United Kingdom House of Lords Decisions

MD Foods v. Baines and Others [1997] UKHL 7; [1997] AC 524; [1997] 1 All ER 833; [1997] 2 WLR 364 (27th February, 1997)

LORD GOFF OF CHIEVELEY

My Lords,

          I have had the advantage of reading a draft of the speech of my noble and learned friend, Lord Nicholls of Birkenhead. For the reasons he has given, I would allow this appeal.

LORD MUSTILL

My Lords,

          I have had the advantage of reading a draft of the speech of my noble and learned friend, Lord Nicholls of Birkenhead. For the reasons he has given, I too would allow this appeal.

LORD NICHOLLS OF BIRKENHEAD

My Lords,

          Mr. Andrew Baines is a milk roundsman in Lancaster. He buys milk from a wholesale supplier, and delivers it from house to house onto the doorsteps of his customers. In August 1989 he entered into a five-year milk supply agreement with Associated Dairies Ltd., now known as M. D. Foods Plc. The company agreed to supply to Mr. Baines, and Mr. Baines agreed to buy from the company, all the milk he needed for sale in his business. His "business" meant his existing milk distribution business, together with any milk distribution business he might acquire in future not already tied to another milk supplier. If force majeure prevented the company from maintaining supplies, Mr. Baines could obtain milk elsewhere as a temporary measure. The agreement contained mutual non-competition clauses. The company agreed not to sell milk to the customers of Mr. Baines' business; Mr. Baines agreed not to sell milk by way of retail to any customers of the company. The latter restriction lies at the heart of this case. I must set out the form in which it was expressed:

          "4. . . . [Mr. Baines] hereby undertakes and agrees with the Company: . .

          (3)  During the continuance of this Agreement (except with the prior written consent of the Company) not to sell milk by way of retail to any customers of the Company"

          Milk roundsmen are under increasingly severe competition from milk sales by shops, especially supermarkets. If a milk roundsman's business is to survive, the difference between the price of milk on sale in shops and the price of the milk he delivers to the homes of his customers must not become too large. So it was a matter of grave concern to Mr. Baines when the company, more than once, increased the price it charged him for his milk. He had to increase his own prices to his customers, or see his profit margin eroded.

          In January 1992 he started taking his milk supplies from an outside source, where he could obtain milk more cheaply. Other sources could obtain milk, ironically from the company itself, at one or two pence per pint less than the price charged by the company to Mr. Baines. They were not tied by an exclusive supply agreement and they were able to negotiate better terms. One of these sources was Mr. Baines' own father, who also was a milk roundsman.

          The company started High Court proceedings against Mr. Baines and obtained interlocutory injunctive relief. One of his defences was that his obligation to buy all his milk from the company was void because the agreement had not been registered under the Restrictive Trade Practices Act 1976. An application to determine this issue under R.S.C., Ord. 14A came before Sir John Vinelott, sitting as a judge of the Chancery Division [1995] I.C.R. 296. He held, in favour of the company, that the agreement was not registrable. He declined to discharge the injunction.

          The Court of Appeal, comprising Stuart-Smith, Hirst and Schiemann L.JJ., [1996] I.C.R. 183 reached the contrary conclusion. By now the agreement had expired by effluxion of time, but the validity of the agreement remained a live issue: partly because of the company's liability on its cross-undertaking in damages, but more especially because the agreement was in the company's standard form. The Court of Appeal upheld Mr. Baines' contentions and ordered an enquiry as to the damages he had sustained by reason of the injunction. With the leave of the Court of Appeal the company appealed to your Lordships' House.

          Some points of common ground can be noted. Clause 4(3), plainly, applied to milk supplied to the milkman under the agreement. It is common ground that in two circumstances the agreement could apply to milk which had not been supplied under the agreement. The milkman's obligation not to sell milk to customers of the company would apply if he obtained milk supplies elsewhere while the company was temporarily unable to supply him. The obligation would also apply if he obtained milk from a third party to whom he was bound by an exclusive supply agreement.

          It is also accepted that if clause 4(3) had been drafted in a different form, although having precisely the same ambit, the agreement would not have been registrable. This would be so if clause 4(3) had been drafted in two linguistically separable pieces, to the following effect:

          "(3) . . . not to sell by way of retail to any of the customers of the Company any milk supplied to him (a) by the Company or (b) by any source other than the Company"

The question is whether this difference in form makes all the difference so far as registrability is concerned.

