, restriction or distortion of competition within the common market,
and in particular those which:
(a) directly or indirectly fix purchase or
selling prices or any other trading conditions;
(b) limit or control production, markets,
technical development, or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent
transactions with other trading parties, thereby placing them at a competitive
disadvantage;
(e) make the conclusion of contracts subject to
acceptance by the other parties of supplementary obligations which, by their
nature or according to commercial usage, have no connection with the subject of
such contracts.
2. Any agreements or decisions prohibited
pursuant to this Article shall be automatically void.
3. The provisions of paragraph 1 may, however, be
declared inapplicable in the case of:
— any agreement or category of agreements between
undertakings;
— any decision or category of decisions by
associations of undertakings;
— any concerted practice or category of concerted
practices;
which contributes to improving the production or
distribution of goods or to promoting technical or economic progress, while
allowing consumers a fair share of the resulting benefit, and which does not:
(a) impose on the undertakings concerned
restrictions which are indispensable to the attainment of these objectives;
(b) afford such undertakings the possibility of
eliminating competition in respect of a substantial part of the products in
question.
Co-contractor issue
It is convenient to examine first whether, under
Community law, a party to an agreement that is prohibited under Article 85 has
a right of action for damages against the other party in respect of damage
caused to him by the observance of the agreement. This court has ruled that
Article 85(1) is designed to protect third-party competitors and not parties to
the prohibited agreement — they are the cause, not the victims, of the
distortion, restriction or prevention of competition: see Gibbs Mew
p604. The vice of a tied-house agreement for the purpose of Article 85(1) is
its foreclosing effect, in combination with other similar agreements, upon
third-party competitors. The tenant benefits from this foreclosing
effect, since it safeguards the tenant from the chill winds of additional
competition at the retail level. That is why tenants, along with suppliers, are
the cause, not the victim, of the restriction of competition. A distinction is
to be drawn between Articles 85 and 86. The latter is directed at abuse of a
dominant position and expressly protects against the consequences of unequal
bargaining power, and, in terms, prohibits ‘unfair trading terms’. The former,
by way of contrast, is designed to provide a remedy for those adversely affected
by an agreement rather than those who are parties to the agreement. We note
that the European Court of Justice pointed out in Mulder v Council of
the European Communities and Commission of the European Communities, joined
cases C-104/89 and C-37/90 [1992] ECR I-3061, that there is a general principle
common to the legal systems of the member states to the effect that the injured
party must show reasonable diligence in limiting the extent of his loss or risk
having to bear that damage himself. It would be to an extent inconsistent with
this doctrine of mitigation of damage for the court to acknowledge a right to
damages where the injured party has entered into the agreement whereby he has
been injured. He should have mitigated his damages by never entering into the
agreement in the first place.
While the English courts have not been prepared to
give parties to agreements prohibited under Article 85 any remedy in damages,
no case has been drawn to our attention in which the European Court of Justice
has ruled either way on this point. The tenants sought to rely on Delimitis
v Henninger Bräu AG Case C-234/89 [1991] ECR I-935. In Delimitis
one of the questions referred to the ECJ was the following:
Does a beer-purchasing agreement which falls
under Article 85 of the EEC Treaty and does not meet the conditions under
Regulation No 1984/83 on block exemptions always require a specific exemption
or does the national court have power to treat the agreement as valid where
there is a minor divergence from the aforesaid regulation?
The court answered that question as follows:
A national court may not extend the scope of
Regulation (EEC) No 1984/83 to beer supply agreements which do not explicitly
meet the conditions for exemption laid down in that Regulation. Nor may the
national court declare Article 85(1) of the Treaty inapplicable to such an
agreement under Article 85(3). It may, however, declare the agreement void
under Article 85(2) if it is certain that the agreement could not be the
subject of an exemption decision under Article 85(3).
In the course of reaching that conclusion the
court said in para 45:
the Commission does not have exclusive competence
to apply Articles 85(1) and 86. It shares that competence with the national
court. As the court stated in its judgment in case 127/73 (BRT v SABAM
[1974] ECR I-51), Articles 85(1) and 86 produce direct effect in relations
between individuals and create rights directly in respect of the individuals
concerned which the national courts must safeguard.
SABAM* was a case
in which there was a dispute between two persons, each of whom claimed
ownership of copyrights. One of them enjoyed a de facto monopoly in the
member state for the management of copyrights and had required global
assignments of such rights in circumstances that arguably amounted to an abuse
of a dominant position within the meaning of Article 86. The Commission claimed
that the national court was without jurisdiction to refer a problem to the ECJ
under Article 177 because the Commission had, for reasons not presently
relevant, exclusive jurisdiction. The court rejected that contention stating at
para 16:
As the prohibitions of Articles 85(1) and 86 tend
by their very nature to produce direct effects in relations between
individuals, these Articles create direct rights in respect of the individuals
concerned which the national courts must safeguard.
*Belgische Radio en Televisie v SV SABAM [1974] ECR I-51
The tenants rely on that reference to ‘the
individuals concerned’ to suggest that the phrase embraces a co-contractor.
While the phrase is wide enough to embrace a co-contractor, the court was not
addressing the question of whether or not a party to a prohibited agreement is
given any rights by Article 85 for damage caused to him by the existence and
implementation of the agreement.
In our judgment, neither that ruling in SABAM
nor its citation in Delimitis amounts to a ruling by the European Court
of Justice that a party to an agreement that infringes Article 85 is entitled
to sue the other party for damages. However, we recognise that there is a
policy argument in favour of accepting that a party to a prohibited agreement
has a right to sue for damages. Thus, in Perma Life Mufflers Inc v International
Parts Corporation, a decision of the United States Court of Appeals for the
7th Circuit 392 US 134, Black J stated at p138:
There is nothing in the language of the antitrust
Acts which indicates that Congress wanted to make the common-law in pari
delicto doctrine a defense to treble-damage actions, and the facts of this
case suggest no basis for applying such a doctrine even if it did exist.
Although in pari delicto literally means ‘of equal fault,’ the doctrine
has been applied, correctly or incorrectly, in a wide variety of situations in
which a plaintiff seeking damages or equitable relief is himself involved in
some of the same sort of wrongdoing. We have often indicated the
inappropriateness of invoking broad common-law barriers to relief where a
private suit serves important public purposes… [past decisions] were premised
on a recognition that the purposes of the antitrust laws are best served by
ensuring that the private action will be an ever-present threat to deter any
one
plaintiff who reaps the reward of treble damages may be no less morally
reprehensible than the defendant, but the law encourages his suit to further
the over riding public policy in favour of competition.
The tenants rely strongly on the opinion of
Advocate General Van Gerven in HJ Banks & Co Ltd v British Coal
Corporation Case C‑128/92 [1994] ECR I-1209. Banks brought an action
for damages against British Coal. Banks was a company extracting coal under
licences concluded with British Coal. The licences were of two kinds: (a) a
royalty licence, whereby the licensee paid a royalty per tonne of coal produced
but was free to sell to anyone without restriction; and (b)
licence, whereby the licensee was obliged by the term of the licence to sell
and deliver coal to British Coal at specified prices. Banks’ claim was under
the ECSC Treaty; alternatively under Articles 85 and 86 of the EEC Treaty. The
European Court of Justice ruled that the ECSC Treaty was the appropriate one to
examine, but that, in the instant case, there were no directly enforceable
rights. Accordingly, the claim for damages could not be entertained by the
national courts because the high authority had exclusive jurisdiction. The
court did not find it necessary to comment on those parts of the Advocate
General’s opinion on which the tenants now rely.
The nature of the plaintiff’s claim is not wholly
clear from the report. At para 40 the Advocate General stated:
the question arises whether the value of the Francovich
judgment as a precedent extends to actions by an individual (or undertaking)
against another individual (or undertaking) for damages in respect of breach by
the latter of a Treaty provision which also has direct effect in relations
between individuals.
He thought that question should be answered in the
affirmative. He stated at para 43:
The general basis established by the Court in the
Francovich judgment for State liability also applies where an individual
infringes a provision of Community law to which he is subject, thereby causing
loss and damage to another individual. The situation then falls within the
terms stated by the Court in paragraph 31 of the Francovich judgment
(and even earlier in Van Gend en Loos), namely breach of a right which
an individual derives from an obligation imposed by Community law on another
individual. Once again, the full effect of Community law would be impaired if
the former individual or undertaking did not have the possibility of obtaining
reparation from the party who can be held responsible for the breach of
Community law…
He continued at para 44:
In a field such as Competition law… there are
powerful additional arguments which militate in favour of undertakings having
the possibility under Community law of obtaining reparation for loss and damage
which they sustain as a result of a failure by other undertakings to fulfil
their obligations under Community law. I shall confine myself to two of those
arguments.
To begin with, recognition of such a right to
obtain reparation constitutes the logical conclusion of the horizontal
direct effect of the rules concerned: the rulings in Simmenthal and Factortame…
offer no solution where a national court has to adjudicate not on a rule of
national legislation or administrative law which it can refrain from applying,
but on a situation governed by a private law in which one or more undertakings
infringe a rule of competition, as result of which a third party [our
emphasis] suffers loss and damage. The only effective method whereby the
national court can in those circumstances fully safeguard the directly
effective provisions of Community law which have been infringed is by restoring
the rights of the injured party by the award of damages… In addition, such a
rule on reparation plays a significant role in making the Community rules of
competition more operational, particularly since the Commission, as
guardian of those rules, itself acknowledges that it is dependent on the
cooperation of the national courts in enforcing them. Individual actions for
damages have for some time proved useful for the enforcement of federal
anti-trust rules in the United States as well.
Although the British Coal Corporation had
submitted that Banks had no rights in Community law, it does not appear that
this submission relied on Banks being a party to any prohibited agreement. No
one, so far as can be seen from the report, found it necessary to address that
question.
Carnwath J in Crehan cited the following
passage from the reasoning of the Commission in its rejection of the complaints
of Mr
in the event that the national judge finds that
Article 85(1) is applicable, he is in a position to determine the civil law
effects following from the prohibition set out in Article 85(2). The national
judge, and he alone, can decide such issues as the severability or not of a
particular clause found to be falling foul of Article 85(1) from the rest of
the agreement. Furthermore, he can distinguish, as to the civil law effects
resulting from the applicability of Article 85(1), between those tenants who
have entered into the purchasing agreement and deed of variation and those who
have not. The judge can also award, compensation for loss suffered as a
result of an infringement of Article 85. Furthermore, the national court
could deal at the same time with claims under national law, such as
‘misrepresentation’ claims which, according to information in possession of the
Commission, have already been made by several Inntrepeneur tenants before the
national courts.
The judge, relying on the italicised words, stated
that the Commission clearly assumed that the tenants would have a claim for
damages if a breach of Article 85 were established. For our part, we believe
that the Commission was not saying more than that these are matters for the
national judge.
We recognise, however, that there is an argument
in favour of holding that a party to a prohibited agreement, such as those
before us allegedly are or became, is given rights by virtue of Article 85 that
are protected under Community law. We are minded to refer to the European Court
of Justice the question of whether this is so. But that question leads on to
the next one, namely can a party to a prohibited agreement assert rights under
it, assuming he has some? In some ways, this issue overlaps with the issue of
whether Community law gives any rights to a party to such an agreement. If the
answer to that question is in the negative, then the present question does not
arise for decision. This part of this judgment proceeds on the basis that the
European Court of Justice, on a reference to it, mightrule that a party to such
an agreement is given rights under Community law against the other party.
There is then raised a preliminary issue as to a
possible tension between two well-established principles. The first is that
Community law requires member states to provide effective protection of rights
granted under Community law to individuals against other individuals: see BRT
v SABAM [1974] ECR I-51. The second is a branch of the general principle
that remedies for breaches of rights are a matter for the national law, so that
the consequences of the nullity of an agreement that infringes Article 85 is a
matter of national law: Société de Vente de Ciments et Bétons de l’Est SA
v Kerpen & Kerpen GmbH & Co Case 319/82 [1983] ECR 4173.
In Kerpen the parties in March 1978
concluded a contract for the annual delivery of some 40,000 tonnes of cement
for a period of five years. Pursuant to that umbrella contract, the defendant
took delivery of 6,000 tonnes of cement, the price of which amounted to about
DM400,000. The plaintiff claimed that sum in a German court. The defendant
contended that the contract was void for infringement of Article 85 of the
Treaty. Pursuant to a reference by the German court, the European Court of
Justice held that a contract of the type there under consideration was prohibited
by Article 85(1) if it were capable of affecting trade between member states.
In the second and third questions, the national court asked what were the
consequences of the nullity of such a contract under Article 85(2), in
particular in relation to orders and deliveries made on the basis of the
contract. The European Court of Justice stated at p4184:
the automatic nullity decreed by Article 85(2)
applies only to those contractual provisions which are incompatible with
Article 85(1). The consequences of such nullity for other parts of the
agreement are not a matter for Community law. The same applies to any orders
and deliveries made on the basis of such an agreement and to the resulting
financial obligations.
Such consequences are to be determined by the
national court according to its own law.
This tension between leaving remedies to be
decided upon by the national court and enforcing equally throughout the
Community the
Gerven in Banks. In the event, the court did not need to rule or comment
on this part of this opinion. He pointed out at para 47:
It is self-evident that a reference to national
law, although providing in certain respects a powerful basis for Community law,
entails serious risks for the uniform and affective application of Community
law if too many details are left to national law.
Under the heading ‘Minimum Rules of Community Law
for the grant of legal redress by the National Court’, the Advocate General
opined at para 48:
the case law of the Court reveals a clear tendency
to lay down a number of minimum requirements which the rules of national
law must fulfil. I shall enumerate the most important ones.
— In the first place, the Court has acknowledged
that the right to obtain an effective legal remedy against measures which are
contrary to the rules of Community law… is a general principle of Community
law. Although Community law has not itself sought to provide other possible
remedies for its enforcement, in addition to the means of redress already
afforded by national law, the system of legal protection established by
Community law implies that ‘it must be possible for every type of action
provided for by national law to be available for the purpose of ensuring
observance of Community provisions having direct effect, on the same conditions
concerning admissibility and procedure as would apply were it a question of
ensuring observance of national law’ [Judgment in case 158/80 Rewe.]
— Further, the substantive and formal conditions
(including therefore the rules on jurisdiction and procedure) laid down by the
national legal systems for claims based on Community law may not be less
favourable than those relating to similar domestic claims and may not be so framed
as to make it virtually impossible to exercise the rights conferred by
Community law.
We are minded to refer to the European Court of
Justice the question of whether, assuming that a party to a prohibited
agreement may be someone who is given rights against the other party, by virtue
of Article 85, which are protected under Community law, and assuming that such
a party has been damaged by actions taken under the agreement by the other
party, the national court is obliged, as a matter of Community law, to award
damages to the injured party.
So far as English law is concerned, it is common
ground that where a defendant is sued under an agreement that is prohibited
under Article 85, he may rely on that prohibition as a defence, and that a
person who is not a party to a prohibited agreement may sue those who are
parties to it for the damage caused to him by their operation of the agreement.
Mr David Vaughan submitted that English law gives a party to an arguably
illegal agreement the right to apply to the court for a declaration of
illegality and an injunction to prevent its enforcement by the other party.
From that premise, he submitted that it followed that a party to an illegal
agreement must equally be entitled to damages against the other if he could show
some. In support of the premise he cited Holleran v Daniel Thwaites
plc [1989] 2 CMLR 917, Marchant & Eliot Underwriting Ltd v Higgins
[1996] 1 Lloyd’s Rep 313 and MTV Europe v BMG Record (UK) Ltd
[1997] EuLR 100. We are not persuaded that those cases support the premise.
However, even were the premise accurately to state the law, we do not accept
that the conclusion would follow from the premise. Even assuming that the court
would come to the aid of a person who for defensive purposes wished to rely on the
illegality of an agreement to which he was a party, it does not follow that the
court would come to the aid of such a person when he wishes to use his own
illegal agreement for offensive purposes.
This court has ruled that ‘English law does not
allow a party to an illegal agreement to claim damages from the other party for
loss caused to him by being a party to the illegal agreement. That is so
whether the claim is for restitution or damages’: see Gibbs Mew at p606.
That ruling was based on Tinsley v Milligan [1994] 1 AC 340. In
that case Miss Milligan asked for an order for sale of a property and for a
declaration that it was held by her and Miss Tinsley in equal shares. The
property had been jointly bought by them but had been placed in the sole name of
Miss Tinsley because they both were engaged on a social security fraud. The
question was whether the fact that she had been engaged in fraud on the social
security disentitled Miss Milligan from receiving the order that otherwise she
would have obtained. It was held, by a majority, that it did not. The main
issue in the House of Lords, which divided the minority from the majority, was
that the minority were in favour of a broad principle to the effect that if a
party is engaged in some act of illegality, then he will not receive any help
from the court on the basis that he does not come with clean hands. The
majority favoured a narrower principle to the effect that a party to an
illegality can recover by virtue of a legal or equitable property interest if,
but only if, he can establish his title without relying on his own illegality,
and that is so even if it emerges that the title on which he relies was
acquired in the course of carrying through an illegal transaction. As Lord
Browne-Wilkinson put it at p377B:
In my judgment the court is only entitled and
bound to dismiss a claim on the basis that it is founded on an illegality in
those cases where the illegality is of a kind which would have provided a good
defence if raised by the defendant. In a case where the plaintiff is not
seeking to enforce an unlawful contract but founds his case on collateral
rights acquired under the contract (such as a right of property) the court is
neither bound nor entitled to reject the claim unless the illegality of necessity
forms part of the plaintiff’s case.
On behalf of the tenant it is submitted that the
infringement of the prohibition in Article 85 arose out of one or both of the
following factors, which would not be known in their fullness to the tenant at
the time when he concluded the lease. The first was that the landlord had
concluded a number of similar leases, and it was the combined effect of the
restrictions contained in all those leases that caused each to infringe Article
85. The second was that beer prices charged by the brewers to the tenant’s
competitors had fallen significantly, so as to increase the disadvantage
suffered by the tenant as a result of the tie without there being any
compensating rise in competitors’ rents or fall in the tenant’s rents to offset
that disadvantage. A third factor, on which counsel for the tenants relied at
certain points in the argument, was that it was the landlords who withdrew
their request for exemption under Article 85(3), so it was only then that it
became clear, retrospectively, that the agreement was illegal.
The significance of the first of these submissions
arises from para 27 of the European Court of Justice’s judgment in Delimitis.
a beer supply agreement is prohibited by Article
85 (1) of the EEC Treaty, if two cumulative conditions are met. The first is
that, having regard to the economic and legal context of the agreement at
issue, it is difficult for competitors who could enter the market or increase
their market share to gain access to the national market for the distribution
of beer in premises for the sale and consumption of drinks. The fact that, in
that market, the agreement in issue is one of a number of similar agreements
having a cumulative affect on competition constitutes only one factor amongst
others in assessing whether access to that market is indeed difficult. The
second condition is that the agreement in question must make a significant
contribution to the sealing-off effect brought about by the totality of those
agreements in their economic and legal context. The extent of the contribution
made by the individual agreement depends on the position of the contracting
parties in the relevant market and on the duration of the agreement.
