England and Wales High Court (Chancery Division) Decisions

Passmore v. Morland Plc, Inntrepreneur Pub Company (CPC) Ltd, Inntrepreneur Beer Supply Company Ltd [1998] EWHC Ch 312 (8th July, 1998)

CHANCERY DIVISION
 

Before: The Hon. Mr. Justice Laddie
 
 

B E T W E E N

JUDGMENT
 
This is the official judgment of the court and I direct that no further note or transcript be made
 
DATED: 8 July. 1998

Mr. Justice Laddie:

Introduction

1. Mr. Passmore, the plaintiff in this action, is a publican. He is the tenant of "The Rose and Crown" public house in Aldershot, Hampshire. On 10 February 1992 he entered into a lease of that public house with Inntrepreneur Estates (CPC) Limited, the Second Defendant. The Second Defendant and The Inntrepreneur Beer Supply Company Limited, the Third Defendant, are part of a group of companies set up as a joint venture between Grand Metropolitan Plc and Courage Group Limited. "The Rose and Crown" was one of the licensed premises owned by that joint venture.

 
2. The lease had a term of 20 years from 1 February, 1992. One of its covenants was as follows:

"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 ..."

Because of this tying provision, Mr. Passmore was obliged to buy beers at a higher price than was available on the competitive market. Inntrepreneur obtained financial benefits under the lease both from the rent paid (the "dry rent") and from the additional profits it made on tied sales to the tenant (the "wet rent"). Although it is not necessary to determine the matter for the purpose of this application, it is said that the dry rent was reduced to take account of the benefits to Inntrepreneur of the wet rent.
 

3. Apparently Inntrepreneur owned about 4500 tied on licensed premises all or most of which were the subject of leases containing the same or substantially the same tie as that in Mr. Passmore’s lease. On 1 July 1992 it notified the standard form lease to the European Commission seeking an exemption under the provisions of Article 85(3) of the Treaty of Rome.

 
4. Morland Plc, the First Defendant, is a small regional brewer. On 29 July 1992 it acquired from Inntrepreneur the legal and beneficial interest in a few of the latter’s tied houses including The Rose and Crown. It thereby became Mr. Passmore’s landlord. In effect it took over the lease entered into between Mr. Passmore and Inntrepreneur.

 
5. Both during the time he was a tenant of Inntrepreneur and for most of the time when he was a tenant of Morland, Mr. Passmore complied with the tie. According to the evidence before me, the requirement to obtain his beer from his landlord or its nominees together with the diminution of trade associate with the reduction of the military presence in Aldershot, reduced the profitability of The Rose and Crown. On 15 October 1997, Inntrepreneur withdrew its notification of the standard lease from consideration by the Commission. On 16 December, Mr. Maitland Walker, Mr. Passmore’s solicitor, wrote to the Chief Executive of Morland. He said that the beer tie contained in the Inntrepreneur lease was void ab initio as a result of the provisions of Article 85(1) of the Treaty of Rome and that it remained so irrespective of the identity of the owner of the freehold reversion. Accordingly the tie was unenforceable by Morland. The next day Mr. Passmore started selling beer purchased from sources other than Morland. Morland did not accept that the tie in the lease they had acquired from Inntrepreneur was unenforceable. It considered that Mr. Passmore was in breach of contract and continues to be so.

The proceedings
 

6. On 27 January 1998 Mr. Passmore commenced the present proceedings. Some of his claims affect the Inntrepreneur defendants alone. However he also asserts that the lease, or at least the tie, breaches Article 85. As a result he asserts that he is free of the restrictions contained within it as against all the defendants and has been damaged by having been obliged to comply with its terms. He therefore seeks damages, restitution in respect of sums unlawfully charged by the defendants under the lease and a declaration that the tie is ineffective. In addition to this, Mr. Passmore alleges that during an oral discussion in late 1991, someone on behalf of the second defendant warranted or agreed that Mr. Passmore would be released from the tie with effect from 1 March 1998. He says that this an inducement or warranty on the basis of which he entered into the lease with Inntrepreneur. Pursuant to this he seeks certain additional relief against Inntrepreneur. He also alleged that Morland learned of this oral representation and that this imposed certain liabilities on Morland. However I understand that Mr. Passmore no longer pursues any claim against Morland arising out of the alleged oral representation and the issue has not been raised before me.