          The basic scheme of the Restrictive Trade Practices Act 1976 is familiar. Certain agreements are made subject to registration in a register maintained by the Director General of Fair Trading. The agreements may concern goods (Part II of the Act) or services (Part III). In respect of agreements of which particulars have been registered, the court is given power to declare whether restrictions, or provisions for the furnishing of information, by virtue of which the Act applies are contrary to the public interest. Any restrictions or information provisions found by the court to be contrary to the public interest are void and unenforceable. The sanction for non-registration is that all restrictions accepted under the agreement, and all information provisions made under the agreement, are void and it is unlawful to enforce them.

          This case concerns restrictive agreements relating to goods. Section 6(1), so far as material, provides that the Act applies to agreements between persons carrying on business within the United Kingdom in the production or supply of goods under which restrictions are accepted by two or more parties in respect of, among other matters, prices to be charged or recommended, the terms on which goods are to be supplied, the quantities to be produced or supplied or, in paragraph (f), the persons from whom goods are to be acquired or to whom goods are to be supplied.

          Mr. Baines' milk supply agreement was an agreement between persons carrying on business within the United Kingdom in the supply of goods. It is common ground that under this agreement Mr. Baines and the company accepted several relevant restrictions, by which I mean restrictions falling within section 6(1). Mr. Baines' obligation to buy all his milk from the company, the company's obligation not to sell milk to customers of Mr. Baines' business, and Mr. Baines' obligation under clause 4(3) not to sell milk to customers of the company are all restrictions which come within section 6(1)(f). Thus, unless exempted, particulars of the agreement were registrable.

          There are two relevant exemptions. Under section 28 the Act does not apply to the agreements described in Schedule 3. Paragraph 2 of Schedule 3 concerns exclusive dealing agreements. Omitting immaterial words for ease of comprehension, paragraph 2 provides:

          "This Act does not apply to an agreement for the supply of goods between two persons . . . under which no such restrictions as are described in section 6(1) above are accepted . . . other than restrictions accepted . . .

          (a) by the party supplying the goods, in respect of the supply of goods of the same description to other persons; or

          (b) by the party acquiring the goods, in respect of the sale, or acquisition for sale, of other goods of the same description."

          Taken by itself, paragraph 2 does not operate to exempt Mr. Baines' agreement from the Act. Some of the restrictions in the agreement fall within subparagraphs (a) and (b). The company's obligation not to sell milk to Mr. Baines' customers is within subparagraph (a). Mr. Baines' obligation to buy all his milk from the company is an obligation not to buy milk elsewhere. This falls within subparagraph (b). So also does his obligation under clause 4(3) so far as it relates to milk not supplied by the company. Mr. Baines' obligation not to sell milk to customers of the company is within subparagraph (b) so far as it relates to milk not bought from the company because that is a restriction accepted by him, as the person acquiring goods under the agreement, in respect of the sale of other goods of the same description.

          However, Mr. Baines' obligation not to sell to the company's customers milk supplied to him by the company is outside subparagraph (b). This obligation is a restriction accepted in respect of the sale of the very goods acquired under the agreement, not a restriction in respect of the sale of other goods of the same description. This being so, the agreement is not within the paragraph 2 exemption, if the paragraph is taken by itself, because to be within the paragraph the agreement must be one under which no relevant restrictions are accepted beyond those falling within subparagraphs (a) and (b).

          I can now turn to the second relevant exemption. Paragraph 2 in Schedule 3 does not stand alone. Section 9 sets out a number of provisions which are to be disregarded in determining whether the Act applies. Section 9(3) reads:

          "In determining whether an agreement for the supply of goods . . . is an agreement to which this Act applies . . . no account shall be taken of any term which relates exclusively to the goods supplied . . . in pursuance of the agreement."

Section 9(7) then spells out how this is to work in a case where Schedule 3 is sought to be applied:

          "Any reference in Schedule 3 to this Act to-

(a)  such restrictions as are described in section 6(1) above . . . shall be construed, in relation to any agreement, as not including references to restrictions . . . of which, by virtue of any provision of this section, account cannot be taken in determining whether the agreement is one to which this Act applies by virtue of this Part, or of restrictions accepted . . . by any term of which account cannot be so taken."