The significance of the second submission arises
from the way in which the Commission reviews the legality of tied leases. It
seeks to establish the value of the disbenefits caused to the tenant by the
tie, and to see whether these are matched by countervailing benefits. The
tenant submitted that as a result of this technique a lease could float in and
out of legality, depending on the levels of dry rents and beer prices. It was
submitted that at the time that the tenant entered into the lease he did not
realise that the conclusion of other leases and changes in market forces would
bring this lease into the category of those prohibited under Article 85, and
therefore any rule of English law preventing recovery by a party to an illegal
agreement should not be applied to prevent recovery by him. There are two
separate points here, neither of which was argued in Gibbs Mew. One
concerns agreements that are unlawful at their inception by reason of factors
unknown to party A but known to party B. The second concerns agreements that
are lawful at their inception but become unlawful by reason of matters within
the control of party B,
relation to the latter category, the possibility arises that the facts that
give rise to the unlawfulness may exist for a while and then cease to exist.
English law is not settled in relation to the rights of one party to a contract
that is unlawful by reason of factors not known to that party: see the
discussion in Fuji Finance Inc v Aetna Life Insurance Co Ltd
[1997] Ch 173 at pp190-197 and pp199-200. It is unnecessary at present to
express an opinion on these matters. It may become so in the light of the
answers of the European Court of Justice to the questions that we propose to
refer to it. We content ourselves with observing that the argument in front of
us has proceeded on the basis of a concession by the landlord for the purposes
of such argument that the agreement infringes Article 85. That concession was
no doubt made in an endeavour to save time, and we proceed on that basis. We
think it proper to record that the factual material in front of us raises some
considerable doubt as to whether the second condition in Delimitis has
been met. But, assuming that it was, the only way in which the agreement might
have been saved would have been by exemption under Article 85(3). That brings
us to the third factor, in relation to which all we need say at this point is
that both parties must be taken to have known that notification and exemption
was the sole route by which an agreement otherwise infringing Article 85(1)
could be validated. Given the relevant knowledge, either party could have
notified and sought exemption, so we doubt whether the third factor adds
anything to the second.
Concerted practice issue
The tenants, having previously failed in this
court on the basis both that no duty under Article 85 is owed to them by a
co-contractor and that their own participation in illegality precludes them
from relief, now present an alternative case, based not on any agreement to which
they are party, but on an alleged concerted practice between the landlord and
the brewer or brewers. This concerted practice, they claim, has damaged them.
In order to establish a case on concerted practice, the tenants need to
establish four elements: first, that there was a concerted practice between the
landlord and the brewers; second, that this concerted practice might affect
trade between member states; third, that the practice has as either its object
or its effect the prevention restriction or distortion of competition in the
common market; and fourth, that they have been damaged thereby.
Whether or not a particular agreement or concerted
practice exists and is prohibited under Article 85 will turn on the facts of
the particular case. For reasons that appear later in this judgment we are not
minded to give relief to any of the tenants save Crehan. In our
judgment, in so far as the case for Mr Crehan and Mr Smith is based on
concerted practices, it ought to be dismissed purely because it lacks any appropriate
factual substance.
Mr Crehan’s case on concerted practice has changed
a number of times in the course of the litigation and is still not reflected in
its final form in any version of the pleadings. In the written submissions sent
to the court before the hearing, Mr Vaughan submitted that there was a
concerted practice between Courage and Inntrepreneur, the object and effect of
which was to discriminate against the Inntrepreneur tied tenants. The agreed
practice was that Courage would not grant the Inntrepreneur tied tenants the
discounts that were granted by Courage to other public houses. In support of
their allegation that Courage and Inntrepreneur entered into such a practice,
the tied tenants relied on clause 4(1) of the beer procurement agreement by
which Courage agreed with IEL that, at all times, it would charge the tied
tenants the list price. The tied tenants’ competitors were given large
discounts, and it was alleged that the difference between the full list price
and the discounted price was shared out between Courage and Inntrepreneur.
In those circumstances, the landlords make a
number of submissions. First, it is contended that the BPA does not oblige
Courage (a nominated supplier) to discriminate between tied and untied tenants.
On the contrary, the BPA actively requires Courage to price competitively. The
allegation that Courage offered discounts to free houses after the BPA was
concluded proves nothing about the BPA itself, but, rather, is consistent with
having commercial freedom to set its own prices. There may be discrimination,
but there is no concerted practice. Under the BPA, IEL appointed Courage as
nominated supplier for a fixed term (clause 2.1.4) and was, simply, not at
liberty to dismiss Courage because it granted discounts to free houses. It does
not appear why it would be in IEL’s interest to encourage Courage to
discriminate against tenants in a manner that threatened their viability and
their ability to pay rent and abide by their covenants, that being IEL’s main
interest in the estate. On the contrary, the two covenants imposed by
Inntrepreneur upon Courage to price competitively were designed to ensure that
the third-party nominated supplier did not act in a manner that would threaten
the viability of the tenant. If Courage did charge higher prices to tied than
to free tenants, such an effect cannot be attributed to the BPA or to IEL.
There is simply no nexus connecting IEL with Courage’s decisions as to prices
to be charged to third parties.
Second, it was submitted by the landlord, and
before us conceded by the tenant, that the suggestion that there was a sharing
agreement between Courage and Inntrepreneur in relation to the difference
between any discounts that were given and the list price is unsustainable.
Third, the tenant’s concerted practice objection is that by virtue of the tie
tenants had to purchase beer for which Courage charged too much. If prices had
been lower the tenants would still have purchased from Courage and from no
other person. In these circumstances, even if the price discrimination had
caused tied tenants to sell less beer, this would not necessarily have caused
them to sell less ‘beer and products imported from other member states or
manufactured in the United Kingdom under licence from brewers and producers
situated in other member states’, as they have pleaded. The pleaded effect on
trade between member states, namely that the alleged price discrimination
caused the tied tenants to sell less products originating from outside the UK,
is an obvious contrivance that does not bear close scrutiny and should be
struck out. There is simply no nexus between the alleged tied price
discrimination and the tenants’ ability or inability to purchase other
(non-beer) products from outside the Community.
In our judgment, it is clear that the case of Mr
Crehan on this issue lacks any factual substance. In the case of Mr Smith,
although the concerted practice alleged is different, we agree with the comment
of Jacob J that it is ‘entirely and utterly speculative’.
Implied terms
Mr Crehan and Mrs Langton, and, no doubt, many
other tied tenants (including Mr Smith and Mr McCaughey), claim that the
conduct of Courage in supplying beer to tenants of free houses at a lower price
than that charged to tied tenants constitutes a breach of an express term of
their respective leases or, alternatively, of a term to be implied in them.
Although we have previously summarised the
material terms of both the BPA and of the lease, it is convenient at this stage
to refer to the actual terms of some of them and to elaborate on some of the
others. The demise of the premises is contained in clause 3. It provides for a
concessionary rent to be payable for the first 12 months. For the next four
years the rent is to be the sum specified in the lease and the particulars
attached to it. At the end of the fifth year and every fifth year thereafter
there is to be an upward-only rent review. The rent is then to be the higher of
the reviewed rent or the rent for the immediately preceding period. The
reviewed rent is to be the open market rent at the time of the review for the
rest of the term on the same conditions as to the tie as are contained in the
lease. By clause 6(9) it was agreed that if any provision of the tie was or
became for any reason unenforceable, then there might, at the landlord’s
option, be an additional rent review in which such provision, and any rent
reduction attributable to it, was to be ignored. By clause 4(17) the tenant
covenanted to use the demised premises for the purposes of a licensed public
house only, and, by clause 4(34), to comply at all times with the terms
contained in the first and second schedules; such schedules contain detailed
provisions concerning the tie.
Para 1 of the first schedule contains a number of
definitions including:
(i) ‘Specified Beers’ means beers of the types
set out in Part ‘A’ of the Appendix hereto however brewed fermented or packaged
being types which are represented by the brands or denominations of beer stated
in the Company’s Price List last issued before the date of the Agreement
pursuant to which this lease is entered into…
(iii) ‘Company’s Price List’ means the price list
for the time being of the Company or (where applicable) its Nominees for the
drinks which they offer to supply to purchasers at the Lessee’s level of
distribution
(iv) ‘Nominees’ means the person firm or company
(if any) specified in the Particulars and/or such person firm or company as the
Company may from time to time specify to the Lessee
Para 2(1) provided:
Subject to the provisions of this Schedule the
Lessee shall purchase from the Company or its Nominees and from no other person
firm or company all such Specified Beers as he shall require for sale in the
Premises and for the purpose of complying with his obligations under Clause 9
of this Schedule
By para 9(i) the tenant is required to buy a
minimum (specified) quantity in a year and to compensate the landlord for any
shortfall by reference to a formula.
Para 12 provides:
The Company shall during the term of the Lease
use its best endeavours to supply the Lessee with or procure the supply to the
Lessee by its Nominees at the prices shown in the Company’s Price List of such
quantities of Specified Beers as he may require and be ready and able to pay
for and if the Company or its Nominees at any time fail to supply any Specified
Beer (not being a product which the Lessee may purchase from any other
undertaking pursuant to Clause 8(1) above) for a period which in all the
circumstances is excessive the Company shall on the application of the Lessee
release the Lessee from any of his obligations under this Schedule to the
extent and for so long as is necessary having regard to such failure to supply
and shall reduce the Required Beer Barrelage for the relevant period by such
amount as shall in all the circumstances be fair and reasonable
By para 13 the landlord is entitled to substitute
for itself as the supplier its nominee. It provided that thereafter references
to the company’s price list should be references to the current price list of
such nominees. This provision is to be read in the light of the definition of
nominee contained in para 1(iv) as including such person, firm or company as
[IEL] may from time to time specify to the lessee.
In this court, but not before Carnwath J, it was
contended that the definition of the company’s price list incorporated an
obligation that there should be only one price list for all ‘purchasers at the
Lessee’s level of distribution’. It was submitted by reference to Article 14(c)
of Regulation 1984/83 that purchasers from free houses were at the same level
of distribution as purchasers from tied houses. The conclusion advanced by
counsel for the tenants was that the landlord or its nominee was thereby
obliged to sell beer to the tenants of tied houses at the same price as it
supplied beer to the tenants of free houses because otherwise there would not
have been a price list within the definition.
We do not accept this submission. It is well known
that the price for beer actually charged to tenants of free houses is less than
that charged to the tenants of tied houses. This proposition, which we did not
understand to be disputed, is made good by the evidence of Professor Kay to the
effect that discounts to free-trade customers have been an established feature
of the beer-supply market, although the level of discount has increased, since
1990. Some compensation, as pointed out by Lord Denning in Petrofina (GB)
Ltd v Martin [1966] Ch 146 at p172, is that the tied tenant pays a
lower rent. In those circumstances, it cannot have been intended that the price
list should be determinative of the price charged to both tied and untied
tenants alike, as opposed to the benchmark from which, after the allowance of
specific discounts, prices actually charged should be ascertained.
The principal case for the tenants is that a term
should be implied into the lease. The suggested implication takes three forms;
first, that the list prices charged to tied tenants should be reasonable;
second, that the margin of the list price charged to tied tenants over the
price actually charged to untied tenants should not be maintained at an
unreasonable level, so as to render the tied tenant’s business uncompetitive;
third, that such margin should not be permitted to exceed the value of any
discounted rent for tied premises as opposed to free premises.
The tenants do not suggest that the provisions of
the BPA constitute surrounding circumstances by reference to which the lease is
to be construed, because they were ignorant of its terms when entering into the
lease. But they do rely on the fact that IEL is entitled, in accordance with
clause 4.1(a)(ii) thereof, to require that the price charged by Courage should
be generally competitive. Further, they point to the fact that by virtue of
schedule 1 para 12 of the lease IEL is entitled to change the supplier. They
rely on the well-known line of authority comprising Catt v Tourle
(1869) 4 Ch App 654; Courage & Co Ltd v Carpenter [1910] 1 Ch
262; Nokes & Co Ltd v Day [1910] 1 Ch 270 and Foley v Classique
Coaches Ltd [1934] 2 KB 1 to the effect that the court will imply into a
long-term supply agreement a requirement that the product in question should be
of reasonable quality and supplied at a reasonable price.
In his judgment in Crehan, Carnwath J was
disposed to accept the submission as applied to the supply of goods by the
other party to the lease. But he considered the fatal objection to be that the
supplier was not such a party. He said:
it is impossible to imply any obligation directly
binding on the nominee; or a provision that the lessor will procure, or even
use its best endeavours to procure, that the nominee will operate in a
particular way. Accordingly, the only term that could be implied would be one
that leaves the tenant free to buy elsewhere if there is unfair discrimination
in the operation of the tie by the nominee. That would not help the tenants in
this case. It would have given them a ground for resisting any attempt by IEL
to enforce the tie, but it would not give them a right for damages for losses
they incurred by complying.
The landlords contend that the judge was wrong to
have considered that the principle would have applied if the beer had been
supplied by the landlord as opposed to its nominee. The tenants argue that the
judge was wrong to have thought that the identity of the supplier could have
justified the distinction he drew. Both sides relied on the decision of this
court in Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187. In
that case the defendant garage was tied to Shell. Shell sought to enforce the
tie. The garage contended that the tie was void as being an unreasonable
restraint of trade. In addition, it claimed that the support scheme operated by
Shell, whereby it allowed additional discounts to some of the garage’s
competitors, was in breach of an implied term that Shell would not discriminate
against it in fixing prices, rebates or discounts. At p1196 Lord Denning MR
recorded that there were two broad categories of implied term, namely those relationships
of common occurrence to which the law attaches the term as a legal incident of
such relationship, and those cases, not of common occurrence, in which, from
the particular circumstances, a term is to be implied. At p1197 Lord Denning
specifically excluded from the first category the case of the relationship of
supplier and buyer under a solus agreement. It was not submitted to us that the
time was now ripe to put such a relationship in that category. Thus, the terms
contended for cannot be implied into the leases unless they can be brought
within the second category.
The second category was described by Lord Denning
at p1196H as comprising all those cases not in the first category where:
the implication is based on an intention imputed
to the parties from their actual circumstances… Such an imputation is only to
be made when it is necessary to imply a term to give efficacy to the contract
and make it a workable agreement in such manner as the parties would clearly
have done if they had applied their mind to the contingency which has arisen.
These are the ‘officious bystander’ types of case… In such cases a term is not
to be implied on the ground that it would be reasonable: but only when it is
necessary and can be formulated with a sufficient degree of precision.
Lord Denning, with whom Ormerod LJ agreed,
considered that the term contended for was neither necessary nor capable of
being formulated with sufficient precision. The landlords rely on both the
formulation of the principle and the conclusions of the majority.
Bridge LJ disagreed with the majority. He
considered that a term should be implied to prevent a contractual absurdity
whereby the supplier drove the buyer out of business by allowing his
competitors a
not be formulated with sufficient precision. At p1204F he said:
It is said that lack of precision in the
criterion to be embodied in the implied term is fatal to any implication. But
it is no novelty in the common law to find that a criterion on which some
important question of liability is to depend can only be defined in imprecise
terms which leave a difficult question for decision as to how the criterion
applies to the facts of a particular case… This kind of pragmatism is so deeply
entrenched in the common law’s approach to a multitude of legal problems that I
decline to accept that the difficulty of defining with precision what term is
to be implied in this case is an insuperable obstacle to the implication of any
term limiting the plaintiff’s freedom to discriminate. I am content, in my
approach to the further questions arising, to take as the test of the degree of
discrimination prohibited by the implied term whether it is such as to render
the defendant’s commercial operation of their petrol sales business
impracticable.
The tenants rely on the principles formulated by
Bridge LJ. They point out that the lease constitutes a 20-year agreement for
the exclusive supply of beer to the tenant. They submit that it cannot have
been intended that the landlords might drive the tenants out of business by
discriminating against them in the level of discount allowed to the free
tenant. They contend, for the reasons we have already alluded to, that the
circumstance that the supplier is the nominee is an insufficient reason to
distinguish the line of authority to which we have referred.
We do not accept these submissions for, in
substance, the reasons advanced by the landlords. First, the obligation of the
tenants is to purchase at the list price. It is not a case in which there is no
provision or agreement as to the price. So long as the list specifies a price
it is binding. If the list is to be produced by the supplier it is still
binding so long only as the list sets out the prices at which the supplier is
genuinely prepared to sell the products specified in it to all who wish to buy
them: see May & Butcher v King [1934] 2 KB 17 at p21; Esso
Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1966] 2 QB 514
at p573 per Diplock LJ. Thus, it would be contrary to this express term
to imply a term in any of the three variations advanced by the tenants. Second,
we do not consider that it would be reasonable, let alone necessary, to make
any such implications. As we have already observed, it should not be assumed,
given the commercial interests of the landlords and their nominated suppliers,
that either of them will operate the provisions of the lease or fix prices
unreasonably. Traditionally the landlord’s return consists of the rent for the
premises and the profit margin on the beer he supplies. In the case of a tied
house, such profit margin, known conventionally as the wet rent, is higher,
because of the lack of discount, than that obtained from the untied tenant. As
we have already pointed out, the higher wet rent is compensated for by the
traditionally lower dry rent for the premises charged to the tied, as opposed
to the untied, tenant. If the landlord unduly maximises the wet rent, he will
not only jeopardise his prospects of recovering the dry rent but he will
thereby run the risk that the open market [dry] rent to be ascertained at the
next rent review will be correspondingly affected. There were no such
circumstances in Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR
1187. The comments of Bridge LJ were directed to the case of a supplier who was
not also the landlord of tied premises. Third, given that the dry rent for each
pub is individual to that pub, what in any given case is reasonable,
competitive or equivalent to the discounted rent for those premises would be
different in each individual case and from time to time. It would be the
negation of a price list common to all tied houses that the price to be charged
to each should be so infinitely variable.
Thus, we agree with the submissions for the
landlords that the implications contended for by the tenants would not be
possible in cases where the landlords were the supplier. We also accept the
submission that if we are wrong on that point, the fact that the supplier is a
third party is a relevant distinction. The circumstances relied on by the
tenants were that the supplier is required by the BPA to maintain competitive
prices, and its identity may be changed in the discretion of the landlords. In
relation to the first, we doubt whether it is an admissible consideration, as
it was probably not known to the tenants. But the first, if admissible, and the
second make the implications sought less reasonable, not more necessary.
The terms of the leases in both Smith and McCaughey
are different. But we do not think that the differences are such as to lead to
any different conclusion. The basic framework of the tie is the same, though,
in the case of Smith, without the nominee supplier, and it is that
framework that, in our view, renders the suggested implications impermissible.
For all these reasons, we reject the submissions for the tenants that a term is
to be implied in the leases in any of the three forms for which they contend.
Unless and until the European Court of Justice determines that Article 85
confers on the tenants a right to be directly enforced by the national courts,
with remedies that include a pecuniary award, the tenants can have no monetary
cross-claim against the claims made against them for rent or the price of beer
or other goods sold and delivered.