 
7. All the defendants dispute Mr. Passmore’s claims. In addition Morland counterclaims. It says that Mr. Passmore is in breach of contract by refusing to purchase supplies of beer in accordance with the tie. It seeks damages and an injunction to restrain him from making purchases of beer otherwise than in accordance with the agreement.

The present application
 

8. The present application has been brought by Morland alone. It seeks an order under Ord. 18 r. 19 or the inherent jurisdiction of the court on the usual grounds striking out the statement of claim in so far as it raises any claim against Morland. Further, it seeks summary judgment on its counterclaim for an injunction and damages to be assessed or, in the alternative, an interlocutory injunction restraining Mr. Passmore from purchasing beer otherwise than in accordance with the tie pending the trial of the counterclaim.

 
9. Central to this application is a single issue; is there an arguable case, as Mr. Passmore alleges, that the tie as between him and Morland is void because of the provisions of Article 85? In brief Mr. Passmore, through his Counsel, Mr. Brealey, puts his case as follows: the lease, or at least the tie provision within it, was prohibited pursuant to Article 85(1) when the parties to the lease were Mr. Passmore and Inntrepreneur. This rendered the agreement, or at least that provision, void absolutely pursuant to Article 85(2). Since that is so, the tie could not be assigned to Morland by Inntrepreneur. The tie is therefore void as regards Morland as well. This argument is dependent on the alleged breach of Article 85(1) when the parties to the agreement were Inntrepreneur and Mr. Passmore. As it was put by Mr. Passmore’s solicitors shortly before the application came on for hearing:

"... our case on the enforceability of the beer tie relies on the fact that the Lease between the parties was concluded between Inntrepreneur and Mr. Passmore."
 

10. It is not asserted that such a tie agreed between Morland and Mr. Passmore offends against Article 85(1). Mr. Passmore no longer claims any relief by way of damages or restitution against Morland. Mr. Brealey accepts that if the lease had been entered into de novo as between Morland and Mr. Passmore on 29 July, 1992 in exactly the same terms as those contained in the current lease, it would not arguably breach Article 85(1). The argument comes down to this that because the tie covenant is void pursuant to Article 85(2) as between Mr. Passmore and Inntreprenneur, Inntrepreneur can not assign it even though in the assignee’s hands the covenant would be legitimate.

 
11. Mr. Nicholas Green QC, who appears on behalf of Morland, concedes for the purpose of this application only that there is an arguable case that the tie as between Inntrepreneur and Mr. Passmore offends against Article 85(1). That notwithstanding he says that Mr. Passmore’s argument is hopelessly bad. He puts his case in two ways. First he says that the claim is based on the fallacy that the tie, if it offends at any time against the provisions of Article 85(1), is treated as dead and void for all purposes thereafter. Secondly he says that even if the assumed invalidity of the tie when operating in Inntrepreneur’s favour prevents it from being validly assigned, Mr. Passmore and Morland conducted their affairs for over 5 years on the basis that the tie did exist and bound them. On the uncontradicted evidence, the parties believed that there existed between them a lease containing the tie and they operated their relationship on that basis. He says that this gives rise to an estoppel by convention or estoppel by acquiescence to which there is no reasonably arguable answer. The result is that by the estoppel route the parties are still bound by the tie. Essentially the same point is also put on the ground of ratification. As noted above, as a long stop he asks for interlocutory relief.

Article 85
 

12. Insofar as relevant to this application Article 85(1) provides that 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 "shall be prohibited" as incompatible with the common market. Article 85(2) then provides:

"Any agreements or decisions prohibited pursuant to this Article shall be automatically void."
 