          The issue on this appeal concerns the meaning and application of section 9(3). Mr. Baines' case is that section 9(3) has no application to the milk supply agreement. The starting point of his argument is that, as already noted, the restriction which excluded the milk supply agreement from the paragraph 2 exemption was Mr. Baines' obligation not to sell to customers of the company milk supplied to him by the company. This restriction is part of the restriction accepted by Mr. Baines under clause 4(3). Clause 4(3) applied, however, not only to milk supplied to Mr. Baines under the agreement. Clause 4(3) applied also to milk bought elsewhere in the two circumstances in which Mr. Baines was entitled to obtain milk from other suppliers. Hence, the argument continues, clause 4(3) is not a "term which relates exclusively to goods supplied . . . in pursuance of the agreement." This being so, the argument concludes, section 9(3) is inapplicable, with the consequence that paragraph 2 of Schedule 3 operates according to its own terms. If that is correct, it follows, as already seen, that the agreement is not exempted from registration.

          Sir John Vinelott rejected this argument. He held [1995] I.C.R. 296, 301H to 302E, that the effect of section 9(3) was that the restriction imposed by clause 4(3) must be disregarded to the extent that it applied to milk supplied by the company. In accordance with section 9(7), paragraph 2 of Schedule 3 must then be applied on that footing. On that footing, to the extent that it applied to milk obtained elsewhere, clause 4(3) imposed a restriction within subparagraph (b). Hence the agreement was not registrable. It was exempted by the joint effect of section 9 and paragraph 2 of Schedule 3.

          The Court of Appeal disagreed with the judge. Schiemann L.J., giving the principal judgment, held [1996] I.C.R. 183, 193-194 that the approach adopted by the judge was not open to him. The Act adopted a mechanistic approach so far as registrability is concerned. Section 9 drew a distinction throughout between terms and restrictions. Clause 4(3) was not a term which related exclusively to milk supplied by the company. The fact that different drafting may produce a situation in which the statute does not require the furnishing of particulars is not a potent argument, in the context of this statute, for applying the Act in an artificial way. A restrictive agreement should only be outside the Act altogether if it is clearly outside.

          I prefer the judge's view. At the outset it should be noted that the Act applies to agreements and arrangements, however made ("any agreement or arrangement"), and whether legally enforceable or not: see section 43(1). An agreement may be made in writing in a single document or in more than one document, or by correspondence, or by word of mouth, or partly in one way and partly in another. An agreement may be inferred from a course of conduct. A restriction may be accepted expressly or impliedly (see section 43(1)). An agreement which provides encouragement to comply with conditions regarding price and so forth is treated as an agreement under which restrictions are accepted in respect of those conditions (section 6(3)).

          Section 9(3), which must be seen against this background, cuts down the width of section 6. As I read the Act, the purpose of section 9(3) is to provide that in the case of every agreement for the supply of goods, however the agreement was made, there shall be left out of account that part of its content which relates exclusively to the goods supplied. In determining whether the Act applies account shall be taken only of the remainder of the content of the agreement. Similarly, in respect of agreements for the application of any process of manufacture to goods, which are also within the scope of section 9(3). A corresponding approach is applicable to the equivalent provision in section 18(2), regarding agreements as to services.

          Thus section 9(3) calls for an examination of the provisions of an agreement, not in a formalistic way akin to a blue pencil test, but having regard to the substance of their content. A restriction which applies both to goods supplied and to other goods is to be disregarded so far as it relates only to the goods supplied. So far as it relates to other goods the restriction is outside the scope of the section 9(3) exemption, and the statutory provisions of the Act are to be applied accordingly. If Stamp J. intended to suggest otherwise in his passing observation in Registrar of Restrictive Trading Agreements v. Schweppes Ltd. (No. 2) (1971) L.R.7 R.P. 336, 373C-D, I am unable to agree with him.

          Any other approach would lead to frankly absurd results. It would mean that in a statute concerned with competition policy and the public interest, registrability and scrutiny by the court would depend on the form in which a restriction was framed and not upon the substance of the restriction. Two agreements could contain exactly the same restrictions: one would be registrable, the other not. It would mean that an agreement, entered into in one form, would not be registrable, but it would become registrable if at a later date the drafting were tidied up and two restraints were telescoped into a single clause in an amended agreement. Parliament cannot have intended this. These distinctions without a difference would bring the Act into disrepute.