Set-off
Tenants sued by the landlords for arrears of rent
payable in respect of tied premises have claimed to set-off against such
liability the alleged cross-liability of the landlord for breach of duty
arising under Article 85 or for breach of an implied term. Some of them claim
to be entitled to do so by means of a legal set-off, others by means of an
equitable set‑off as well as, or instead of, by means of a legal set-off.
As there is no claim for unpaid rent in Crehan the issue does not arise
in that appeal. Equitable set-off is claimed in Langton and both legal
and equitable set‑off in Smith and McCaughey. As we have
rejected the claim for the implication of a term, which was raised in Langton,
Smith and McCaughey, the issue of set-off arises only in respect
of the alleged liability for breach of duty arising under Article 85. For the
reasons we have already given, we doubt whether there is any such liability,
but only the European Court of Justice can give a conclusive ruling on that
point. Accordingly, for the purposes of the argument on set-off we will assume
that the landlords are liable to the tenants for breach of Article 85, and that
any fetter on the tenants’ rights imposed by the English law rules as to the
consequences of illegality are displaced or superseded.
Before considering the principles applicable to
the types of set-off relied on it is necessary to consider the consequences of
the breach of Article 85 we have assumed. We assume that the breach would give
rise to a liability for damages: cf Garden Cottage Foods Ltd v Milk
Marketing Board [1984] AC 130. The measure of damage would be the loss
sustained by the tenants for the unlawful maintenance of the tie. In practice,
this would mean the difference between the price paid by the tenant for the
beer supplied to him as a tied tenant and the price he would have paid if he
had been allowed the discounts available to his untied competitors. From the
sum so ascertained there would be deducted the value of the countervailing
benefits, if any, available to the tied, but not the untied, tenant. The
balance would be the prima facie measure of his loss. It is plain, and
was not disputed, that such a demand is unliquidated.
Agreements or concerted practices in breach of
Article 85 are also prohibited. But it does not follow that the leases of the
tied houses are wholly void. This court has decided that the invalid tie may be
severed from the relationship of landlord and tenant, leaving that
relationship, in particular the covenant to pay the rent, unimpaired: see Inntrepreneur
Estates (GL) Ltd v Boyes [1993] 2 EGLR 112*.
*Editor’s note: Also reported at [1993] 47 EG 140
It was also suggested that if the tie is illegal
and void because it infringes Article 85, then the individual contracts for the
supply of the beer and other products entered into pursuant to the tie are
likewise illegal and void. In this connection we were referred to Halsbury’s
Laws of England 4th ed vol 9(1) 1998 reissue paras 876-879 and Cheshire,
Fifoot and Furmston’s Law of Contract 13th ed pp398-401. We do not accept
this submission. First, we have to assume that the principles of illegality applied
by the courts in England, and exemplified in Gibbs Mew, are displaced or
superseded by the requirement of European Community law that the rights
conferred by Article 85 are of direct effect and to be protected by national
courts. Without that assumption
scope within that assumption for a finding that the individual supply contracts
are themselves illegal and void. Further, in Kerpen, to which we have
referred, one of the questions referred to the European Court of Justice was
whether, if the umbrella contract was void under Article 85(2), individual
contracts of sale made in performance of that contract were likewise to be
regarded as void. The court answered this by holding that the consequences, for
any orders or deliveries made on the basis of the umbrella contract, of the
nullity of contractual provisions in the umbrella contract were not a matter
for Community law. Community law does not provide that those who have taken deliveries
under the individual contracts do not have to pay for them. Nor, in our
judgment, does English law. Second, as we have already pointed out the vice at
which Article 85 is, in the circumstances of beer ties, aimed is that
identified by the European Court of Justice in Delimitis at p987 para
27. We have quoted that paragraph already and will not repeat it. It is
sufficient to observe that it is the cumulative effect of all the ties in
foreclosing the relevant market, and the contribution to that effect made by
the individual agreement, that is to be considered. In that context, individual
contracts for the supply of beer pursuant to a single tie cannot be illegal and
void in their own right. Nor, in our view, can such a contract be considered to
be so closely connected with the breach of Article 85 so that it should be
regarded as springing from, or founded on, the agreement rendered illegal by
Article 85.
A convenient point of departure in the
consideration of the various forms of set-off is the judgment of this court in Hanak
v Green [1958] 2 QB 9. Legal set-off arose from the provisions of the
Statutes of Set-Off, the effects of which are now preserved by section 84(2)
Supreme Court Act 1981. It enables a set-off of mutual debts between a
plaintiff and a defendant: ‘but the claims on both sides [have] to be
liquidated debts or money demands which [can] be ascertained with certainty at
the time of pleading’ per Morris LJ at p17. As Morris LJ pointed out at
p23 a court of equity also allowed a set-off where it would have regarded the
cross-claims as entitling the defendant to be protected in one way or another
against the plaintiff’s claim. Such protection was originally afforded by
injunction or prohibition, but now arises from section 49(2)(a) Supreme
Court Act 1981.
It is convenient to consider the claim for legal
set-off first. The cross‑claims must be mutual; they need not be
connected. But it is essential that they should be ascertained with precision
at the time of pleading. In Axel Johnson Petroleum AB v MG Mineral
Group [1992] 1 WLR 270 the Court of Appeal refused to set-off a liability
under a guarantee because the amount thereof depended on the underlying debt
that could not be established at the time of pleading. Leggatt LJ quoted with
approval the statement of Lord Ellenborough in Crawford v Stirling
(1802) 4 Esp 207 at p209 that ‘to make the sum admissible as a set-off, the sum
must be settled in moneys numbered’. It was suggested by reference to the
judgments in Aectra Refining & Manufacturing Inc v Exmar NV: The
New Vanguard and The Pacifica [1994] 1 WLR 1634 that the requirement for
ascertainment had been overstated. We do not accept that submission. The latter
case did not reduce or undermine the necessity for ascertainment of the quantum
of the claim at the time of pleading. The members of the court merely pointed
out that the amount ultimately recoverable (Hirst LJ at p1647) and the
existence of a dispute as to the recoverability of the amount so quantified
(Hoffmann LJ at p1648) were different matters.
The claim for a legal set-off proceeds from the
premise that the contracts for the supply of beer to the tenant are illegal and
void. Therefore, it is submitted, the price paid is recoverable as paid for a
consideration that has wholly failed, so that there is a restitutionary remedy
for that reason in that amount. It is suggested that it is for the supplier to
raise in his defence some form of cross-claim for the value of the beer
supplied on the basis of change of position and the profit made by the tenant
from its resale. Thus, it is suggested that the gross price is both
quantifiable and, subject to the defence of the supplier, recoverable for the
purposes of set-off, notwithstanding that only the net amount can truly be due.
The submission was supported by references to passages in the speeches in Lipkin
Gorman (a firm) v Karpnale Ltd [1991] 2
Benson Ltd v Lincoln City Council [1998] 4
various judgments in Westdeutsche Landesbank Girozentrale v Islington
London Borough Council [1994] 1 WLR 938, Kleinwort Benson Ltd v Birmingham
City Council [1997] QB 380 and Guinness Mahon & Co Ltd v Kensington
and Chelsea Royal London Borough Council [1998] 3 WLR 829.
We do not accept the claim to be entitled to a
legal set-off for a number of reasons. First, for the reasons we have already
explained, the assumption on which we are bound to approach this part of the
case is that the supply contracts were and are valid. The tenant paid the
price, took delivery of the beer and sold it on to his customers. In those
circumstances the claim to a restitutionary remedy fails at the outset. Second,
we regard the argument that the sum prima facie recoverable is the gross
price as a triumph of form over substance. The landlords or suppliers were
never enriched, whether justly or otherwise, by the gross amount, for it is
undoubted that they delivered the beer in exchange. Such a case is quite unlike
the interest rate swap cases where the money was paid in anticipation of
receiving a chose in action that was defeated because the underlying contract
was ultra vires and void. It follows that the loss sustained by the
tenants cannot be liquidated, for, even assuming a restitutionary remedy, it is
necessary to compute the enrichment by reference to the prices paid by the
tenants compared with the lower prices they would have paid if they were not
tied tenants. From the resulting figure, the value of countervailing benefits
would have to be ascertained and deducted before arriving at the amount for
which the remedy could be given. For these reasons, the claim to a legal
set-off fails.
An equitable set-off may be available in respect
of an unliquidated claim as well as one that is liquidated. The principles on
which it is allowed were examined in detail by Forbes J in British Anzani
(Felixstowe) Ltd v International Marine Management (UK) Ltd [1980]
QB 137*. The question in that case was whether it was possible to set‑off
against a claim for rent damages for breach of a contract for the construction
of a warehouse on the land to be let contained in the original agreement for a
lease. Forbes J allowed such a set-off. Having considered the relevant
authorities in depth the principles he extracted and applied may be clearly
seen from the following passages from his judgment at pp152E, 154H and 155E:
While I am satisfied that it is proper in
principle to allow that a cross-claim could be effective as an equitable set
off against a claim for rent, it by no means follows that such a defence is
available in all circumstances. The important qualification is that the equity
must impeach the title to the legal demand, or in other words go to the very
foundation of the landlord’s claim. This seems to me to involve consideration
of the proposition that the tenant’s cross-claim must at least arise under the
lease itself, or directly from the relationship of landlord and tenant created
by the lease…
it does not seem possible to conclude that it is
in all cases necessary that claim and cross-claim must arise out of the same
contract. Where as in this case they do not, it still remains for consideration
whether in any particular case the two matters are so closely connected that
the principles affecting equitable set off can be said to apply…
in considering questions of this kind it is what
is obviously fair and manifestly unjust that will determine the solution. This
is because today, while it is necessary to look back before the Judicature Act
to discover the broad principles upon which equity would grant relief, it may
not be helpful to seek to find out from the cases what a court of equity would
have done in a similar case… The application of that principle should be
reached by a consideration of what today would be regarded as fair or just.
*Editor’s note: Also reported at [1979] 1 EGLR
65; (1978) 250 EG 1183
As Lord Denning MR put it in Federal Commerce
& Navigation Co Ltd v Molena Alpha Inc [1978] QB 927 at pp974H-975:
it is not every cross-claim which can be
deducted. It is only cross-claims that arise out of the same transaction or are
closely connected with it. And it is only cross-claims which go directly to
impeach the plaintiff’s demands, …that it would be manifestly unjust to allow
him to enforce payment without taking into account the cross-claim.
For the tenants it was submitted that those
principles require that the liability of the landlords for breach of Article 85
be set off against their claim for unpaid rent. It was pointed out that the
benefit and burden of the tie are sufficiently connected with the demised
premises as to run with the term and the reversion: see Clegg v Hands
(1890) 44 ChD 503. Reliance was placed on a number of cases in which a set‑off
has been allowed in respect of claims arising under different agreements. By
contrast, it was alleged in this case that the tie is a part of the lease under
which the claim for rent arises.
These contentions were opposed by the landlords on
a number of grounds. First, it was submitted that the connection was
insufficient and that the decision of this court to that effect in Gibbs Mew
is binding on us. Second, it was claimed that the necessary connection was to
be found in the necessity for the cross-claim to arise out of the physical use
and enjoyment of the land. Third, it was suggested that the cross-claim arising
out of the physical use and enjoyment of the land must arise in respect of the
same period of time as that for which the claim for rent was made.
In Star Rider Ltd v Inntrepreneur Pub Co
[1998] 1 EGLR 53* Blackburne J was faced with the same issues, but without the
benefit of contrary argument or the judgments of this court in Gibbs Mew.
He accepted that the claim for breach of Article 85 was not sufficiently
connected with the claim for rent. He relied on the circumstances that: the tie
did not affect the tenant’s physical use and occupation of the premises; the
constraints imposed by the tie did not affect the tenant’s ability to pay the
rent; and it would be manifestly unjust to allow the set‑off. In Gibbs
Mew Peter Gibson LJ, with whom Schiemann and Mantell LJJ agreed, concluded
at p607H that:
In any event, there was insufficient connection
between Mr Gemmell’s counterclaim and the claim for rent arrears to enable
there to be an equitable set-off. That is consistent with the decisions of all
the judges sitting in the High Court who have considered this point in similar
cases (see, for example, Scottish & Newcastle plc v Bond,
Judge Peter Crawford QC; and Star Rider Ltd v Inntrepreneur Pub Co
Ltd, Blackburne J).
*Editor’s note: Also reported at [1998] 16 EG 140
The tenants submitted that the Court of Appeal was
there considering only the facts of that case, and, because no reasons were
given, it was open to us to reach a different conclusion. We do not agree. The
decision was one of mixed fact and law on the same IEL form of lease and the
same alleged cross-claims. At p608 Peter Gibson
although not all points argued had been specifically mentioned, they had all
been taken into account. In those circumstances, it is not open to us to reach
a conclusion as a matter of law that such a connection is sufficient for an
equitable set-off. Accordingly, in our view, no equitable set-off is available.
Apart from authority, we consider that decision to
be right. The reason why we would deny set‑off in these cases is because
the connection between the Article 85 claim and the claim for rent is so
tenuous. As we have already pointed out on more than one occasion, one tie is
not avoided in isolation from other similar ties. The avoidance of one tie
arises from the combined effect of that and other similar ties in foreclosing
the market to outsiders. The other ties necessary to avoid the tie in the
instant case have no connection with the tenant’s obligation to pay the rent.
As we have already pointed out, the invalidity of the tie does not affect the
validity of the lease or the covenant to pay the rent. Thus, the right of the
landlord to the rent is not impeached in any way by the cross-claim, and the
facts relevant to the cross-claim have no real connection with the individual
lease. In those circumstances, we see nothing unjust in refusing a set-off. In
this as in other fields the tenant must pay now and sue later.
That is sufficient to dispose of the issue of
equitable set-off. However, in recognition of the arguments presented to us and
of the fact that one or more of these matters may go further, we will deal
shortly with the other arguments advanced by the landlords. We can find no
justification in either principle or authority for the suggested limitation to
claims affecting the tenants’ physical use or occupation of the premises for
which the claim for rent is made. No doubt such a connection is likely to be
sufficient, but we see no reason why it should in all cases be necessary. Given
the basic principles to which we have referred there is no reason why it should
be; the title to the rent may be impeached or it may be unjust to deny set‑off
for other reasons. In the present cases, the terms of the lease require the
tenants to carry on a specific business with the landlords or their nominee
supplier and in a specific manner. We can see no reason why cross-claims
arising out of the conduct of that business should not be set off against the
rent for the premises. The only case that supports the contention of the
landlords is Star Rider Ltd v Inntrepreneur Pub Co [1998] 1 EGLR
53. But, in that case, Blackburne J did not have the benefit of argument to the
contrary. His reasoning was not approved by this court in Gibbs Mew. To
the opposite effect is the decision of the Court of Appeal in New Zealand in Grant
v NZMC Ltd [1989] 1 NZLR 8 allowing an equitable set-off in respect of a
cross-claim for damages for breach of a contract collateral to the lease that
the landlord would refer work of a specified nature to the tenant. If the point
were open to us we would follow the reasoning and conclusion of the latter
case.
We would also reject the suggestion that there
should be some temporal connection between the period for which the rent is claimed
and the events giving rise to the cross-claim.
In cases of time-charters, some such limitation
was recognised in Century Textiles & Industry Ltd v Tomoe
Shipping Co (Singapore) Pte Ltd: The Aditya Vaibhav (No 1) [1991] 1 Lloyd’s
Rep 573. In that case, the hirer sought to set off against the hire losses
sustained by the hirer due to the failure of the owner to provide the services
for which the hire had been paid. Saville
be allowed for failure to provide such services in the period for which the
hire was claimed, but not in respect of subsequent periods. His reason was that
the failure to provide the services that grounded the cross-claim was ‘the very
thing’ for which the hire was payable. Thus, it would be manifestly unjust to
permit recovery of the hire without allowance for the cross-claim for that
period. Saville J did not consider that there was any such injustice in
relation to other periods because the claim for the hire could not be impeached
on the ground that the hirer was being asked to pay for a service that the
owner had not provided. There is no suggestion in any case to which we were
referred that such a limitation should be introduced in a case of a lease of
land. As in the case of the first suggested limitation, such a temporal
connection may be sufficient to justify an equitable set-off, but we see no
reason why in all cases it should be necessary.
It was also suggested that if we concluded that
there was no right to a set-off we should refer to the European Court of
Justice the question of whether the provision of national law that denies such
a right is displaced by the requirement of European law that the national
courts protect directly enforceable rights such as those arising under Article
85. We decline to make any such reference. The assumed right we are required to
protect is unimpaired. The consequence of refusing the set‑off is to deny
to that extent a defence to the claim to rent that has no connection with
European Community law.
As we have also mentioned, the landlords have
claimed that any right of set-off that might have existed was excluded by the
specific terms of the individual leases. That such an exclusion is possible is
demonstrated by the decision of this court in Connaught Restaurants Ltd
v Indoor Leisure Ltd [1994] 1 WLR 501*. A contention common to each such
submission was the effect (if any) of the right, actual or potential, of the
landlord to require the rent to be paid by direct debit. As this point of
principle is common, in one form or another, to three of the matters before us
we will deal with it shortly in this part of our judgment.
*Editor’s note: Also reported at [1993] 2 EGLR
108; [1993] 46 EG 184
In Esso Petroleum Co Ltd v Milton
[1997] 1 WLR 938 this court determined (Thorpe LJ and Sir John Balcombe, Simon
Brown LJ dissenting) that a contractual requirement that the price of goods be
paid by direct debit was the equivalent of a requirement that it be paid in
cash, and, for that reason, inconsistent with, and sufficient to exclude, any
right of set-off. The landlords contend that the decision is binding on us; the
tenants disagree.
In that case, the licensee of a tied filling
station was required by the terms of his licence to pay for motor fuels
supplied to him by Esso ‘by bankers direct debit or in such manner as Esso may
from time to time require’. Having obtained supplies sufficient to fill up his
tanks, he cancelled the direct debit instruction given by him to his bank and
claimed that the conduct of Esso in seeking to increase both the price of the
fuel and the rent for the garage constituted an anticipatory breach of
contract. When sued for the price, the licensee sought to set off the damages
for breach of contract for which he counterclaimed. The court was unanimous in
rejecting the claim to set-off, but the members of the court were not agreed as
to the effect of the requirement to pay for the supplies by direct debit.
Thorpe LJ considered at p952H-953A:
it is a natural evolution rather than an
extension of the Nova Knit principle to hold that the seller of goods
for cash transferred by the direct debit mechanism should be in no worse
position than if he had accepted a cheque on delivery.
Sir John Balcombe considered at p954D that:
It is its equivalence to cash which is the
essential feature of a direct debit and which makes relevant Lord Wilberforce’s
explanation for the reason why a defence of set-off is not normally allowed in
the case of a claim based on a bill of exchange… I accept that the precise
circumstances in which a payment by direct debit will preclude a defence of
set-off may require to be worked out as further cases show different
combinations of fact but, like Thorpe LJ, I accept the fundamental principle
that, in general, a payment by direct debit for goods or services received
should preclude a defence of set-off.
