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