          I do not believe that the interpretation of the Act which I prefer does any violence to the statutory language. "Term", used in relation to an agreement, is a loose expression. Its meaning is not confined to a linguistically discrete provision. In ordinary usage one refers to the "terms" of an agreement when referring generally to the provisions of the agreement. In ordinary usage one states that a particular obligation is a "term" of an agreement, meaning thereby simply that it is a contractual obligation. This is so even if the obligation is expressed in the agreement as part of a larger, linguistically indivisible obligation.

          The context supports this usage of "term". This meaning produces a workable and sensible result, the suggested alternative does not. Section 9(3) is intended to be applicable to all agreements, and term must bear a meaning capable of being applied across the range of different forms in which an agreement, as widely defined in the Act, can come into being. Mr. Baines' interpretation of section 9(3), which involves looking at the form in which the provision is expressed, could not be applied to implied agreements or implied terms where, ex hypothesi, a restriction was accepted without its being expressed in any form. In such cases the substance of the restriction is capable of being identified and section 9(3) applied accordingly, but there could be no criteria for deciding which of several possible forms in which the restriction might be expressed is the form to be adopted for the purposes of section 9(3). Further, an attempt to apply the "form" interpretation to an oral agreement could involve a bizarre analysis of precisely what words were used and by whom in the course of a discussion at a meeting or over the telephone. There remain express terms of written agreements. In such cases Mr. Baines' interpretation could be applied, but for the reason already given, with an arbitrariness of result which would bemuse a businessman.

          In Mr. Baines' submissions and in the Court of Appeal judgments reliance was placed on the contrast in language in section 9 between "term" and "restriction". This was seen as supporting the view that term is not synonymous with, or co-extensive with, restriction. Linguistic arguments of this character should be handled warily. They are a legitimate and useful aid in statutory interpretation, but they are no more than this. Sometimes a difference in language is revealing and therefore important, other times not. In the process of statutory interpretation there always comes a stage, before reaching a final decision, when one should stand back and view a suggested interpretation in the wider context of the scheme and purpose of the Act. After all, the object of the exercise is to elucidate the intention fairly and reasonably attributable to Parliament when using the language under consideration. It is wrong to rely upon linguistic dissimilarities as indicative of an intended meaning with far reaching consequences when those consequences, seen in the wider context of the Act as a whole, lack all rhyme and reason.

          That is the position in the present case. Mr. Baines' interpretation of section 9(3) gives rise to the serious difficulties spelled out above. In seeking to minimise the significance of these difficulties, Mr. Roth submitted that having to register an agreement imposes no hardship. The consequence is to enable restrictions in an agreement to be scrutinised, in the public interest. This is no answer. The scheme of the Act is that only registrable agreements call for scrutiny. An agreement is either registrable in accordance with the provisions of the Act, or it is not. There is no reason for supposing Parliament intended that the obligation to register should depend upon what is essentially an irrelevancy: the precise form in which a restriction is expressed, as distinct from its substance.

          I should add a final observation. The test for registration under the Act should be as simple and clear as possible. The interpretation of section 9(3) which I prefer furthers this laudable aim. On any view it is necessary to analyse a restriction by identifying the circumstances in which it may operate. No reason has been suggested why, this having been done, it should be necessary to go on and attempt to apply the "linguistically separable" test. The statutory registration test is mechanistic in the sense that if an agreement contains relevant restrictions it is registrable unless exempted, regardless of whether the restrictions have any significant economic consequences. But there is no warrant for interpreting the Act as elevating form over substance when identifying the existence or scope of restrictions or when applying the statutory exemptions.

          I would allow this appeal, set aside the order of the Court of Appeal and restore the order of the judge.

LORD HOFFMANN

My Lords,

          I have had the advantage of reading a draft of the speech of my noble and learned friend, Lord Nicholls of Birkenhead. For the reasons he has given, I too would allow this appeal.

LORD CLYDE

My Lords,

          I have had the advantage of reading a draft of the speech of my noble and learned friend, Lord Nicholls of Birkenhead. For the reasons he gives I too would allow this appeal.