In Nova (Jersey) Knit Ltd v Kammgarn
Spinnerei GmbH [1977] 1
bills of exchange payable at future dates as ‘deferred instalments of cash’.
The reason why set-off was not permitted against the liability on the bill of
exchange was so that it might be immediately negotiated for cash.
The tenants submit that the judgments of the
majority in Esso Petroleum Co Ltd v Milton do not justify an
extrapolation of the principle to payment of rent under a commercial lease. We
do not agree. The consequence of a requirement for payment by direct debit that
set-off is excluded was one but not the only reason for the conclusion of the
majority. As such, the decision is binding on us. We understand that
Mr
to pursue it. As the point does not arise for decision in this case, we express
no view on the merits of the decision itself; it is sufficient that we are
bound by it.
For all these reasons, we consider that even if
the European Court of Justice were to conclude that Article 85 conferred on a
tenant of tied premises a right for the breach of which he is entitled to
damages from his landlord, that cross-claim could not go to reduce or
extinguish the tenant’s liability to his landlord in respect of the rent for
the tied premises.
Specific appeals or applications
Inntrepreneur Beer Supply Co Ltd v Crehan
By agreements for leases dated 11 July 1991 and
made between Inntrepreneur Estates (CPC) Ltd and Mr Crehan the former agreed to
grant to the latter 20-year leases of two public houses, the Phoenix and the
Cock Inn, both in Staines, Middlesex. By the terms of the leases, to which we
have already referred, Mr Crehan agreed to purchase for resale in those
premises from Courage Ltd, and no other person, the various beers and other
liquors specified in it.
On 9 June 1993 Courage commenced these
proceedings, claiming from Mr Crehan £15,266 as the price of beer sold and
delivered to him. In due course, Mr Crehan served a defence and counterclaim to
which both Courage, as the supplier, and Inntrepreneur Estates (CPC) Ltd were
defendants. In his defence, he claimed that Courage was not entitled to recover
the price of the beer sold and delivered because the price was determined by
the beer tie contained in the leases, which, for the reasons set out in his
counterclaim, was unlawful. In addition, he sought to set off against any such
liability the damages or other sums for which he counterclaimed. By his
counterclaim, Mr Crehan asserted that: (1) the beer tie contained in the leases
was contrary to Article 85; (2) the beer tie was the product of concerted
practices engaged in by Courage and Inntrepreneur, also contrary to Article 85;
and (3)
into the leases to which we have already referred. Mr Crehan sought damages
under all three heads, and, in the alternative under the first two heads,
restitution in respect of the amounts allegedly unlawfully charged to him by
Courage. Those were the monetary claims that pursuant to his defence he sought
to set off.
On 9 October 1998 Inntrepreneur applied for orders
to dismiss the defence and counterclaim of Mr Crehan on the ground that he did
not have the causes of action against the defendants to his counterclaim for
which he contended. That relief was sought under RSC Ord 18 r 19 or Ord 14A.
Thus, the contention was that there was no cross-liability; it was no part of
the application that if Mr Crehan did have any such causes of action no such
cross-liability could be set off. That application, with others, came before
Carnwath J. By his order, made on 25 November 1998, Carnwath J dismissed Mr
Crehan’s counterclaim and gave judgment in favour of Courage for the sums
claimed as the price of beer sold and delivered. This is the appeal of
Mr
that the judge was wrong to have rejected the three heads of cross-liability to
which we have referred.
It will be apparent from the earlier sections of
our judgment that we agree with the judge that the claim based on an alleged
implied term must fail. This leaves only the claim based on an alleged breach
of Article 85. For the reasons explained by this court in Gibbs Mew that
claim must also fail, unless Community law confers on the tenant of licensed
premises the right as against his landlord not to be subjected to a beer tie,
which, together with other such ties, infringes Article 85, and that such right
is to be protected by national courts notwithstanding their own rules as to the
enforceability of illegal agreements as between the parties to them.
For the reasons we have also explained, we
consider that to enable us to give judgment on those most important issues it
is necessary for us to seek a preliminary ruling from the European Court of
Justice under Article 177. Thus, in that respect, we agree with the conclusion
of this court in Trent Taverns Ltd v Sykes. But, in that case,
the court also concluded that, in the exercise of its discretion, it would not
make a reference. It had a number of reasons for not doing so. The matter had
been recently considered by this court in Gibbs Mew, from whose order an
application for leave to appeal was pending. The Court of Appeal considered
that it would be more convenient to leave the decision to the House of Lords,
which might, as the court of last resort, be required to make a reference
anyway. It is apparent from the third reason given by Chadwick LJ that the
Court of Appeal was also influenced by the fact that the trial of the action
was fixed to start within the next two weeks. It is clear that the outcome of
the action might have obviated the need for a reference, in the sense of making
the point academic.
By contrast, this case is one of many that raise
the same point. No trial is imminent. Nor is there any other circumstance to
suggest that the point is anything other than one of the greatest importance,
which should be determined as soon as reasonably possible. Having given the
matter anxious consideration, we have come to the conclusion that we should
refer the two points we have mentioned to the European Court of Justice. We
should be grateful for counsel’s assistance in the formulation of the reference
and of the specific questions.
We will hear further submissions on the form of
our order in due course. Although the issue of set-off was not argued in this
appeal, it must follow from our judgment on that issue that even if the outcome
of the reference ultimately leads us to the conclusion that the counterclaim
does disclose a cause of action for breach of Article 85, any liability in
respect thereof cannot be set off against Courage’s claim for the beer sold and
delivered. Accordingly, subject to further argument, we consider that the
judgment on Courage’s claim should stand, and the order for a reference should be
made on Mr Crehan’s counterclaim. We leave for further argument the questions
of whether
terms.
Inntrepreneur Beer Supply Co Ltd v Langton
On 15 June 1992 Inntrepreneur Estates (CPC) Ltd
granted to Mr
a term of 20 years commencing on 16 March 1992. The lease was in the standard
form of Inntrepreneur lease of licensed premises, including the beer tie, to
which we have already referred, which was notified to the European Commission
in July 1992. On 22 May 1995 Mr Jenkins assigned the lease to Mr and Mrs
Langton for £32,000 (half being attributed to the lease and half to the
tenant’s fixtures and fittings). On 3 December 1997, a bankruptcy order having
been made against Mr Langton, his trustee disclaimed any interest in the lease.
On 27 August 1997 Mrs Langton, having in July 1997
started to withhold the rent due by her under the lease, issued a writ against,
among others, the landlord and nominated supplier seeking damages for breach of
Article 85 together with restitution of sums unlawfully charged to her. After
due service of the statement of claim and defence, the proceedings were stayed
in October 1997 pending the decision of the European Commission in respect of
the notification of the Inntrepreneur lease and judgment in Crehan and
another test case, called Target. In March 1998 the nominated supplier
under the terms of the lease was changed to Supplyline Ltd.
By a writ issued on 8 April 1998 the landlord
sought an order for payment of the arrears of rent and for possession of the
Albion for non‑payment of rent, the amount claimed to be outstanding at
that date being £20,411. By her defence and counterclaim, served on 5 May 1998,
Mrs Langton sought to set off against her liability for the rent the sums
claimed by her in her counterclaim. In her counterclaim Mrs
contended that the beer tie contained in the lease infringed Article 85;
alternatively she claimed that the beer tie was imposed pursuant to concerted
practices likewise contrary to Article 85. In either event, she sought damages
against the landlord for breach of duty imposed by that Article by reference to
the difference between the price charged to her for the beer supplied pursuant
to the tie and the prices charged to those not subject to a tie. In addition,
she sought relief from forfeiture. Subsequently, Mrs Langton sought leave to
amend her defence and counterclaim so as to bring it into line with that of Mr
and to raise the implied term issue.
By a summons issued on 12 March 1999 the landlord
sought judgment under RSC Ord 14 for possession and payment of the arrears of
rent. Judgment, as sought, was given by Jacob J on Friday 30 April 1999. This
is the appeal of Mrs Langton. She contends that the judge, who, as agreed,
followed the judgment of Carnwath J in Crehan, was wrong. Thus, this
appeal raises the same issues as Crehan. In addition, it involves the
issue of set-off. For the reasons given in the relevant sections of this
judgment, we reject the case for Mrs Langton on the alleged implied term and on
the availability of a set-off of the alleged cross-liability for breach of
Article 85. It follows that there is no necessity in this case to make any
reference to the Article 85 points pursuant to Article 177 because there is no
application before us to strike out the counterclaim. If and when the
counterclaim comes to be heard, either summarily or at a trial, the answer to
the reference we propose to make in Crehan will be known. There is no
reason of which we are aware why that answer should not also be determinative
of the Article 85 points in this case also.
For these reasons, in this case we simply dismiss
the appeal.
Greenalls Management Ltd v Smith
This is an application by Mr Smith for leave to
appeal, and an extension of time within which to do so, from each of two orders
made by Jacob J on 17 August 1998, in consequence of which Mr Smith was ordered
to give possession of the George Inn, Great Missenden, Bucks, to Greenalls
Management Ltd, and judgment for £19,429 arrears of rent was entered against
him. Leave to appeal was refused by the judge, and an extension of time was
refused by May LJ.
On 15 June 1992 Greenalls, which had bought the
freehold reversion on 13 April 1992, granted to Mr Smith, the existing tenant
of the premises, a lease of the George Inn for a term of three years at an
annual rent of £24,995 (the 1992 lease). The lease contained a beer tie
obliging Mr Smith to buy all his requirements from the landlord; there was no
provision for the landlord to nominate some other supplier. The tie was
contained in Part II of the lease. In substance, its terms did not differ
materially from those contained in the Inntrepreneur 20-year lease to which we
have referred in some detail. For present purposes, it is sufficient to record
that clause 4.1.8 provided for the determination of the lease in the event of
the tenant failing to pay the rent or to comply with a default notice for which
clause 3.32 made provision in the event of the tenant failing to observe and
perform his covenants. Clauses 7.7 to 7.9 were in the following terms:
7.7 Reservation of Rights
The Operator shall not be entitled to any rights
or privileges other than those hereby specifically and expressly granted to the
Operator.
7.8 Whole Agreement
The Operator acknowledges that this Agreement
contains the whole agreement between the parties and he has not relied upon any
oral or written representation made to him by the Company or its employees or
agents and has made its own independent investigations into all matters
relevant to the Business
7.9 Supercedes prior agreements
This agreement supercedes any prior agreement
between the parties whether written or oral…
On 20 April 1995 Greenalls granted to Mr Smith a
further lease of the George (the 1995 lease) at an annual rent of £30,000, but
otherwise on, for present purposes, the same terms as those contained in the
1992 lease. On 30 April 1997 Greenalls notified the European Commission of its
standard tenancy and franchise agreements, being the form entered into by Mr
Smith. On 9 July 1997 Greenalls served a default notice on Mr Smith in respect
of six specified defaults, including: failure to pay rent and the cost of
supplies; failure to operate the business as required by the lease; failure to
provide to the landlord copies of the tenant’s accounts and VAT returns;
failure to observe the tie; and seeking to make an arrangement with his
creditors. The response of Mr Smith was to issue a generally indorsed writ on
24 July 1997 claiming declarations that the beer tie was void because it
infringed Article 85, the prices charged should be fair and reasonable and for
damages and restitution. No statement of claim was ever served, but Greenalls
served a defence and counterclaim on 1 September 1997 seeking orders for
possession and payment of the rent and other arrears. The attempt by Greenalls
to obtain summary judgment on its counterclaim failed because the Master
thought that it was arguable that it had waived the breaches relied on. Thus,
by an order made on 18
to defend three of the claims made against him, and adjourned the rest.
Accordingly, in November and December 1997,
Greenalls served further default notices. The defaults of which complaint was
made included failure to pay the rent, to observe the tie and to provide
details of gross turnover, as required by clause 3.1.2. On 31 December 1997
Greenalls issued a writ seeking possession of the George Inn and payment of the
arrears of rent. By a summons issued on 14 January 1998 Greenalls sought
judgment under RSC Ord 14 in respect of each of those claims. The application
was opposed by Mr Smith on the basis of a draft statement of claim he sought to
use in the first action. This raised substantially the same points with regard
to Article 85 and the implication of terms as to the price to be charged to
tied tenants as had been raised in Crehan. In addition, Mr Smith relied on a
collateral contract made in May 1992 that, in consideration of Mr Smith
entering into the first lease, Greenalls would carry out various works of
repair and refurbishment, would provide Mr Smith with professional assistance
and that the range of products to be available for supply to Mr Smith would,
from and after November 1992, include two further specified brands. He alleged
a breach of each warranty, and sought to set off any sum recoverable thereunder
against his liability for the rent claimed by Greenalls.
The summons came before Master Dyson on 24
February 1998. He ordered that Greenalls’ counterclaim be discontinued, and
made the order for possession and payment sought by Greenalls. On 2 April 1998
Mr Smith applied by summons for leave to amend his writ in the first action so
as to maintain the same claim in respect of another pub in Great Missenden
called the Waggon & Horses, and for leave to serve a statement of claim.
That application, and the appeal of Mr Smith from the order of the master made
on 24 February 1998, came before Rattee
them to await the judgment of the Court of Appeal in Gibbs Mew. The
Court of Appeal gave judgment in Gibbs Mew on 22 July 1998 to the effect
we have already described.
On 3 August 1998 the European Commission, in
response to Greenalls’ notification of its standard tenancy and franchise
agreements, indicated that its examination thereof had not revealed the
existence of any grounds under Article 85(1) for further action on the part of
the Commission. Accordingly, its file was closed. On 7 August 1998 Mr Smith
sought a stay in both actions pending final determination of the appeals to the
House of Lords in Gibbs Mew, for which petitions for leave were pending.
The adjourned application and appeals and the
application for a stay came before Jacob J on 17 August 1998. He decided that
Greenalls was entitled to possession because of the unpaid rent, unless Mr
Smith could establish a right of set-off so as to extinguish that liability.
Jacob J rejected the suggested defence, based on the misrepresentations alleged
to have been made at the time of the first lease, on three grounds; first,
because such separate promises could not give rise to a separate contract in
view of the terms clause 7.8; second, because they were promises as to the
future, which could not give rise to actionable misrepresentations; and third,
because there was no nexus between the representations alleged at the time of
the first lease with the grant of the second. He also considered that the
decision of the Court of Appeal in Gibbs Mew applied, with the
consequence that Mr Smith could have no monetary claim for a breach of Article
85. He refused leave to amend and to serve a statement of claim out of time in
the first action. Finally, for a number of reasons, he considered that, in the
exercise of his discretion, he should refuse to grant the stay of proceedings
Mr Smith sought.
Mr Smith applied for leave to appeal on 7 October
1998. By his draft notices of appeal he sought orders in both actions that the
orders of Jacob J be set aside and that he be granted unconditional leave to
defend. He also sought leave to adduce fresh evidence. In the view we have
reached, such evidence would not advance matters, and the leave sought is
refused. In oral argument, his counsel indicated that he wished to amend his
notice of appeal so as to seek leave to serve the statement of claim out of
time in the first action.
In the light of our decision on the implication of
terms as to the price to be charged to tied tenants and on set-off, Mr Smith’s
contentions in respect of the breach of an implied term and of Article 85
cannot give rise to any defence to Greenalls’ claim. Our only concern with
those claims is in connection with whether there is an arguable case for leave
to appeal the refusal of leave to serve the statement of claim in the first
action out of time. In our view, there is not. The claim for the implication of
a term is not sustainable. The claim for damages or restitution would depend on
the outcome of a reference to the European Court of Justice similar to that
which we shall make in the case of Crehan. But, given the delay that has
occurred in service of a statement of claim in the first action, we do not
think that the appeal for which leave is sought could have any realistic
prospect of success in this respect.
Thus, this application does not now give rise to
any issue of principle. The only remaining question is whether there is an
arguable case for saying that the judge was wrong to dismiss the cross-claims
based on misrepresentation or breach of warranty. We do not think that there
is. With regard to the collateral warranty, it seems to us to be clear beyond
doubt that it was superseded by the second lease, in accordance with the
express terms of clause 7.9 carried forward into the second lease from the
first. With regard to the alleged misrepresentation, there is no allegation of
either fraud or negligence. Further, by clause 7.8 Mr
he had not relied on any oral or written representation when entering into the
second lease. Whether or not that provision is valid as an exclusionary term, cf
per Jacob J in Thomas Witter Ltd v TBP Industries Ltd [1996]
2 All ER 573 at p597, it was manifestly true in relation to the statements
allegedly made in May 1992.
Accordingly, there is no basis for any arguable
cross-claim capable of being set off against the claim for unpaid rent in those
respects either. For that reason, as well as because of the excessive delay,
there can be no prospect of this court granting Mr Smith leave to serve his
statement of claim in the first action out of time. Moreover, as Mr Andrew
Myers, for Greenalls, pointed out, there has already been one appeal in this
case, namely from the Master to Jacob J. In accordance with the practice of
this court as explained in para 20 of Practice Direction (Court of Appeal:
Leave to Appeal and Skeleton Arguments) [1999] 1 WLR 2 Mr Smith is required to
demonstrate that his appeal would involve an important point of principle or
practice or that for some other reason it should be considered by the Court of
Appeal. In our view, Mr
For those reasons we refuse leave to appeal.
Walker Cain Ltd v McCaughey
The plaintiffs, Walker Cain Ltd and Ind Coope
(Oxford & West) Ltd, are wholly-owned subsidiaries of Allied Domecq
Retailing Ltd. Walker Cain Ltd is the owner of the freehold of the White Lion
& Railway, 158 Whelley, Wigan, Lancashire. By a lease dated
11
& West) Ltd, demised the White Lion & Railway to the defendant, Mr McCaughey,
for a term of 10 years from 6 August 1993. The rent was £15,000 pa subject to
indexation and review, together with the cost of insurance and other costs and
expenses incurred by the landlord. The tenant covenanted to use the premises as
a public house with associated living accommodation only, and to perform and
observe the provisions of the business agreement contained in the fourth
schedule thereto. The fourth schedule contained a beer tie requiring the tenant
to obtain his requirements of beer, as specified, from the landlord or its
nominated supplier only. Although not in identical terms, the obligations
imposed by the tie were, in substance, the same as those imposed by the tie in
the Inntrepreneur leases.
On 14 August 1997 the landlord commenced these
proceedings, seeking orders for possession of the premises and for payment of
the arrears of rent amounting to £11,779, and mesne profits. By his
defence and counterclaim served on 19 September 1997 the tenant claimed that
the beer tie was void for breach of Article 85. He claimed to set off against
the unpaid rent sums allegedly due to him by way of restitution of the sums
paid by him to the landlord pursuant to the tie, and damages for breach by the
landlord of a term implied in the lease that the tenant would be charged only
reasonable prices for the beer supplied pursuant to the tie.
By a summons issued on 2 April 1998 the landlord
sought judgment under RSC Ord 14 for possession and payment of the arrears of
rent. By an order made on 29 April 1998 Master Moncaster gave summary judgment
for possession of the premises, but adjourned the application of summary
judgment for the arrears of rent. The tenant’s appeal from that order was
dismissed by Mr Stanley Burnton QC, sitting as a deputy judge of the Queen’s
Bench Division on 30 March 1999. In addition, the deputy judge gave summary
judgment for £8,583.92, being that part of the claim for rent for which there
was no arguable defence, mesne profits from the date of the issue of the
writ.
