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Cite as: [1998] EWHC Ch 281

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Courage Ltd v. Crehan [1998] EWHC Ch 281 (25th November, 1998)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Before: THE HON. MR. JUSTICE CARNWATH

CH 1998 C No. 801

 

B E T W E E N

 

COURAGE LIMITED
(now known as THE INNTREPRENEUR BEER SUPPLY COMPANY LIMITED)                                     Plaintiff

- and -

BERNARD CREHAN                                                                                                                         Defendant

By original Action

 

BERNARD CREHAN                                                                                                                          Plaintiff

- and -

(1) COURAGE LIMITED                                                                                                                    Defendants

(2) INNTREPRENEUR ESTATES CPC LIMITED

(3) COURAGE GROUP LIMITED

By Counterclaim

 

AND

CH 1997 I No. 1404 (previously 1997 I No 290)

B E T W E E N

 

INNTREPRENEUR PUB COMPANY (CPC) LIMITED                                                                          Plaintiff
(Formerly known as Inntrepreneur Estates (CPC) Limited)

- and -

(1) DAVID ANDREW HAIGH                                                                                                            Defendants

(2) PHILIP KENNETH LUKE RAPER

(trading as TARGET DEVELOPMENTS)

 

APPEARANCES

In Case No. CH 1998 C No. 801

Mr David Vaughan QC and Mr Mark Brealey,
instructed by Charles Russell,

for Mr Bernard Crehan.


Mr Richard Field QC (hearing of 10th June 1998), Mr Peter Goldsmith QC, (hearing of 19th October 1998),
Mr Nicholas Green QC, Miss Siobhan Ward, Mr Martin Rodger and Mr Aidan Robertson,
instructed by Masons,

for Inntrepreneur/Courage.

 

In Case No. CH 1998 I No. 1404

Mr Richard Field QC (hearing of 10th June 1998), Mr Peter Goldsmith QC, (hearing of 19th October 1998),
Mr Nicholas Green QC, Miss Siobhan Ward, Mr Martin Rodger and Mr Aidan Robertson,
instructed by Masons,

for Inntrepreneur Pub Company (CPC) Limited.

Mr David Vaughan QC, Mr Jonathan Brock QC, Mr Mark Brealey and Mr Michael Swainston,
instructed by Maitland Walker,

for Target Developments.

 

JUDGMENT

This is the official judgment of the court and I direct that no further note or transcript be made

DATED: Wednesday, 25th November 1998

 

 

 

JUDGMENT

This is the official judgment of the court and I direct that no further note or transcript be made

DATED: Wednesday, 25th November 1998

Background
Mr. Crehan's case
The target case
Master Moncasters orders
Course of proceedings
Gibbs Mews decision
Pleaded cases
Issues
Breach of Article 85 by co-contractor
Concerted practice

Implied term
Set-off
Conclusion
Appendix 1
Appendix 2
Appendix 3

 

 

Mr. Justice Carnwath:

I have before me two sets of proceedings directed to be heard together by Master Moncaster. Both concern the validity under European law of a standard tie clause in the Inntrepreneur leases and the consequences of that in terms of remedies. The cases have been referred to as the Crehan case and the Target case.

Background

Inntrepreneur Estates Ltd ("IEL") was formed in March 1991 as a result of what was referred to at the time as the "pubs for breweries swap" between Courage Ltd (a subsidiary of the Fosters Brewing Group) and Grand Metropolitan plc ("Grand Met"). Courage acquired Grand Met's breweries and brands and the pubs of both companies were put into the newly created IEL which was owned in equal shares by Fosters and Grand Met. (Various different subsidiaries of the main groups have been involved in the history of this matter, and the names of the companies are not always indicative of the group to which they belong. In the interests of simplicity, and I hope without material inaccuracy, I propose to use the names IEL and Courage to represent the interests respectively of landlords and nominee brewers.)

The proposal had been announced in March 1990. Following a reference by the Secretary of State for Trade and Industry in April these were subject to an investigation by the Monopolies and Mergers Commission who reported in October 1990. They expressed concern that the loss of one of the national brewers would significantly increase concentration. They recommended certain modifications for the purpose of remedying the adverse effects. Following this report, the Secretary of State for Trade accepted undertakings given by the parties, which enabled the proposals to go ahead in modified form.

One of the agreements forming part of the arrangements was a "Beer Procurement Agreement" dated 28th March 1991, under which all tied IEL lessees would be required initially to purchase their principal beer requirements from Courage as nominees, at the relevant wholesale list price, and payments would be made by Courage to IEL to compensate in part for the difference between tied rents and open market rents. I will need to look at this agreement in more detail below.

In July 1992 IEL notified their standard lease ("the old lease") to the European Commission for clearance under Article 85 of the Treaty. (Relevant provisions of Article 85, and related EU legislation are set out in Appendix 1). In July 1993 the Commission published a notice indicating its intention to grant retro-active exemption pursuant to Article 85(3), and inviting representations from interested parties. The statement accompanying the notice reviewed the structure of the UK beer market, but did not explain the Commission's reasons in detail.