13. Although the combined effect of these two provisions is the subject of dispute between the parties, there is much on which they agree. Mr. Brealey says that in the case of tied house agreements, the network of similar agreements is relevant to the application of Article 85(1). In particular a network of such agreements is likely to infringe that Article where two conditions are satisfied, namely (1) the United Kingdom retail beer market is foreclosed (i.e. foreign breweries find it difficult to penetrate the United Kingdom market) and (2) the network of tied house agreements concluded by the relevant landlord significantly contributes to this foreclosure effect. That this is so follows from the ECJ decision Stergios Delimitis v. Henniger Brau [1991] ECR 935 (Case 234/89). Since it is accepted that Morland’s tied estate does not significantly contribute to the foreclosure of the market, the second of these conditions is not satisfied. It is for this reason that Mr. Passmore accepts that a lease in precisely the terms of the one which was assigned to him would be valid and enforceable if entered into de novo by him and Morland. However that has not happened.

The arguments

 
14. Mr. Brealey says that while Inntrepreneur was a party to the tie, the agreements were not only void but illegal. He then relies on the following passage from the ECJ decision Kerpen v. Kerpen [1983] ECR 4173 (Case 319/82):

"In its judgment of 25 November 1971 in Case 22/71 (Beguelin Import Company and Others v. SAGL Import-Expoert and Others [1971] ECR 949), the Court ruled that an agreement falling under the prohibition imposed by Article 85(1) of the Treaty is void and that, since the nullity is absolute, the agreement has no effect as between the contracting parties. It also follows from the previous judgments of the Court, and in particular from the judgment of 30 June 1996 in Case 56/65 (Société Technique Miniere v. Machinenbau Ulm [1966] ECR 235), that 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."
 

15. Mr. Brealey placed particular emphasis on the fact that the ECJ described the nullity as "absolute". Once the tie is a nullity it should be treated as if it no longer exists. It could not be passed on by Inntrepreneur to Morland. It is for that reason that Mr. Passmore only needs to show that the tie infringed Article 85(1) in February 1992 when it was for the benefit of Inntrepreneur (Plaintiff's Skeleton Argument paragraph 15). As I have noted already, it is accepted by Mr. Passmore that a valid and enforceable tie could have been agreed in precisely the same terms between him and Mr. Morland, but he says that it is not possible for Inntrepreneur to assign a contract containing that tie.

 
16. I accept Morland’s submission that this argument is bound to fail.

 
17. Article 85(1) is concerned with certain intended or actual economic effects arising out of the operation of agreements and concerted practices. It does not prohibit clauses of a particular form or language. It only prohibits agreements and concerted practices which have a particular offensive economic objective or effect. No agreement or clause in an agreement is per se invalid. It has to be looked at in the factual environment in which it is operating or intended to be operated. For example, even a clause expressly prohibiting export from one member State to another is not automatically invalid. This is demonstrated by the Delimitis decision itself:

"13. If such 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.

14. In its judgment in Case 23/67 Brasserie De Hecht v. Wilkin [1967] ECR 407, the Court held that the effects of such an agreement had to be assessed in the context in which they occur and where they might combine with others to have a cumulative effect on competition. It also follows from that judgment that the cumulative effect of several similar agreements constitutes one factor amongst others in ascertaining whether, by way of a possible alteration of competition, trade between Member States is being affected."
 

18. It follows that in a case, as here, which is advanced on the footing that the agreement has a prohibited effect, it is necessary to look at and weigh up all relevant economic facts, including matters such as the size of the parties to the agreement, before it is possible to say that a breach has occurred. The result of this is that a contract in one trader’s hands may offend against the Article but the same contract in another’s may not. This lies behind Mr. Passmore’s acceptance that a tie of the form in this case does not offend insofar as it is in a contract between Morland and their lessees.

 
19. This leads to another consequence. As Mr. Green put it, an agreement could commence lawfully and be unaffected by Article 85(1) because the parties to it are too small to have any significant economic impact on the market. However the agreement could subsequently fall within the Article, for instance because one of the parties grows into a major figure in the market or because it is taken over by a larger competitor or even because the nature of the market changes for reasons beyond the control of the parties. The agreement, or more accurately the economic effect of it, moves from being outside the scope of Article 85(1) to being within it.