This is an application by the tenant for leave to
appeal from that order and a stay of execution pending that appeal. The draft
notice of appeal accompanying the application seeks unconditional leave to
defend the landlord’s claim. But the grounds of the appeal are more limited. By
para 1 it is contended that the judge should have referred to the European
Court of Justice the question of whether a breach of Article 85 confers any
rights on the defendant for damages against or restitution from the plaintiff.
By para 2 it is contended that the judge should have adjourned the appeal
before him to await our decision in Crehan and Smith and that of
the House of Lords in Gibbs Mew.
In his oral argument, counsel for the tenant went
well beyond the points raised by his notice of appeal. He addressed argument on
the
and the computation of any restitutionary or damages claim, including the
Regulation 19(3) notice. His argument on those points has been considered in
the general section of our judgment that deals with them. It follows from our
conclusions on those issues that we reject the contention that there can be any
cross-claim for damages for an implied term of the sort claimed. We also reject
the contention that if there is a pecuniary claim against the landlord for
breach of Article 85, it can be set off against the claim of the landlord for
rent.
It was also suggested that if we refused leave to
appeal we would then become the court of last resort, so that we would be obliged
to refer to the European Court of Justice the question referred to in the draft
notice of appeal. We do not accept that submission either. One consequence of
our conclusion that there could be no set-off of any Article 85 claim against
the liability of the tenant for the rent is that the question the tenant seeks
to have referred is not now germane to the determination of this application.
Even assuming that this court on refusing leave to appeal thereby becomes the
court of last resort, see Chiron Corporation v Murex Diagnostics Ltd
(No 8) [1995] All ER (EC) 88, we would not be obliged to refer a question
that was not necessary to our decision of the case: see CILFIT and Lanificio
di Gavarda SpA v Minister of Health of Italy (Case 283/81) [1982]
ECR III-3415 para 10.
For all these reasons we refuse this application.
Byrne v Inntrepreneur Beer Supply Co Ltd
(formerly Courage Ltd)
In this action Neuberger J had before him two
applications by the defendant (IBSCO) seeking the determination of four
questions under RSC Ord 14A. He handed down a draft judgment, which decided the
first of such questions in IBSCO’s favour. The remaining questions became on
this basis strictly hypothetical, but the judge, after careful consideration, gave
answers to them largely favourable to the claimant (Mr Byrne). Two
cross-applications were then made to him, one by Mr
his claim, the other by IBSCO to dismiss the claim. The judge dismissed both
cross-applications. Notices of appeal have been issued by both parties.
Mr Byrne was, as from 1 February 1988, the tenant
of licensed premises, the Goat in Broom Road, Shirley, under a lease and
business agreement contained in a deed dated 11 May 1988 made with IBSCO, then
known as Courage Ltd (Courage), for an initial period of five years. The
business agreement included in clause 4 undertakings to purchase from IBSCO a
minimum barrelage of beer and minimum gallonage of liquors. The lease contained
in clause 26 an option to renew for a further five-year term if certain
specified conditions, including the purchase of at least the minimum barrelage
and gallonage in each year (clause 26(1)(b)), had been fufilled. Mr Byrne’s
pleaded case is that, in 1991, IBSCO told him that there was ‘no way’ in which
IBSCO would allow him to renew his existing lease, and that he had no option
but to accept a new 20-year lease, failing which he would have to vacate the
premises. He further pleads that IBSCO justified its attitude by an (allegedly
incorrect) representation that the grant of a second five-year term would be
contrary to the Supply of Beer (Tied Estate) Order 1989. As a result, Mr Byrne
alleges, instead of insisting on performance of the old lease and exercising
his option to renew, he was prevailed upon, in September 1991, to surrender his
old lease and to enter into a new 20-year tenancy at a higher rent, the further
increase of which, in 1993, led to him vacating the public house in August
1994. He claims damages for IBSCO’s anticipatory breach of the option in his
old lease and/or for misrepresentation and/or negligent misstatement.
IBSCO’s amended defence includes, among other
points, the allegation that the option condition relating to the purchase of
the minimum barrelage of beer and gallonage of liquors in prior years (clause
26(1)(b)) had not been satisfied, and that the option did not therefore
‘subsist’ by June 1991. Mr Byrne’s reply alleges, among other matters, that the
minimum purchase obligations in clause 4 were contrary to Article 85 of the EC
Treaty, and that Mr Byrne’s lease contained three restrictions that meant that
it could not benefit from the block exemption in Commission Regulation 1984/83.
His application to amend, refused by the judge after release of the draft
judgment, was to add an allegation that clause 26(1)(b) was itself contrary to
Article 85(1) and (2).
We turn to the relevant provisions of the deed
dated 11 May 1988. The deed starts under the head ‘Preliminary’ with lettered
paragraphs including the following:
A. The Company [sc IBSCO] is one of the
leading brewing and retailing companies in the United Kingdom and has
established and wishes to maintain a high reputation for the products which are
sold in its public houses and for the appearance, comfort and amenities of
those public houses. It is for the mutual benefit of the company and all its
Tenants and Lessees that these standards be maintained and to this end the
Company provides a wide range of services for its Tenants and Lessees.
B. The Lessee [sc Mr Byrne] wishes to
conduct the business of running a Courage public house on the Premises and the
Company has agreed to grant the Lessee the following Lease on condition that
the Lessee shall enter into the following Business Agreement with the Company…
D. For the purpose of both the Lease and the
Business Agreement the following expressions shall where the context so admits
have the meanings set against them below:
|
‘the designated Beers’ |
The Beers listed in Part 1 of the Second Appendix to |
|
‘the designated Liquors’ |
The Liquors listed in Part II of the Second Appendix |
|
‘Beers of a different type’ |
Beers which are clearly distinguishable by their |
|
‘Liquors of a different type’ |
Liquors which are clearly distinguishable by their |
|
‘the minimum barrelage’ |
The minimum barrelage specified in the Particulars |
|
‘the minimum gallonages’ |
The minimum gallonages specified in the Particulars… |
E. For the purposes of the Lease and Business
Agreement:…
(5) Where the Company is entitled to nominate or
specify any person or thing it shall be entitled to change its nomination or
specification…
F. The Lease and Business Agreement shall for all
purposes be construed as two separate agreements notwithstanding that they are
contained in one Deed
The particulars specify 554 as the minimum
barrelage of beer and 188 gallons of spirits and liqueurs, 150 gallons of wine
and 300 of cider as the minimum gallonages of liquors.
The second appendix to the business agreement
lists in Part I five types of beer — ale, lager, stout, low-carbohydrate,
including ‘lite’ beer, and low-alcohol, including dealcoholised or alcohol-free
beer. It went on to list five subtypes of ale — light bitter or pale ale,
export or premium ale, mild ale, brown ale and strong ale, including barley
wine; four subtypes of lager — lager, export or premium lager, strong lager and
diet pils or premium low-carbohydrate beer; and two subtypes of stout — bitter
stout or porter and sweet stout. It contains these notes:
1. The brands or lines manufactured or factored
by the Company within the types of beer listed above and which are available
for supply under this Lease are those listed in the Company’s current standard
trade price list at the Date of Occupation [defined in the Particulars as 15th
January 1988] as being available for supply at that date.
2. Where a brand or line manufactured or factored
by the Company is listed in the Company’s current standard trade price list at
the Date of Occupation as being available for supply as a type of beer listed
above the Lessee may not purchase other brands or lines of the same type from
other sources.
3. Premium Lager includes malt lager and malt
liquor.
Part II of the second appendix lists 23 types of
designated liquor — grape wine (defined to include red, white and rosé types;
dry, medium and sweet; still and sparkling), fruit wine, ginger wine, sherry,
montilla, port, madeira, vermouth, whisky, gin, vodka, brandy, rum, pastis,
tequila, cider, perry, aperitifs and aromatised wines, bitters and cups,
cocktails and mixtures, liqueurs and alcoholic cordials — with explanatory
descriptions and the following note:
If the Lessee wishes to sell on the Premises any
type of liquor on this list and brands or lines corresponding to that type are
listed in the Company’s current
Lessee may not purchase other brands or lines corresponding to that type from
other sources except as may be permitted under Clause 4 of this Business
Agreement.
Parts II and III of the deed contain respectively
the lease and the business agreement. The lease included, inter alia,
the following provisions:
12. USER
(1) The Lessee shall use the Premises only as a
public house for the sale of drinks (and ancillary thereto the provision of
accommodation, food and other refreshments and recreation to the public) upon
the terms and conditions in this Lease and Business Agreement and not for any
other purpose…
21. AMENDMENT AND SEVERANCE OF INVALID CLAUSES
(1) The Lessee shall within 14 days of receipt
thereof from the Company execute such deeds or documents as the Company may
reasonable require from time to time to give effect to any amendment or
variation of the provisions of the Lease which may be necessary at any time to
bring the Lease within the exemption granted by EC Regulation 1984/83 as
interpreted by the European Communities Commission and/or the European Court of
Justice.
(2) If any provision of this Lease is invalid or
is made invalid by subsequent legislation this shall not affect the validity of
the remainder of the provisions of the Lease.
26. OPTION TO RENEW
(1) If the Lessee shall wish to take a Lease of
the Premises and enter into a Business Agreement for a further term of five
years… at the rent and on the terms and conditions herein after mentioned and
if
(a) the Lessee shall have paid the rent and all
monies due under Lease and the Business Agreement to the Company and have
performed and observed all the obligations on his part thereunder up to the end
of the Term and
(b) the Lessee shall have purchased from the
Company or its Nominated Suppliers at least the minimum barrelage of the
designated Beer in draft or packaged form and the minimum gallonage of the
designated Liquors in each year of the Term and
(c) the Lessee shall have agreed with the Company
a further Business Plan and a further Business Agreement and
(d) the Lessee shall not be more than 68 years of
age at the expiry of the Term and
(e) the Lessee shall not more than 12 months nor
less than 6 months before the expiry of the Term give notice to the Company of
his wish to take a further Lease of the Premises
then the Company will lease the Premises to the
Lessee for a further term of 5 years from the expiry of the Term at a rent to
be determined in manner hereinafter provided and subject in all respects to the
same obligations and stipulations as are herein contained except this clause
for renewal but with the substitution of the then Company’s current products
lists for beers and for liquors.
Clause 26(2) required IBSCO and Mr Byrne to enter
into a new business agreement in the event of the option being exercised. The
remainder of clause 26 was concerned with the assessment of the initial rent
under the new lease.
The business agreement imposed obligations on Mr
Byrne as lessee as follows:
2. LESSEE’S OBLIGATIONS
…
(2) The Lessee will conduct on the Premises the
Business of a Courage public house subject to and in accordance with the terms
of the Business Agreement and the Lease…
(5) The Company will allocate the Lessee a target
level of volume sales of the designated Beers and the designated Liquors… and
the Lessee will endeavour to achieve at least such target volumes…
(8) The Lessee will not without the Company’s
prior consent in writing be directly or indirectly engaged, interested or
concerned in any capacity whatsoever in any business other than the Business
and will devote his whole time to the Business (sc the business of
running a Courage public house on the premises).
4. SUPPLY OF BEER AND LIQUOR
(1) The Lessee agrees:–
(a) to purchase only from the Company or its
nominated suppliers all his requirements for the designated Beers for sale on
the Premises
(b) not to sell or make available for purchase…
any Beer other than the designated Beers unless such other Beer is of a different
type from any of the designated Beers and
(i)… is in bottles, cans or other small packages
or
(ii) where such other Beer is in draught form its
sale in draught form is customary or necessary to satisfy a sufficient demand
from the Lessee’s customers… and the Lessee shall notify the Company in writing
of his intention to sell… on the Premises such other Beer in draught form
indicating the demand or other circumstances which justify its sale in draught
form
(2) The Lessee agrees:–
(a) to purchase only from the Company or its
Nominated Suppliers all his requirements for the designated Liquors for sale on
the premises except that the Lessee may purchase designated Liquors from an
undertaking other than the Company or its nominated suppliers in the event that
the Lessee has been offered the designated Liquors by that other undertaking on
conditions which are taken as a whole more favourable than those offered by the
Company or its Nominated Suppliers and that having notified the Company in
writing of all relevant details of this offer he has not received from the
Company or its Nominated Suppliers a written notice that the Company or its
Nominated Suppliers are prepared to supply the designated Liquors on conditions
which taken as a whole are no less favourable than the conditions offered by
some undertaking
(b) not to sell… any Liquors other than the
designated Liquors supplied by the Company or its Nominated Suppliers except
where
(i) those other Liquors are of a different type
from any of the designated liquors or
(ii) although those other Liquors are not of a
different type from any of the designated Liquors they bear different trade
marks from the designated Liquors in the Company’s current product list for
Liquors and there is a bona fide demand from the Lessee’s customers for such
other Liquors.
Clause 4(1) and (2) thus contained the exclusive
purchasing obligations or tie by which Mr Byrne was intended to be bound.
Clause 4(3) obliged IBSCO to supply Mr Byrne with the ‘designated Beers’ and
‘designated Liquors’, and released him from the tie to an appropriate extent if
IBSCO was for any reason unable to do so. Clause 4(4) went on:
(4) The Lessee agrees:
(a) that he will… purchase from the Company… at
least the minimum barrelage… of the designated Beers in draught or packaged
form in each year of this Agreement… In the event of the Company and its
Nominated Suppliers being unable to supply for any period the minimum barrelage
will be reduced by the quantity of the designated Beers purchased during such period
from alternative sources…
(b) that he will purchase from the Company… at
least the minimum gallonage… of the designated Liquors in each year of this
Agreement… provided that the Lessee’s rights under paragraphs 2(a) and 2(b)(ii)
above shall override the minimum gallonage requirement to the extent that it is
necessary to allow the Lessee full exercise of those rights and provided
further that in the event of the Company… being unable to supply for any period
the minimum gallonage will be reduced by the quantity of the designated Liquors
purchased during such period from alternative sources.
Clause 11 of the business agreement was in similar
form to clause 21 of the lease, although referring to the business agreement
rather than the lease.
Article 85 has been set out earlier in this
judgment. The block exemption (Commission Regulation 1984/83/EEC) starts with a
23‑paragraph preamble, and is then divided into four titles. Title 1 is
headed ‘General Provisions’, Title II ‘Special Provisions for Beer Supply
Agreements’ and Title III ‘Special Provisions for Service-station Agreements’,
Title IV being ‘Miscellaneous Provisions’.
Title 1 incorporates Articles 1 to 5 of the block
exemption:
1. Pursuant to Article 85(3) of the Treaty, and
subject to the conditions set out in Articles 2 to 5 of this Regulation, it is
hereby declared that Article 85(1) of the Treaty shall not apply to agreements
to which only two undertakings are party and whereby one party, the reseller,
agrees with the other, the supplier, to purchase certain goods specified in the
agreement for resale only from the supplier or from a connected undertaking or
from another undertaking which the supplier has entrusted with the sale of his
goods.
2 .3. Article 1 shall apply notwithstanding that
the reseller undertakes any or all of the following obligations…
(b) to purchase minimum quantities of goods which
are subject to the exclusive purchasing obligation;…
Title II incorporates Articles 6 to 9 of the block
exemption:
6.1. Pursuant to Article 85(3) of the Treaty, and
subject to the conditions set out in Articles 2 to 5 of this Regulation, it is
hereby declared that Article 85(1) of the Treaty shall not apply to agreements
to which only two undertakings are party and whereby one party, the reseller, agrees
with the other, the supplier, in consideration for according special commercial
or financial advantages, to purchase only from the supplier, an undertaking
connected with the supplier or another undertaking entrusted by the supplier
with the distribution of his goods, certain beers, or certain beers and certain
other drinks, specified in the agreement for resale in premises used for the
sale and consumption of drinks and designated in the agreement.
2. The declaration in paragraph 1 shall also
apply where exclusive purchasing obligations of the kind described in paragraph
1 are imposed on the reseller in favour of the supplier by another undertaking
which is itself not a supplier.’
7.1. Apart from the obligation referred to in
Article 6, no restriction on competition shall be imposed on the reseller other
than:
(a) the obligation not to sell beer and other
drinks which are supplied by other undertakings and which are of the same type
as the beers or other drinks supplied under the agreement in the [designated]
premises…
(b) the obligation, in the event that the
reseller sells in the [designated] premises beers which are supplied by other
undertakings and which are of a different type from the beers supplied under
the agreement, to sell such beers only in bottles, cans or other small
packages, unless the sale of such beers in draught form is customary or is
necessary to satisfy a sufficient demand from consumers:
(c) …
2. Beers or other drinks are of different types
where they are clearly distinguishable by their composition, appearance and
taste.
8.1. Article 6 shall not apply where:
(a) the supplier or a connected undertaking
imposes on the reseller exclusive purchasing obligations for goods other than
drinks or for services;
(b) the supplier restricts the freedom of the
reseller to obtain from an undertaking of his choice either services or goods
for which neither an exclusive purchasing obligation nor a ban on dealing in
competing products may be imposed;
(c) the agreement is concluded for an indefinite
duration or for a period of more than five years and the exclusive purchasing
obligation relates to specified beers and other drinks;…
2. Where the agreement relates to premises which
the supplier lets to the reseller…, the following provisions shall also apply:
(b) the
agreement must provide for the reseller to have the right to obtain
— drinks, except beer, supplied under the
agreement from other undertakings where these undertakings offer them on more
favourable conditions which the supplier does not meet,
— drinks, except beer, which are of the same type
as those supplied under the agreement but which bear different trade marks,
from other undertakings where the supplier does not offer them.
By Article 9, certain Articles contained in Title
1, including Article 2(3) ‘shall apply mutatis mutandis’ to Title II. Title IV
contains, inter alia, Article 18, which provides:
This Regulation shall apply mutatis mutandis
to the categories of concerted practices defined in Articles 1, 6 and 10.
The four questions raised for the judge’s decision
under Ord 14A were (in the order in which he took them):
1. Assuming the Lease [or the tie provisions]…
would otherwise be contrary to Article 85… and void, is it or are they rendered
valid because it is [or they are] within the terms of the block exemption
(Commission Regulation 1984/83) or, alternatively, does the Lease or any part
thereof fall outside the block exemption…?
2. [Is] the requirement contained in clause
26(1)(b) of the Lease… a condition precedent which must be satisfied by the
[plaintiff] if he is to exercise the option to renew irrespective of any
question of validity or otherwise of the [tie provisions in the Lease]?
3. If not, [is] the option to renew contained in
clause 26 of the Lease void and unenforceable if the condition contained in
clause 26(1)(b) or alternatively the [tie provisions] are held to be void and
unenforceable…?
4. Assuming that any part of Clause 26(1)… is
void as being contrary to Article 85… is the plaintiff barred from the relief
claimed in the writ… by his need to plead and rely on the illegality of his own
contract in order to establish his entitlement to that relief?’