Complaints were submitted by a number of IEL lessees. Judging by the time taken to consider them, the Commission does not seem to have found it an easy issue to resolve. It had still not reached a final view by March 1997, when IEL notified a new form of a standard lease ("the new lease"), and at the same time withdrew the notification and request for exemption of the old lease.

On 24th November 1997 the Commission formally rejected the complaints relating to the old lease. Its reasoning is important in the context of the present case. It noted the withdrawal of IEL's notification and continued:-

"35. There is thus no more request for exemption pending for the 'old' Lease. This means that the only remaining question with regard to the application of Community competition law to the 'old' Lease, is whether or not Article 85(1) is applicable.

36. This is a question which the national court is in a position to decide. It can be added that the national court can take into account some factual and legal elements which the Commission has made public on earlier occasions. With regard to a general market description, reference can be made to the earlier mentioned 19(3) notice and to similar such notices in the Bass and Whitbread cases. As to the legal point of the applicability of Article 85(1), indirect guidance can be taken from the Commission's intention indicated in the earlier mentioned Inntrepreneur 19(3) notice to grant an exemption to the Lease.

37. Furthermore, 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 Inntrepreneur tenants before the national courts.

Conclusion

38. The Commission considers that there are insufficient grounds for granting the complainant's application as, in the absence of a request for exemption pursuant to Article 85(3), it would lead to a duplication of procedures and is therefore not in the Community interest for the Commission to rule upon the complainant's request that the 'old' Lease has infringed Article 85(1) since the date of its introduction." (emphasis added in para 37)

On 10th December the Commission issued an Article 19(3) notice indicating its intention to grant exemption for the new lease. The notice contained a detailed review of the terms of the lease, and concluded that the disadvantages of the tie were more than compensated by countervailing benefits. Again, there were complaints from IEL lessees, but these were rejected by a letter dated 26th January 1998. The letter stated:

"...Any price differential is more than compensated by countervailing benefits, such as the terms of rent payable, training and procurement benefits in addition the possibility to assign the new lease can lead to substantial premiums being paid by the new to the old lessee... The tied lessees are therefore, on average, in a position to compete on a level playing field with their free trading competitors."

As appears from the above extracts, there were concurrent proceedings involving Bass and Whitbread leases. It is unnecessary to refer these in detail other than to note that, as in the IEL case, the central issue addressed by the Commission was whether tied tenants were afforded countervailing benefits sufficient to compensate them for the obligation to pay for their beer products at a higher price by virtue of the tie.

 

Mr Crehan's case

In July 1991 Mr Crehan became a licensee of two Courage public houses, the Cock Inn and the Phoenix in Staines, Middlesex. Each was occupied on the terms of a draft lease in IEL's standard form attached to an agreement for a lease dated 11th July 1991. (Relevant provisions of the standard lease are set out in Appendix 2).

He surrendered possession of the Cock Inn in March 1993 and of the Phoenix in September 1993. In June 1993 Courage commenced proceedings in the High Court for some 15,000 plus interest, in respect of goods delivered to the Phoenix pub between December 1992 and May 1993. By a defence and counterclaim dated 10th August Mr Crehan denied liability for the sums claimed and sought to set-off against Courage's claim his counterclaim for damages for breach of Article 85. There were some initial skirmishes between 1993, but between October 1994 and November 1997 the proceedings were put on hold pending the determination by the EC Commission of the application for clearance.

Following the withdrawal of the application for clearance, in October 1997, there was further procedural activity, leading in March 1998 to agreement to propose preliminary issues for decision by the court. Although in May 1998 Lightman J ordered that the parties prepare an agreed statement of facts, that did not prove possible. The agreed preliminary issues are set out in Appendix 3 to this judgment. They have to some extent been overtaken by events, as will appear below.

 

The Target case

The other case concerns a lease of the Market Tavern public house in North Ormesby, Cleveland. Mr Haigh and Mr Raper, who trade as "Target Developments", are the occupiers. Target are lessees of 15 public house owned by IEL, some of which go back to February 1990. Before entering into an agreement for the lease of the Market Tavern they occupied under a six month licence commencing on 6th January 1992. The lease was in the standard form. It was dated 1st February 1995, but was for a term of 20 years commencing on 26th June 1992. It reserved a rent of 31,000 per annum, with concessionary rents in the first two years. No rent has been paid since October 1996.

On 26th November 1996 Target commenced proceedings against IEL for damages for breach of Article 85 of the Treaty. On 5th March 1997 IEL started proceedings claiming forfeiture of the lease on the grounds of arrears of rent, which then totalled over 15,000. They sought judgment under RSC Order 14 for possession and arrears of rent, together with interest and mesne profits. On 30th May 1997 a defence and counterclaim was served by Target, claiming relief against forfeiture and a set-off in respect of sums claimed by them in their own 1996 action.