 
20. If this is so, then one would expect the nullity created by Article 85(2) only to apply when the offensive economic effects are being generated by the agreement (For the purpose of this judgment it is not necessary to consider a case (which this is not) where the purpose of the agreement is to create an economic effect which is prohibited.  It would seem that in such a case the agreement will be a nullity even before it achieves its objective). In my view this is what Article 85(2) does. In terms Article 85(2) only imposes automatic nullity on agreements and concerted practices which are "prohibited". This is a reference back to Article 85(1). It is only when a contractual arrangement or concerted practice offends against the latter that it is prohibited and it only when it is prohibited that it is treated as a nullity. It would seem to follow that if an arrangement or practice is not prohibited it is not a nullity.

 
21. This is also consistent with Kerpen v. Kerpen upon which Mr. Brealey relied. There the ECJ pointed out that where the economic environment was such that agreement was prohibited, it had no effect "as between the contracting parties". The Court did not say that the agreement was a nullity for all purposes. It did not say that the agreement would be prohibited automatically in the hands of other contracting parties. In fact, as noted above, the Court said that

" ... the automatic nullity decreed by Article 85(2) applies only to those contractual provisions which are incompatible with Article 85(1)".
 

22. When contractual provisions are not incompatible with Article 85(1) - for example because they are passed to different parties having a negligible presence on the market in issue - then the automatic nullity of Article 85(2) does not apply. As Mr. Green put it, the statutory prohibition in Article 85(1) operates periodically, i.e. it can be turned on and off depending on the surrounding facts. This is consistent with the provisions relating to the illegality of agreements falling within Article 85. Under Regulation 17 the Commission has the power to fine parties who breach Articles 85 or 86. In particular Article 15 of the Regulation stipulates that the fines are to be imposed on parties who

"intentionally or negligently ... infringe Article 85(1)..."
 

23. Therefore the Commission can only imposes fines for the period during which a particular agreement offends against Article 85(1). It cannot fine in respect of a previous or subsequent period where it does not so offend. Just as the agreement can move into and out of illegality, so too it can move into and out of nullity.

 
24. Mr. Brealey accepts that an agreement can move in and out of illegality. He also accepts that an agreement does not become invalid retrospectively because at some time after its commencement it begins to offend against Article 85(1). However he says that when it becomes a nullity under Article 85(2) a guillotine comes down and it does not revive subsequently. More precisely, he says that it does not revive spontaneously. As I have said, he accepts that Morland and Mr. Passmore could have entered into an identical agreement on the day that Morland took its assignment from Inntrepreneur. I understand that he also accepts that if there had been no assignment by Inntrepreneur but the market conditions changed so that the agreement stopped offending against Article 85(1), it would have been possible for Inntrepreneur and Mr. Passmore to enter into a valid and enforceable new agreement in identical terms as soon as those new conditions prevailed. However his argument is that a new agreement would have to be entered into because the old one in identical terms had become, in the words used by the ECJ in Kerpen v. Kerpen, an "absolute" nullity.

 
25. The ECJ’s decision in Kerpen does not support Mr. Brealey’s argument. For reasons I have given, it is more consistent with the view that nullity under Article 85(2) is periodic. In any event the issue which is before me was not before the ECJ in that case. Merely to say that an agreement is an absolute nullity does not indicate for how long it remains in that state nor as between which parties. The lease between Inntrepreneur and Mr. Passmore created a bundle of contractual obligations between them. As and when those obligations gave rise to effects prohibited by Article 85(1) they became a nullity in the sense that they were absolutely unenforceable between the parties. If and when the effects of the obligations no longer offend, they are not a nullity and they are no longer unenforceable. The effect of the assignment by Inntrepreneur to Morland was to pass to the latter the bundle of obligations. In the assignee’s hands they are admittedly inoffensive. As a consequence in those hands they are enforceable.

 
26. It follows that Mr. Passmore’s claims against Morland fail and should be struck out. Mr. Brealey pressed no other defence against Morland’s counterclaim and Morland is entitled to summary judgment on it. In the light of these findings, it is not necessary to consider Mr. Green’s estoppel by convention argument nor his application for interlocutory relief.