In relation to the second question, the judge
accepted IBSCO’s submission that clause 26(1)(b) of the lease was a
free-standing condition precedent, which, although overlapping in
subject-matter with clause 4(4) of the business agreement, was capable of
independent existence even if clause 4(4) was invalid. But the judge went on to
hold that if clause 4(4) fell foul of Article 85, the provisions of clause
26(1)(b) could themselves be capable of having an anti-competitive effect.
While clause 26(1)(b) imposed no positive obligation on Mr
be viewed as an agreement to bestow a benefit on him if he did something
infringing Article 85, and, on that basis, as potentially contrary to Article
85. The judge found support for this conclusion in Wyatt v Kreglinger
& Furnau [1933] 1 KB 793 at p809 per Slesser LJ and Marshall
v NM Financial Management Ltd [1997] 1
LJ (as he was). However, in the absence of any plea to that effect, he did not
consider the point further before handing down the initial draft of his
judgment. He also held that if clause 4(4) of the business agreement and clause
26(1)(b) of the lease were contrary to Article 85, the fact that Mr Byrne was
party to the lease and business agreement would not have debarred him from
relying on the remainder of the option.
In relation to the first question, the judge held,
however, that the lease and business agreement fell within the block exemption,
so that his answers on the other questions became, as we have said, of
essentially academic interest. After the judge handed down the initial draft of
his judgment, Mr Byrne then sought either permission for, or time to formulate,
an amendment to plead that clause 26(1)(b) was itself anti-competitive. The
judge refused his application on the ground that such a plea, even if properly
formulated, could not assist Mr Byrne, because clause 26(1)(b) fell to be
regarded as an obligation within the meaning and scope of Article 2(3)(b) of
the block exemption, and would benefit from the block exemption in the same way
as clause 4(4).
The judge’s conclusions on each of the four
questions, and his rulings on Mr Byrne’s application to amend and IBSCO’s
application to dismiss the claim are all challenged by this appeal. We start
with the point on the block exemption, which he decided in IBSCO’s favour.
Block exemption
Mr Byrne’s notice of appeal advances two main
obstacles to reliance by IBSCO on the block exemption to save the option
condition requiring Mr Byrne to have taken the minimum barrelage and gallonage.
The first repeats the argument raised by Mr Byrne’s unsuccessful application
for amendment, and is, in essence, that clause 26(1)(b), although
anti-competitive in nature, is not an obligation, and cannot therefore be saved
by the block exemption. The second repeats submissions made to the judge that
three aspects of the terms of the business agreement take the lease and
agreement outside the block exemption.
Before us, Mr Nicholas Green QC, for IBSCO,
advanced a new argument designed to circumvent both these obstacles to IBSCO’s
reliance on the block exemption. The argument depends on the difference between
the treatment of beer and liquors in clause 4(4)(a) and (b). Mr Byrne now
concedes that he failed to take the minimum gallonage of liquors in at least
one year of the term (a concession made after the hearing before the judge).
Relying on the concession, Mr
minimum gallonage contained in clause 4(4)(b) could not be regarded as
anti-competitive, since it was subject to clause 4(2)(a) and (b)(ii). Rather,
it was, in his submission, pro-competitive, since Mr Byrne was entitled to take
advantage of any alternative source of liquors that could offer more favourable
terms for the designated liquors or any alternative source of liquors of the
same type but different trade mark in so far as there was customer demand for
them. Article 85(1) could not in these circumstances apply to clause 4(4)(b),
and, since Mr Byrne had not purchased the minimum gallonage, there had on any
view been
minimum gallonage requirement in clause 26(1)(b). The option had on this basis
ceased to subsist for a reason relating to liquor, irrespective of the validity
of the tie and minimum purchasing obligations relating to beer.
Mr Mark Brealey objected to this argument,
submitting not only that it came too late, but that it raised potential issues
of fact or expertise relating to the anti- or pro-competitive nature and effect
of clause 4(4)(b). We gave permission to IBSCO to amend to raise the point,
reserving the position in case it should depend on matters of fact or expertise
with which Mr Byrne had not had proper opportunity to deal.
Mr Green’s argument assumes that: (a) the beer tie
is in terms that take the lease and business agreement outside the block
exemption; (b)
85(1); and (c)
be invalid under Article 85(2) to the extent of the invalid beer tie. The
liquor tie, particularly clauses 4(2)(a) and (b) and clause 4(4)(b), would thus
survive and entitle IBSCO to assert non-fulfilment of the option conditions
relating to minimum gallonage. Mr Brealey points out in response that the block
exemption operates as a blanket exemption under Article 85(3) in circumstances
where the conditions of Article 85(3) ‘may be considered as having been
fulfilled’: see the recitals to the block exemption itself and to Regulation
19/65 OJ 1965-6, 35, which authorised the block exemption. If the block
exemption is inapplicable, there has been no individual exemption for this deed
under Article 85(3). Further, the fact that liquor ties have to include certain
terms if they are to benefit by the block exemption does not mean that liquor
ties with or without such terms do not fall within Article 85(1). On the
contrary, it is because they may fall within Article 85(1) that they were dealt
with, and were required to include such terms, by the block exemption, with a
view to exemption under Article 85(3). In our judgment, therefore, Mr Green’s
argument fails, because, on an assumption that the block exemption is
inapplicable, there is no specific exemption under Article 85(3), and Article
85(1) is at least potentially applicable. It may be that, on full consideration
of the matter, it would be concluded that any invalidity under Article 85(1)
and (2) did not extend to the obligation to take a minimum gallonage of
liquors. But we do not regard this as so self-evident that it can be determined
now, least of all when Mr Byrne has had virtually no warning of, or opportunity
to respond with any factual or expert material on, the point. We add that if Mr
Green’s argument had been otherwise good, it would still have faced the problem
that the terms of the liquor tie did not mirror those of Article 8(2)(b)bis of
the block exemption, because of the presence in clause 4(2)(b)(ii) of the words
‘and there is a bona fide demand from the Lessee’s customers for such other
Liquors’. The questions would have arisen whether the difference was more than
verbal, and, if it was, whether this alone would have indicated that the liquor
tie could be anti-competitive. We shall revert to the first of these questions
when considering whether or not the business agreement fell within the block
exemption.
We turn therefore to Mr Brealey’s contention that
the deed falls outside the block exemption. His first reason relies on the
judge’s conclusion that, if clause 4(4) of the business agreement fell foul of
Article 85(1), then clause 26(1)(b) would, because of its anti-competitive
characteristics, do so likewise, although it was a condition not an obligation.
The argument distinguishes between clause 4(4), which could potentially enjoy
exemption under the block exemption, and clause 26(1)(b), which, it is
suggested, cannot, because the block exemption only applies to ‘obligations’.
There may be thought to be an element of blowing hot and cold about this
submission. Block exemptions generally have been subject to some criticism for
their rigidity — cf para 37 of the Commission Green Paper on Vertical
Restraints in EC Competition Policy COM(96) 721; [1997] 4 CMLR 519. Even
so, we share the judge’s view that this particular block exemption cannot
sensibly be read so narrowly. Mr Green points out that recitals (2), (21) and
(22) and Article 18 make clear its application to ‘concerted practices’.
Assuming that the anti-competitive characteristic of clause 26(1)(b) is to
encourage the lessee to comply with the minimum purchasing obligation, even if
that obligation is itself invalid under Article 85(1) and (2), it seems to us
that clause 26(1)(b) would constitute a concerted practice within the block
exemption.
In the event, Mr Brealey did not put any contrary
argument at the forefront of Mr Byrne’s appeal. His primary submission was that
clause 26(1)(a) of the lease was part and parcel of the same obligation as
clause 4(4) of the business agreement, and that the two must stand or fall
together. There is, in our view, some force in this way of looking at the
matter, for a reason to which the judge’s attention does not appear to have
been directed. Clause 26(1)(b) makes it a condition of the option that Mr Byrne
‘shall have purchased… at least the minimum barrelage… and the minimum
gallonage… in each year of the Term’. The initial impression might be that the
references here to the minimum barrelage and gallonage are simply to the
figures in the particulars. But, if that were so, the condition in the option
could operate inconsistently with the obligations in clause 4(4)(a) and (b), in
view of the provisions in these clauses for pro rata reduction of the minimum
purchasing obligations in the event of IBSCO being unable to supply for any
period, and, with respect to liquors, in the event of Mr Byrne becoming entitled
under clause 4(2)(a) or (b)(ii) to buy liquors other than the designated
liquors. That cannot have been intended. Clause 26(1)(b) must, in our view, be
read together with, and as subject to, the provisions in clause 4(4)(a) and
(b). So read, clause 26(1)(b) can itself be viewed as a short-hand requirement
of compliance with the minimum purchasing obligations in clause 4(4)(a) and
(b). As such, it is no different in substance from the requirement in clause
26(1)(a) that Mr Byrne should have performed and observed all his obligations
under the lease and business agreement. It was not suggested that the fact that
the option was made conditional on performance of Mr Byrne’s obligations
generally took the whole lease and agreement outside the block exemption. Nor
do we think that the inclusion in clause 26(1)(a) of a specific requirement,
intended in substance to pick up and operate by reference to the minimum
purchasing obligations, can do so.
Three respects exist in which it is now submitted
that the business agreement contains terms that take it outside the block
exemption. Mr
on competition imposed on Mr Byrne outside clauses (a) and (b) of Article 7.1
of the block exemption; (2) clause 4(2)(b)(ii) includes a pre‑condition
that there should be ‘a bona fide demand from the Lessee’s customers for such
other Liquors’, which is not found in clause (b) of Article 8.2 of the block
exemption; and (3) a tie by category or type of beer or liquor in the terms
expressed in the business agreement was inconsistent with the block exemption.
On this basis, he submits, there must be a trial to determine whether the tie
in the lease and agreement are, without the benefit of the block exemption,
invalid under Article 85(1) and (2), since, if they are, Mr Byrne will be
entitled to treat the option as free from any condition of performance of the
minimum purchasing obligations and to pursue his claim for IBSCO’s repudiation,
misrepresentation or misstatement with respect to the option.
The judge rejected Mr Brealey’s submission, and
held the block exemption applicable to the agreement. As to clauses 2(8) and
4(2)(ii), he considered that it was, as a matter of principle, incumbent on
Mr
practice of restricting, or were being used in practice to restrict,
competition in a material way. In the absence of any pleading to that effect,
he concluded that he could determine summarily that their presence did not take
the deed outside the block exemption. Second, he held that, if and in so far as
clauses 2(8) and 4(2)(ii) would otherwise take the deed outside the block
exemption, they could and should be severed, leaving the remainder of the deed
within the block exemption. As to the fact that the tie was defined by category
or type of beer or liquor in the terms expressed in the second appendix to the
business agreement, the judge held that there was binding authority against
Mr
v Canavan (No 2) [1998] EuLR 507 and Gibbs Mew plc v Gemmell
[1998] EuLR 588.
We take these points in turn. The argument on the
first turns on the opening words in Article 7.1 of the block exemption: ‘Apart
from the obligation referred to in Article 7, no restriction on competition
shall be imposed on the reseller other than:…’. Mr Brealey submits that clause
2(8) involved, necessarily, a restriction of competition, in that it precluded
Mr Byrne from carrying on any other business than that pursued at the tied
house. The test to be applied is, he suggests, similar to that applicable when
determining whether a contract or clause is in restraint of trade at common law
(and so invalid unless shown to have been reasonable in the interests of the
public and the parties). This common law test itself involves drawing a not
always readily discernible ‘line between those contracts which are in restraint
of trade… and those which merely regulate the normal commercial relations
between the parties’: Esso Petroleum Co Ltd v Harper’s Garage
(Stourport) Ltd [1966] 2 QB 514 per Lord Pearce. In the same case,
Lord Hodson approved language of Diplock LJ in Petrofina (GB) Ltd v Martin
[1966] Ch 146 at p180D, 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 persons not
parties to the contract in such manner as he chooses.
Lord Morris at p307 found the same passage
helpful, provided it was used rationally and not too literally. Lord Pearce at
p328 distinguished between contracts that tied the trading activities of a
party during the course of, and after the termination of, ordinary commercial
relations between them. Thus, he considered that:
The doctrine does not apply to ordinary
commercial contracts for the regulation and promotion of trade during the
existence of the contract, provided that any prevention of work outside the contract,
viewed as a whole, is directed towards the absorption of the parties’ services
and not their sterilisation.
We note, however, the comment in Chitty on
Contracts 27th ed vol
the theory that the doctrine does not apply during the contract, a theory which
has been rejected by the House of Lords’, a comment supported by reference to A
Schroeder Music Publishing Co Ltd v Macaulay (formerly Instone)
[1974] 1 WLR 1308.
It is clear that, in the interpretation and
application of the block exemption, the English doctrine of restraint of trade
can only be of general assistance in indicating the sort of considerations that
may have been envisaged. It was not argued by Mr Green (as it might perhaps
have been) that clause 2(8) was itself void and severable under the English
doctrine — turning Mr Brealey’s own weapon on him in a way that might, if
sound, have facilitated Mr Green’s argument that the block exemption covered
the rest of the deed. But, in his submissions on the consistency of clause 2(8)
with the block exemption, Mr Green transposed and invoked one of the
considerations recognised as relevant under domestic law when he submitted that
clause 2(8) represented no more than a normal commercial restriction, and,
therefore, so he went on, could not take the deed outside the block exemption,
unless Mr
restricting competition in a material way or that it had the effect of
restricting, or had been used so as to restrict, competition in a material way.
The judge in accepting Mr Green’s argument on this
point referred to Delimitis v Henninger Bräu AG Case C-234/89
[1991] ECR I-935, where the European Court said in para 13 that if beer tie
agreements ‘do not have the object of restricting competition within the
meaning of Article 85(1), it is nevertheless necessary to ascertain whether
they have the effect of preventing, restricting or distorting competition’.
That, however, was a statement made when considering the compatibility of such
agreements with Article 85(1), not when considering the applicability of the
block exemption. The judge also referred to an (unsuccessful) submission in Inntrepreneur
Estates (GL) Ltd v Boyes [1993] 2 EGLR 112 at p116F-M that a rent
clause provided for rent so excessive as to distort competition. Again, that
was in the context of Article 85(1) and also involved a clause that, on its
face and without extrinsic evidence, was self-evidently a normal commercial
provision, rather than anti-competitive.
Finally, the judge found assistance in relation to
the block exemption in decisions of this court in Greenalls Management Ltd
v Canavan (No
these cases, the question arose over a clause in a tied-house lease prohibiting
the installation of any amusement or gaming machine without the landlords’
prior written consent and subject to such conditions (including the sharing of
takings) as the landlord might then stipulate. The lessee’s argument was that
by this clause the landlord/supplier was restricting the lessee’s freedom of
choice to obtain such machines from whoever he wished, contrary to Article 8.1
of the block exemption. In rejecting this argument, this court cited para 52 of
the Commission notice of 22 June 1983 for the rationale of such a clause, viz
to protect the character and quality of the public house on an objective basis,
and for the proposition that inconsistency with the block exemption would only
arise if, in practice, the landlord limited the lessee to certain suppliers of
such machines on other criteria. Again, we think that Mr
correct in submitting that these cases do not resolve the present. The clause
in each relating to amusement and gaming machines was, on its face, directed at
upholding the character, quality and beneficial operation of the public house.
Any restriction of freedom of choice within Article 8(1)(b) could only arise if
the clause was deployed in practice in a certain way by the landlord, and, in
that event, only the application of the block exemption would have been
imperilled.
Returning to Article 7(1), with which we are
directly concerned, we consider that Mr Brealey is correct in his submission
that the phrase ‘no restriction on competition shall be imposed’ requires, in
the first instance, a judgment as to the essential character of the clause
under scrutiny. That is an exercise to be undertaken objectively. Both as a
matter of pedigree and in its own terms, the block exemption is, at this stage,
concerned with categorising or characterising particular clauses. Its pedigree
is to be found in Article 85(3) and Regulation 19/65, which make it clear that
the purpose of block exemptions is, where experience allows, ‘to define
categories of agreements and concerted practices in respect of which the
conditions of Article 85(3) may be considered as fulfilled’ (fourth recital of
Regulation 19/65) and ‘to specify in particular (a) the restrictions or clauses
which must not be contained in the agreements; (b) the clause which must be
contained in the agreements, or the other conditions which must be satisfied’:
Article 1(2) of the Regulation. Recital (8) of the block exemption echoes these
provisions. Article 6 defines and exempts certain beer supply agreements
containing an exclusive purchasing obligation. Article 7(1) provides that,
apart from such obligation and further obligations defined in paras 1(a), (b)
and (c), no restriction on competition shall be imposed on the lessee.
The first question, therefore, is whether the
agreement contains other obligations going beyond those in Articles 6 and
7(1)(a), (b) and (c). That is a matter of construction. If it does, then the
second and critical question arises of whether the additional obligation
involves a ‘restriction on competition… imposed on the reseller’. An agreement
such as the present may contain many additional obligations that do not involve
any such restriction. In the present case, assistance is provided by Articles 6
and 7 themselves on the critical question of whether clause 2(8) is to be
regarded as imposing a restriction on competition. The opening words of Article
7 treat the obligations in Articles 6 and 7(1)(a), (b) and (c) as involving
restrictions (albeit expressly permitted restrictions) on competition. All of
these permitted obligations are confined to the ‘premises designated in the
agreement’. Mr Byrne could be and was therefore required to buy all his beer at
the Goat from IBSCO and could be and was prohibited from selling at the Goat:
(a) other beers of the same type as IBSCO’s beer at the Goat; and (b) other
beers of a different type, unless (generally) in bottles, cans or packages.
When considering whether a wider tie could be imposed, embracing other
premises, it seems to us that the terms of these provisions provide, on their
face, an obvious answer. Any such tie would, on its face, involve a restriction
on competition outside the scope of those permitted by Article 6 and para 1(a),
(b) and (c) of Article 7. This is a conclusion
effect or any actual granting or refusal by IBSCO of consent under clause 2(8)
in an anti-competitive way. Whether or not Mr Byrne wished to compete is not
the issue on this way of looking at the matter. The essential issue is whether
the terms of the lease and agreement imposed on him any restriction on
competition not falling within clauses (a), (b) or (c) of Article 7(1). In
other words, what is an impermissible restriction for the purposes of the block
exemption does not, in the first instance, depend upon and vary according to
the particular circumstances and wishes of the individual lessee. They may
become relevant at a third stage, if it is suggested that a clause that does
not on its face impose any restriction on competition is being operated in
practice by the landlord in an anti-competitive way. That represents the
approach that Neuberger J took to clause 2(8), but, in our view, that stage is
never reached in this case, because this particular clause is, in character and
in terms of the block exemption, essentially anti‑competitive.
In support of his submission that the primary task
must be to characterise the particular clause, Mr Brealey referred us to the
approach adopted in Cabour SA v Automobilies Peugeot SA Case C‑230/96
[1998] 5 CMLR 679 by the Advocate-General at paras 25‑26, and by the
European Court at paras 30-33, and in Hydrotherm Gerätebau GmbH v Compact
de Dott Ing Mario Andredi Case 170/83 [1984] ECR III-2999. Cabour
was concerned with the block exemption relating to motor dealers, which
permitted the manufacturer to impose an obligation not to sell, at the
contractually specified premises, new motor vehicles other than those offered
for supply by the manufacturer, unless they could show objectively justified
reasons for so doing. The agreement under consideration prevented such sale
even at separate premises, unless there were objectively justified reasons. The
court said, first, that:
Having regard to the general principle
prohibiting anti-competitive agreements laid down in Article 85(1)… [of the
Treaty], provisions in a block exemption regulation which derogate from that
principle cannot be interpreted widely and cannot be construed in such a way as
to extend the effects of the regulation beyond what is necessary to protect the
interests which they are intended to safeguard.
It went on to hold on a proper construction of the
block exemption that the clause prohibiting sale at separate premises fell
outside the block exemption. There was no suggestion that this conclusion
required or depended upon consideration or proof of whether in practice the
prohibition in respect of separate premises affected or distorted competition
in any material way. Nor did the presence of the dealer’s right in that case to
sell other manufacturer’s vehicles at separate premises if he could show
‘objectively justified reasons’ prevent the agreement from falling outside the
block exemption. Although the two cases are not exact parallels, the limitation
of clause 2(8) to circumstances where no prior consent of IBSCO is forthcoming
does not, in our view, mean either that clause 2(8) imposes no restriction on
competition, or that it imposes no such restriction unless and until it is
shown that IBSCO has given or refused consent in an anti-competitive way. A
qualification by reference to the other party’s consent is, on its face, less
favourable to the party bound than a provision entitling him to trade elsewhere
on showing ‘objectively justified reasons’. Even if it could be implied that
IBSCO’s consent would not be unreasonably withheld, questions could clearly
arise about the critieria by reference to which, and viewpoint from which,
reasonableness was to be judged, and the fact that consent would have to be
sought at all for any competitive business activity would still mean that
clause 2(8) imposed a restriction on competition.
Hydrotherm
concerned the block exemption for exclusive dealers and a licence that had been
granted to distribute radiators bearing two trademarks. The licensee sought to
invoke Article 3 of the block exemption making it inapplicable, where (at para
18):
the contracting parties make it difficult for
intermediaries or consumers to obtain the goods to which the contract relates
from other dealers in the Common Market, in particular where… [they] exercise
industrial property rights to prevent dealers or consumers from obtaining from
other parts of the Common Market or from selling in the territory covered by
the contract goods to which the contract relates which are properly marked or
otherwise properly placed on the market…
The suggestion was that the mere grant of the
right to use the two trademarks brought Article 3 into play. The court rejected
this, holding at para 21 that the prohibition could apply:
only if either the terms of the agreement itself
or the actual conduct of the parties suggest that an industrial property right
is being exercised abusively in order to create absolute territorial
protection. The mere possibility of such use, arising from the fact that the
parties have not adopted any express provisions in their agreement, is
therefore not a sufficient reason for excluding an agreement from block
exemption.
The first inquiry was, therefore, whether the
licence in its terms fell directly within Article 3, and only if they did not
did it become material to consider whether one of the parties had actually used
the licence in a manner contrary to Article 3.
In the present case, the judge mentioned the
possibility that a clause might be imposed with the specific ‘object’ of
restricting competition. In doing so, he was quoting the language of Article
85(1). But the issue that he had to decide was whether clause 2(8) imposes a
‘restriction on competition’ in the context of Articles 6 and 7 of the block
exemption. The provisions of those Articles, relating specifically to beer
supply agreements, provide an essential framework within which this issue must
be approached and decided. They indicate that the court can and should seek, in
the first instance, to characterise clause 2(8) by reference to its terms. On a
comparison with the obligations that are permissible under Article 6(1)(a) and
(b) in particular, we have no doubt that clause 2(8) must be viewed in the
context of Article 7 as a restriction on competition over and above those
specifically permitted. Mr Byrne was an independent trader, not an employee or
an agent. The premise behind Article 7 is that he should be free to trade
without any tie away from the designated premises. It is of the essence of
clause 2(8) that it removes that freedom. It is no mitigation that it does so
not merely in respect of beer, but in respect of all other commodities and
activities. Any suggestion that clause 2(8) merely reflects the view that a
tied tenant cannot sensibly operate more than one pub is dispelled, not merely
by the carefully limited wording of Article 7(1)(a) and (b) but also by the
fact, from which Mr Green sought to derive assistance, that Mr Byrne was
permitted to take on the licences of two other houses tied to IBSCO at the same
time as the Goat. Finally, we note the Commission’s observations in its notice
of 22 June 1983, para 41:
The exclusive purchasing obligation can be agreed
in respect of one or more premises used for the sale and consumption of drinks
which the reseller runs at the time the contract takes effect. The name and
location of the premises must be stated in the agreement. Any extension of the
exclusive purchasing obligation to other such premises requires an additional
agreement, which must likewise satisfy the provisions of Title II of the [block
exemption].
In our view, in the context of Article 7, clause
2(8) introduces, on its face, an impermissible ‘restriction on competition’,
and this is not a case where it was or is incumbent on Mr Byrne to produce any
specific evidence that it was in fact operated or used to restrict competition.
We turn to clause 4(2)(b)(ii), which Mr Brealey
submits fell outside Article 8(2)(b)bis of the block exemption, because of the
added pre‑condition of ‘a bona fide demand from the Lessee’s customers
for such other Liquors’. The judge interpreted that requirement as satisfied by
either actual or potential demand, so that, he concluded, it could not restrict
competition in a material way. He said that ‘quite apart’ from that, there was
also ‘no pleaded or alleged factual basis for contending that the closing
provisions of clause 4(2)(b)(ii) were operated so as to distort the market’.
Whether clause 4(2)(b)(ii) takes the lease and agreement outside the block
exemption falls again to be judged in context, the context here being Article
8(2)(b). Under Article 8(2)(b), an agreement such as the present lease and
agreement:
must provide for the reseller to have the right
to obtain… drinks, except beer, which are of the same type as those supplied
under the agreement but which
supply them.
This is, on any view, a requirement as to the
terms of the agreement. If the terms of a particular agreement do not include
such a right, in the full width mentioned, then Article 8(2)(b) is not complied
with and the block exemption is inapplicable. On that analysis, it is not for
Mr Byrne to prove that any limitation restricts competition in any material way
or distorts the marker. At most, if there were some minor limitation, IBSCO
might be able to justify it as de minimis and so retain the benefit of
the block exemption.
It is arguable that, on the judge’s interpretation
of clause 4(2)(b)(ii) as referring to potential as well as actual demand, there
was either no limitation of the right required by Article 8(2)(b)bis or, if
there was any, it was de minimis. But we find it difficult to agree with
the judge’s view that the clause does in fact extend to potential demand.
Despite the judge’s contrary view, bona fide demand from the lessee’s customers
appears to us a readily understandable concept looking at the customers’ actual
demand for other products. It may be that the words bona fide add little, if
anything, although they might have a role if, for example, a landlord drummed
up a temporary demand by instigating it. A concept of bona fide potential
demand is, we think, even less easy to grasp. The judge and Mr Green before us
invoked the principle that the court should, where possible, construe an
agreement so as to make it efficacious rather than ineffective. The judge’s
reference in this context to the court leaning in favour of a construction
rendering the agreement valid goes too far, since failure to come within the
block exemption does not invalidate this agreement. It would only be invalid if
it fell within Article 85(1) and was not the subject of any specific exemption
under Article 85(3). There is more force in his point that the lease and
agreement themselves indicate the intention that they should come or, if
necessary, be brought within the block exemption: cf clauses 21 and 11.
But both these clauses contemplate the possibility that they may in fact fail
to fall within the block exemption, and whether they do is ultimately a matter
of construction. In our judgment, for the reasons we have given, clause
4(2)(b)(ii)bis represents a second respect in which they do not.
Tie by type
We have set out above the types of beer and liquor
listed in the second appendix to the business agreement. The effect of the tie
was that, where IBSCO’s standard trade list at 15 January 1988 contained a
brand or line within one of such types, Mr Byrne was precluded or restricted
under clause 4(2) from purchasing any brand or line of that type from any other
source. Mr Brealey submitted that was impermissible, for two reasons. First, he
suggested that clause E(5) of the lease and agreement gave IBSCO a right to
change the listed types of beer and liquor. That submission is plainly wrong.
Clause E(5) has no application where, as here, the types are fixed at the
outset by virtue of the definitions in clause D and the lists in the second
appendix. Second, he submitted that beer and liquor were classified in the
second appendix in ‘types’ of a broader character than the block exemption
permitted. The block exemption defines what it means by type in Article 7(2):
Beers or other drinks of the same type are those
which are not clearly distinguishable in view of their composition, appearance
and taste.
The classification adopted in the second schedule,
although it used the words type and subtype, did so, he submitted, in a
different and inherently broader sense. For example, a lager drinker could distinguish
different lagers, and even an amateur lover of wine different ‘red, white and
rosé types’ or ‘still and sparkling types’ of wine from each other ‘by their
composition, appearance and taste’. Mr Brealey pointed out that the
Commission’s consistent view had been that beers and liquors ought therefore to
be listed at the outset by brand or denomination: see Commission notice of 22
June 1983, paras 36 and 40, and Holleran v Daniel Thwaites plc
[1989] 2 CMLR 917, para 17. Mr Green countered by observing that a tie by brand
or denomination would itself be problematic. New brands could not be added.
Different tied houses with leases dating from different dates would be tied in
respect of inconsistent brands.
The nature of the tie permissible under the block
exemption has been considered twice previously in this court. In the Greenalls
case, the view expressed obiter, by at least the majority, was that (at
p514C):
a close analysis of Arts 6, 7 and 8… shows that
it is only the type of beer or other drink which must be specified in the
contract, and that these articles do not require the brand or trade mark to be
so specified,…
The majority went on to express the further view
(not directly relevant in the present case) that a liberty given to Greenalls
to amend its price list, so as to add to or vary the brands or trade marks of
beers or drinks within the types to which the tie extended, did not take the
lease outside the block exemption. In Gibbs Mew the beer tie ‘identified
tied beers and other drinks by type (eg light ale or bitter ale, export or
premium ales, mild ale, brown ale, strong ale)’ (p601), and had no provision
for subsequent variation of the types of beer and drinks covered. It evidently
therefore followed the same form as the present tie, which is in fact, we
understand, commonplace in the industry. The majority in Gibbs Mew
adopted and applied the view from Greenalls quoted above. It did so when
considering an alternative ground for rejecting any claim based on Article 85,
namely that, even if Article 85(1) applied, the agreement fell within the block
exemption. This court in Trent Taverns Ltd v Sykes has held that
the observations in Gibbs Mew on the effect of Article 85 were part of
the ratio, and were, in any event, intended to provide authoritative
guidance, which should be followed. The same applies to the court’s
observations in Gibbs Mew in giving an alternative ground for rejecting
any claim based on Article 85. We would only add that the petition to the House
of Lords for permission to appeal in Gibbs Mew seeks to raise there the
question of whether a tie by type of the present nature is acceptable under the
block exemption.
Mr Brealey submitted that we could and should
review the matter in this court, having regard to the Commission’s decision of
29 February 1999 in Case No IV/35-079/F3 — Whitbread OJ 31.3.99, L88/26.
The Commission had there to do with a specification of some 12 types of beer in
terms which, as they appear from para 42 of the Commission’s decision, were
effectively identical to those in the second appendix to the agreement before
us. An argument very similar to that put before us by Mr Brealey was dealt with
by the Commission in para 44:
It was remarked that the ‘specified’ type
definitions cover substantially all beer types sold in the UK. This was not
disputed. One complainant has argued that the 12 specified types are too
generic and thus not ‘clearly distinguishable by composition, appearance or
taste’, the relevant criteria indicated in the Regulation to define ‘different
types of beer’ (Article 7(2)). The complainant referred to the difference
between ‘cask-conditioned beer’… and ‘keg beer’… and the absence of any
reference to this difference in the specification of the 12 types. The
Commission recognises that discerning drinkers can taste the difference between
the cask-conditioned and the kegged version of the same brand. However, the
Commission does not consider that this necessarily implies that specification
of the types should take account of this difference. The definition of beer
types is a matter for experts to decide. As the specification of the 12 types
was originally agreed between the respective federations of brewers and
licensed victuallers in the United Kingdom, experts with regard to beer, the
Commission accepts this definition as an appropriate, workable way of defining
beer types in the UK.
Later, at para 147, the Commission referred to the
European Court’s decision in Delimitis that any tie must relate to beers
or drinks specified in the agreement to prevent the supplier from unilaterally
extending the scope of the purchasing obligation, and so Article 6(1) was not
satisfied by a tie relating to a list of products that the supplier could alter
from time to time; in that case a tie relating to drinks set out in the
suppliers’ price list as amended from time to time. That is not a problem that
exists in the present case. But the Commission then said:
(148) The standard Leases provide for a
specification of the beer tie by type which allows Whitbread to add to, delete
or substitute the brands of beer that it supplies to the lessees by amending
the contents of its price list from time to time for specified beers. The
specification of the beer tie by type thus allows
obligation and therefore does not fulfil the conditions of Article 6, which
requires a specification by brand or denomination.
So far as this statement deals with a power by
amending a price list to add to or alter specified brands within the 12
specified types, it takes a different view to that taken by this court in Greenalls.
But, as we have said, that problem does not arise before us. So far as the
Commission’s statement suggests that Article 6 ‘requires a specification by
brand or denomination’, we find it difficult to reconcile with the Commission’s
earlier statement at the end of para 44 accepting the appropriateness of the 12
specified beer types under Article 7(2). Articles 6, 7 and 8 appear to us, as
they did to the court in Greenalls, to represent a coherent whole, and
the Commission appears to us to have taken the same view in para 44. We do not
therefore understand the origin of the suggested requirement for specification by
brand or denomination.
Be that as it may, nothing in a Commission
decision alters the doctrine of precedent, quite apart from the fact that, at
its highest, the Commission, in para 148, was simply giving expression to a
long-standing view that was well known before both the Greenalls and Gibbs
Mew cases. This court remains bound by those previous decisions. We
therefore consider that, as regards the tie by beer, we can and should follow
those decisions in holding that the tie by type was appropriate under the block
exemption, and that the final sentence of para 44 of the Commission’s decision
in the Whitbread case serves to reinforce those decisions. As regards
the tie by type in respect of liquors, the subject-matter and reasoning in Gibbs
Mew extended beyond beer to other drinks, most of which were also specified
by type rather than brand: see pp592C, 601F-G and 602D. But the types specified
do not appear from the report. The types specified in the second appendix
before us are of considerable width, and, judging by the other leases before
us, may not follow a standard pattern. This was not, however, an aspect
specifically addressed before us. We would prefer therefore to reserve judgment
on the question of whether the types of liquors were specified in too broad a
way to fall within the scope of the block exemption.
For the reasons already given, we conclude that
clauses 2(8) and 4(2)(b)(ii) of the present lease and business agreement fall
outside those allowed under the block exemption.
Severance
This brings us to Mr Green’s alternative argument,
that, if their presence would otherwise take the lease and agreement outside
the block exemption, clause 2(8) and the final words of clause 4(2)(b)(ii) can
and should be severed, whereupon the block exemption would (subject to the
point we have left open relating to the non-beer tie) apply to the remainder of
the lease and agreement. The judge pointed out that it is for national law to
determine whether severance is possible in a case where a particular provision
is incompatible with Article 85(1): see VAG France AG v Établissements
Magne SA [1986] ECRV-4071. He found some encouragement for severance under
English law in clauses 21 of the lease and 11 of the business agreement.
However, there was, in our view, a fallacy in his approach. The question of
severance arises where a particular provision is unlawful or void, and the
choice is between invalidity of the whole agreement or of just the particular
provision. The present issue arises in the context of the block exemption, not
of Article 85(1). The block exemption does not prohibit or make void clauses
2(8) and 4(2)(b)(ii) or itself mean that a choice arises between treating those
clauses or the whole agreement as invalid. Their presence simply means that the
conditions of the block exemption are not satisfied. The agreement must then,
unless there is some specific exemption under Article 85(3), be tested for its
general validity under Article 85(1). The block exemption is irrelevant at that
stage. The agreement must be examined as a whole. There is no basis for
examining, first, any clauses that took the agreement out of the block
exemption or for severing such clauses with a view to going back a stage to
reconsider the block exemption. There is nothing in clauses 21 and 11 to
require or permit any such approach.
European authority cited to us by Mr Brealey
demonstrates clearly that compliance with the block exemption is a matter that
must be assessed looking at the particular agreement as a whole, and that
(unless, perhaps, there is specific contractual provision for severance in such
circumstances), once an agreement is found to contain any restriction on
competition beyond those provided, the block exemption ceases to apply, and the
focus reverts to Article 85(1): see Commission notice of 22 June 1983, para 17
and its Green Paper on Vertical Restraints, para 283; Delimitis,
paras 38-40; and Cabour, paras 47-48.
Does the option survive the invalidity of
clauses 4(4) of the agreement and 26(1)(b) of the lease?
It follows from what we have so far said that the
block exemption is irrelevant to the deed, and that the question of whether the
deed complies with Article 85(1) could only be resolved at trial. Assuming, for
present purposes, that Mr Byrne were then to establish that the tie was
contrary to Article 85(1), the question would arise of whether the effect would
simply be that IBSCO could not rely on Mr Byrne’s failure to take the minimum
barrelage (and minimum gallonage) as a reason for not allowing him to exercise
the option to take a further five-year lease or whether the option would fall
in its entirety. This question as to the effect of invalidity under Article
85(1) and (2) is, as stated above, one for English law.
The correct approach to such a problem has been
variously described in the cases. In Chemidus Wavin Ltd v Société
pour la Transformation et l’Exploitation des Resines Industrielles SA
[1978] 3 CMLR 514, this court suggested at p520 that the questions to ask were
whether:
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 at all.
In Amoco Australia Pty Ltd v Rocca Bros
Motor Engineering Co Pty Ltd [1975] AC 561, the Privy Council held that, in
circumstances where a petrol station operator had granted a lease to Amoco at
£1 pa and Amoco had subleased the station back to the operator also at £1 pa,
but subject to a tie that was invalid as being in restraint of trade, both
lease and underlease were invalid in their entirety. The tie was the heart and
soul of the underlease, and the lease and underlease were parts of a single
commercial transaction. The parties’ agreement to the contrary in the lease was
simply untrue, and, in a context where public policy had a role to play, did
not bind the parties. The Privy Council referred to the various tests mentioned
in prior authorities: is that which is unenforceable ‘part of the main purpose
and substance’?; does the deletion ‘alter entirely the scope and intention of
the agreement’?; or does the deletion ‘leave the rest of the deed a reasonable
arrangement between the parties’? It pointed out that these might not always
lead to the same result, but concluded, in the case before it, that it made no
difference which was applied. By contrast, in Alec Lobb (Garages) Ltd v Total
Oil (Great Britain) Ltd [1985] 1 WLR 173*, this court upheld a lease by
petrol station operators to Total for a premium representing the equivalent of
the market rent, and a leaseback at a rent that provided Total with an
essential financial return on its outlay, despite the invalidity of a tie in
the leaseback. The change in the leaseback and the fact that Total would not
have granted a leaseback without a tie were not sufficient to invalidate the
whole lease and leaseback.
*Editor’s note: Also reported at [1985] 1 EGLR
33; (1985) 273 EG 659
In Inntrepreneur Estates (GL) Ltd v Boyes
[1993] 2 EGLR 112, this court held that the invalidity of a tie in ‘an ordinary
lease’ for 20 years of a public house did not ‘so… change the nature of the
agreement or so… disappoint the main purposes of the [brewer/landlords] that
the tie provision can be regarded as inseverable’. By contrast, in Richard
Cound Ltd v BMW (GB) Ltd [1997] EuLR 277, the judge and this court
concluded that the tie and other dealership obligations imposed on a BMW motor
dealer regarding purchases, resale to the public and provision of servicing
facilities to anyone owning a BMW were fundamental, that without them the
agreement would amount to nothing more than an agreement for sale and purchase,
and that the whole agreement failed if they were invalid. Finally, in Marshall,
this court
insurance and pension policy sales agent’s contract, clause 10(g) of which
entitled him, after five years’ service as agent, to commission on renewal
premiums paid after termination of his agency, provided that he did not, within
one year of such termination, become an independent intermediary or be employed
by any organisation in competition with his former principals. His former
principals contended that the whole of clause 10(g) was void in its entirety as
being in restraint of trade. The court held that only the proviso failed.
Millett LJ suggested at p1531H that most cases of restraint of trade fell
between two extremes, in a category where:
The invalid restraint is only part of the
consideration for the promise, but… an important part, for without it the
promise would probably not have been given.
He explained the Amoco Australia Pty Ltd v Rocca
Bros Motor Engineering Co Pty Ltd [1975] AC 561 case as one where the
contract made no commercial sense at all without the tie, and said at p1532E:
The test has been variously described in the
cases. The contract will be upheld unless the invalid restraint forms ‘the real
consideration’ or ‘the main consideration’ or ‘the whole or substantially the
whole consideration’ for the promise: for the last formulation see Bennett
v Bennett [1952] 1 KB 249, 261, per Denning LJ.
I doubt that there is any real difference between
these different formulations, so long as it is recognised (i) that the
avoidance of the contract is not limited to the case where the only
consideration for the promise, apart from the invalid restraint, is a technical
or nominal consideration; (ii) that the court does not attempt to assess the
relative values of the various considerations for the promise… I prefer the
formulation expressed by Denning LJ, since it appears to me to put the point of
balance in the right place. The contract will be upheld even if the consideration
for the promise of the promisee includes an invalid restraint. It will be
struck down in its entirety only if, in substance, and regardless of its form,
it is an agreement for an invalid restraint.
That is a question of substance not form. It is
rightly submitted on behalf of the defendant that the substance of the contract
is to be ascertained from its words and that the parties are at liberty to
allocate different considerations to different promises. The structure and
language of the contract are therefore of prime importance. I agree that this
is so, provided that the parties do not attempt to disguise their true
intentions by artificial stratagems.
The court’s reasons for concluding that only the
proviso to clause 10(g) failed were that it was not correct to consider clause
10(g) in isolation, since it formed part of the total package of Mr Marshall’s
remuneration, and that, even if it were considered in isolation, the renewal
commission was payable under its terms partly in consideration for the five
years’ service and not exclusively for the invalid restraint.
The present case concerns the enforceability by Mr
Byrne of the option in clause 26, on an assumption that the minimum purchase
obligations contained in clause 4(4) of the agreement were invalid (and could
not therefore be relied upon under clause 26(1)(a)), and that clause 26(1)(b)
was itself an invalid condition of any option. It was suggested that clause
26(1)(c) must also be treated as having fallen away, because IBSCO could not
present a new business agreement containing any tie, and the tie lay at the
heart of any business agreement. But this last submission does not appear to us
good. Assuming that the tie in the first five-year lease was invalid, it would
still have been open to IBSCO, acting in good faith (cf Little v Courage
Ltd (1995) 70 P&CR 469 at p479), to present, in respect of the second
five years, a business agreement with the minor modifications necessary to
bring it within the block exemption. Nevertheless, when considering whether the
option survived, clause 26(1)(a) must be approached on the assumption that
there was no valid obligation under the first five-year lease to observe any tie
(because the tie was invalid under Article 85(1) and (2)), and, accordingly,
that any option would, on Mr Byrne’s case, operate free not simply of
compliance with any minimum purchasing condition but also irrespective of
whether there had been performance or observance of any tie.
Before us, the step in the judge’s reasoning to
which most criticism was addressed was that by which he concluded that, if the
minimum purchasing obligation and condition fell away, the option could still
subsist. He said that there were still plenty of covenants as lessee and
obligations (other than those involved in the invalid first five-year tie) that
fell to be observed within the meaning of clause 26(1)(a), and that compliance
with the minimum purchasing obligation could not be regarded as anything like
the sole consideration to be provided by Mr
The option constituted a unilateral commitment to
grant a second five-year term, for the consideration identified in the
conditions stated. The approach approved in Marshall requires us to
consider whether the conditions arising under clauses (a) and (b), that Mr
Byrne should have fulfilled the minimum purchase obligations and complied with
the tie, constituted the ‘substance’ or ‘substantially the whole’ of such
consideration. Taking the conditions, clauses (a) and (b) are self-evidently
the most important. They go to establish the tenant’s suitability for a further
term by reference to his past performance. Whether or not clause (d) was met is
a matter that would have been ordained and known when the lease and agreement
were first agreed, and not one in respect of which the lessee can have provided
any further consideration beyond entering the original agreement. Clause (e) is
largely procedural, with significance no doubt for IBSCO’s planning and
arrangements in the last year of the first five‑month period, but not
otherwise. Clause (c), especially as interpreted in Little v Courage,
is a stipulation regarding the terms of a business plan and agreement, which
IBSCO could require Mr Byrne, or any other new lessee, to enter into before
granting any lease. Mr Byrne would have no real choice whether or not to accept
terms put forward bona fide by IBSCO. The clause bears no special relevance to
Mr Byrne or the grant of an option as distinct from the grant of an entirely
new lease.
Clauses (a) and (b) are, on the other hand,
specifically referable to Mr Byrne and his past performance. The judge was
correct that the deletion from their scope of the tie and of any minimum
purchasing requirement leaves other aspects untouched, such as the due payment
of rent and the performance of obligations in respect of matters such as
dilapidations, inventory, insurance, alterations, user, repair, decorations,
maintenance and licensing referred to in the lease. But the reference in clause
(a) to compliance with the business agreement would become almost entirely
nugatory if the tie was invalid, and the reference in clause (b) to the minimum
purchasing obligations would have to be disregarded. The specific repetition in
clause (b) of a condition already inherent in clause (a) emphasises the
importance that must, understandably, be taken to have been attached to this
aspect.
We do not consider that any prior authority offers
a precise parallel to the present. In Inntrepreneur Estates (GL) Ltd v Boyes
the issue was whether a lease that had been granted fell with an invalid tie.
Here, the issue is whether a new lease and tie must be granted at all. That
turns not on considering whether the lease and tie could be severed, but on
whether certain specified, but invalid, conditions for the grant of a new lease
with tie constitute the substance or substantially the whole of the
consideration for IBSCO’s landlord’s willingness to commit itself to grant Mr
Byrne a fresh lease, rather than reserve the right to relet the public house to
anyone it chose, including, of course, him. Marshall itself was also a
very different case on its facts. Mr Marshall had, during the 12-year period of
his agency (considerably longer than the minimum five period specified in
clause 10(g)), introduced the clients and the business that gave rise to the
renewal premiums on which he was claiming commission. The substance of the
matter was that he was entitled to such commission during his agency and after,
but, in respect of the period after, the additional condition to entitlement
was imposed that he should not, within a year, become an independent
intermediary or join a competitor. That latter condition was self-evidently
remote from, and ancillary to, his entitlement to the renewal commissions. It
was his years of service and activity as an introducing agent that, as a matter
of reality, earned his claim to, or expectation of, such commissions.
In the present case, by contrast, we do not consider
that the conditions that the tie and the minimum purchasing requirements should
have been fulfilled can be viewed as either remote or ancillary. They are, if
anything, analogous to the requirement in Marshall that
serviced the clients and obtained the business to which the commission related.
The present case also differs from Marshall in that it involves not one
essential package (whereby Mr Marshall became agent and received a package of
remuneration) but two separate packages, the opening of the second of which
depended upon carefully defined conditions, which included performance of all
the obligations under the first and, specifically also, purchase of the minimum
quantities. Standing back from the arrangement constituted by this particular
option, it seems to us that it would, on its face, fundamentally alter its
nature if one were to treat it as continuing to bind IBSCO, but without any
preconditions under clauses (a) and (b) that Mr Byrne should have performed the
tie or taken the minimum quantities. We acknowledge that other obligations
exist and survive under clause (a), but it is worth underlining that clause (a)
itself stresses the need for performance of ‘all’ the obligations, while clause
(b) emphasises, by, in effect, repeating specifically, the need for the minimum
quantities to have been taken. Each agreement must be viewed according to its
own nature and terms. On Mr Brealey’s approach, as he acknowledged, the variety
of obligations embraced by the conditions meant that it was hard to envisage
the option ever being invalidated, short of the whole lease and agreement
falling. In our view, the nature and terms of the present option leads to a
wider view of the substance of the conditions imposed, and a condition of due
performance of the tie and minimum purchasing requirement must be viewed as at
least one integral aspect of the substance of the consideration, without which
it would amount, as a whole, to something quite different.
It does not assist Mr Byrne to point out that
there is no actual complaint of breach of any condition other than the minimum
purchasing condition or that, although he fell short in that respect, he met,
or largely met, the target figures that IBSCO set. The issue is not how
significant the conditions are on the facts of any particular case, but
whether, as a matter of interpretation and law, the conditions go to the
substance of the consideration or to substantially the whole or main consideration.
We would add, for completeness, to cover a hypothesis not directly explored
before us, that we would reach the same conclusion if we were to assume that
the tie and minimum purchasing obligations were only invalidated in respect of
beer and not other drinks. The tie and minimum purchasing obligations relating
to other drinks were clearly an ancillary matter, and it was not suggested
before us that it could make any difference to the result on this point if one
were to conclude that it was only the conditions relating to beer that fell.
In these circumstances, we consider that if, as Mr
Byrne contends, the tie and minimum purchasing requirement are invalid under
Article 85(1) and (2), it follows that the option ceases also to have any
validity. Assuming that the option survived despite the invalidity of certain
of its conditions, would Mr Byrne anyway be precluded from pursuing his claim
for damages because he would have to rely on the invalidity of clauses 4(4) and
clause 26(1)(b), to which he was himself party?
This issue does not arise if we are correct in our
answer to the immediately previous question. But it provides a further reason
why Mr
the option. The judge considered, first, whether an allegation by Mr Byrne that
clause 26(1)(b) (or clause 4(4)) falls foul of Article 85 would constitute an
allegation of illegality that would prevent him from obtaining relief; and,
second, whether Mr Byrne was in fact making such an allegation. On the first
aspect, he said that Gibbs Mew held authoritatively that an allegation
that a clause was invalid under Article 85(1) and (2) constituted an allegation
of illegality within the principle of Tinsley v Milligan, and,
further, that there were no degrees of illegality, and this was not a case
where it could be argued by Mr Byrne that the parties were not in pari
delicto. It has not been contended before us that the judge was wrong in
any of these statements, although this is not a case where Mr Byrne is seeking
damages under the illegal agreement — rather the point on illegality arises to
clear an obstacle that otherwise stands in the way of a claim for damages for
misrepresentation or repudiation at common law or misstatement under statute.
The judge found the second aspect difficult, but held that all that Mr Byrne
had to establish was an accepted repudiatory breach (or, presumably,
misrepresention or misstatement), after which the onus lay on IBSCO to allege
and, in due course, establish any contention that the option had expired
through non-fulfilment of any of its conditions. Otherwise, since he could not
claim relief by asserting that the clause was invalid, he would, as a matter of
fact, be forced to comply with the invalid conditions. The difficulty with this
last argument is that it derives the answer to the question of whether Mr Byrne
was making any allegation of illegality from a consideration of the
consequences if he was. That is to put the cart before the horse, in an area of
common law where the reasoning in Tinsley v Milligan confirms
that the consequences of illegality can be capricious.
The test stated in Tinsley v Milligan
involves considering whether a party is ‘forced to plead or rely on the illegality’
or whether it ‘of necessity forms part’ of his case: see eg per Lord
Browne-Wilkinson at p376E. It was not sufficient to debar relief that the
illegality of the title on which the plaintiff relied ’emerged’ during the
trial. Lord Browne-Wilkinson said at p377A:
In my judgment the court is only entitled and
bound to dismiss a claim on the basis that it is founded on an illegality in
those cases where the illegality is of a kind which would have provided a good
defence if raised by the defendant.
Before us, Mr Brealey submitted at one point that
it was only in cases where this latter test was met that the court could ever
refuse relief on grounds of illegality. That is plainly wrong. Lord
Browne-Wilkinson was considering the alternative scenario of illegality
emerging during trial, and the circumstances in which it could affect the claim
of a party who had not had to plead or raise it as part of his case.
The critical questions are, therefore, whether or
not Mr Byrne is forced either to plead or to rely on the alleged illegality of
the tie and/or minimum purchasing requirement as part of his case. It is his
case that, as a result either of repudiation or of misrepresentation or
misstatement by IBSCO, he suffered loss, relating principally (though not exclusively)
to advantages that he would have had under a second five‑year term, as
opposed to the new 20-year lease that he actually took in substitution. In
response to IBSCO’s defence that the option no longer subsisted, because of his
failures to take the minimum purchasing quantities, he pleaded in his reply (as
amended):
If… the Plaintiff failed to purchase the minimum
barrelage of designated beers and the minimum gallonage of designated liquors,
it is denied that this failure prevented the exercise of the option for a
further 5 year term by virtue of the fact that the minimum purchase obligation
for beers and liquors was void and unforceable being contrary to Article 85 of
the EC Treaty.
Under a lease in the present form, it seems to us
that the underlying onus of proof in respect of satisfaction of the specified
conditions may very well always rest on a lessee in Mr Byrne’s position. On
that basis, his original claim for damages would have inherent in it the
assertion not merely that the option was still alive and valuable at the time
of the repudiation or misrepresentation/misstatement but also that he had
satisfied, and would satisfy, the conditions necessary for it to subsist. Such
an assertion need not be expressly pleaded, there being (to use the terminology
of the old rules that governed the present pleadings) implied in his statement
of claim a statement that any ‘thing or event the doing or occurrence of which
constitutes a condition precedent necessary for the case of the party’ has been
done or has occurred: RSC Ord 18 r 7(4). But it would be implied, and, if and
when IBSCO pleaded in defence any failure to satisfy any of the conditions to
clause 26, the onus of proof of their satisfaction would be on Mr Byrne.
Independently of that, however, it seems to us
that, even if the onus of pleading and proving failure to satisfy the
conditions in clause 26 rested from the outset on IBSCO, once IBSCO pleaded
non-compliance with the minimum purchasing requirement, it was not incumbent on
IBSCO to plead or prove the validity of that requirement. On its face, it was a
valid, contractually agreed provision, to which a court would, without more,
give effect. If any party wished to suggest otherwise, it was for that party to
make the necessary plea and adduce the necessary
In these circumstances, whichever way the matter
is approached, Mr
conditions, which, as is common ground, means that his claim must fail in so
far as he claims directly for loss of the option.
Conclusion and relief sought
In our judgment, Mr Byrne’s claim is doomed in so
far as he seeks to rely on the existence of any valid option. The whole option
would fall with the conditions that we are assuming to have been invalid under
Article 85. Further, and in any event, Mr Byrne is precluded from relying on
the invalidity of such conditions in order to displace his need to have
satisfied them. We would therefore answer the four questions somewhat
differently from the judge, although arriving at a similar overall result, as
follows:
1. The lease and deed fall outside the block
exemption.
2. If the tie provisions in the business agreement
are void under Article 85, Mr Byrne has an arguable case for saying that the
condition in clause 26(1)(b) is itself void, which he should, if it was
otherwise relevant, be given the opportunity to plead. In the light of the
answers to questions 3 and 4, such permission could not assist him.
3. If the tie provisions and clause 26(1)(b) are
void under Article 85, the option as a whole ceases to be enforceable under
English law.
4. Further, and in any event, Mr Byrne would need
to rely, but be precluded under English law from relying, on the illegality of
the tie provisions and clause 26(1)(b) in order to pursue any claim relating to
the option.
Mr Green submits that that should be an end of
this litigation. There are, however, problems about that submission. First, Mr
Byrne has, at least in theory, a claim for damages for alleged loss, due to
repudiation or misrepresentation or misstatement, of the balance (of about 17
months) of his original five-year lease, which is unaffected by any invalidity
or illegality of the option. Second, as the judge mentioned, the
misrepresentation or misstatement claim might enable Mr Byrne to pursue a claim
for damages on the basis that, in 1991, it was not certain that the whole
option was invalid or that he would be precluded from relying on the illegality
of the invalid conditions in it, so that (but for IBSCO’s incorrect assertions
that the option conflicted with English law) he might have had bargaining
counters that he could have used to advantage to negotiate for a renewed
five-year lease, even though he had no right to such a lease. In refusing
IBSCO’s application to dismiss Mr Byrne’s whole claim, the judge also took into
account the lateness of the stage at which the suggestion of its dismissal was
raised before him, a matter that no longer arises, since Mr Byrne has now had
ample opportunity to consider and, if necessary, clarify his case on such
matters.
The pleadings and other material before us contain
little, if anything, to suggest or support any real claim on either of the
bases mentioned in the preceding paragraph. The idea that Mr Byrne would have
preferred to remain on for the balance of his first lease, without either
having any option to take a fresh five-year lease or taking a new 20-year lease
seems remote. The idea of bargaining based on doubts about the invalidity of
the option or about Mr Byrne’s right to enforce it without the invalid clauses
appears to ignore the fact that the suggestion of non‑compliance with the
minimum purchasing requirement did not arise until pleaded by amendment in early
1998. That takes one back, however, to the original issues, and to a
consideration of the position if IBSCO had not made any such misrepresentation
or misstatement as alleged. It is possible that Mr Byrne has some arguable
remaining case on that basis, but we consider that we need to hear further
argument on this.
For those reasons, we allow the appeal and the
cross-appeal to the extent stated. We will hear further argument as to what, if
any, further order we should make.
Summary of the conclusions
In summary:
(a) we dismiss the appeal in Langton;
(b) we dismiss the applications in Smith
and McCaughey;
(c) in Crehan, we will refer to the
European Court of Justice the questions indicated above;
(d) in Byrne we allow the appeal and, to
the extent indicated, the cross-appeal; and
(e) we invite further submissions on the form of
the reference in Crehan and any consequential orders in Crehan or
Byrne.