Master Moncaster's orders

On 13th March 1998 Master Moncaster was asked to make orders in a large number of IEL cases, where tenants were in occupation of premises owing substantial arrears of rent. By that time there had been decisions adverse to the tenants in a series of similar cases at first instance. In Star Rider Ltd -v- IEL [1998] 16 EG 140 (8th December 1997), Blackburne J held that, even if there were a claim for damages under Article 85, it would have insufficient connection with the claim for rent arrears to be allowed by way of set-off. In Trent Taverns v Sykes (18 February 1998 - unreported), David Steel J said that "enough was enough", and that the issues should now be regarded as settled in the High Court pending any review by the Court of Appeal.

When the matter came before Master Moncaster, he noted agreement on the need for a test case in the Court of Appeal to settle the issues; Crehan had been chosen as a test case, which, following agreement of preliminary issues, it was intended to take to the High Court and Court of Appeal as soon as possible. He was asked to consider the terms on which the other cases should be stayed pending resolution of the test case. He ordered that further proceedings in the other cases -

"be stayed until determination of the intended test case in the Court of Appeal or further order..."

This was made conditional upon the tenants paying into Court by 13th May sums in respect of arrears of rent, as directed in a "lodgement schedule" annexed to the order, and paying current rent and other payments under the leases from 1st April 1998. The provision for arrears was made on the basis that 20% of the arrears claimed up to 31st March 1998 would be paid, save in cases where the tenant applied for a reduction or waiver on the grounds of financial hardship. On 20th March, the Master ordered that the Target case be listed at the same time as the agreed issues of law in the Crehan case.

 

The course of proceedings before me

Both cases came before me on 10th June, when I heard full argument. At the beginning of the hearing I had been informed that another similar case, Gibbs Mew plc -v- Gemmell, was about to be heard in the Court of Appeal. Accordingly, with the agreement of all the parties, I reserved judgment to await the decision in that case.

Judgment in Gibbs Mew was given on 22nd July. Arrangements were then made for the cases before me to be re-listed at the beginning of the new term to consider the implications of the Court of Appeal judgments. I heard further argument on 19th and 20th October.

By that time, the pleadings in both cases had been further amended (at my invitation) to ensure as far as possible that all issues of principle which the parties wished to raise were fully before the Court, and presented in their most refined form. IEL had issued a new notice of motion in both proceedings, designed to provide me with the flexibility to dispose of the cases under Ord 18 r 19 (strike-out), Ord 14 (summary judgment), or Ord 14A (disposal on a point of law), as I might consider appropriate. Arrangements had also been made for an Order 14 summons in another Target case (relating to the Pavilion public house in Eaglesfield, Cleveland) to be listed before me. This was solely for the purpose of enabling me to consider issues arising out of Master Moncaster's stay of this and other proceedings. I indicated that I would defer consideration of those issues until after judgment on the main issues.

 

The Gibbs Mew decision

The facts of the Gibbs Mew case were not wholly straightforward. A lease had been granted by Gibbs Mews' predecessors to Mr Gemmell for three years from 1st December 1992. It contained a tie requiring the tenant not to sell beers other than those supplied by the lessor or its nominees. There was provision for payment of rent by direct debit if required. In 1994, at Mr Gemmell's request, a fresh tenancy agreement was entered into, for the same period but including his partner as joint tenant. It differed in two respects from the previous lease: the covenant to pay rent included the words "without any deduction or set-off whatsoever"; and it was provided that the tenant would pay for all goods as "further additional rent".

After the expiry of the lease in December 1995, Gibbs Mew offered Mr Gemmell a further temporary tenancy on the terms set out in a letter, at a lower rent and on the basis that it was to be a tenancy at will. Mr Gemmell paid the rent under the tenancy at will by direct debit until August 1996, when he countermanded the direct debit. Gibbs Mew then served notice to terminate the tenancy at will and commenced the first action claiming possession and arrears of rent. By his defence and counterclaim Mr Gemmell claimed that the previous lease had continued in force, as a business tenancy which had not been validly determined, and that the tenancy at will had been induced by duress and misrepresentation; and further raising issues under Article 85. (Although there seems to have been mention of the 1992 lease in the pleadings, the argument in Court seems to have proceeded on the basis that only the 1994 lease could be relied on.) In June 1997 Gibbs Mew brought a second action, claiming possession and forfeiture of the 1994 lease (assuming it was still in force), on the ground of non-payment of rent and breach of covenant.

The landlord succeeded in the High Court before HH Judge Anthony Thompson QC, who held that the Tenancy at Will was valid, and that in any event, a monetary claim under Article 85 would not provide a defence to the claim for rent under the 1994 lease.

In the Court of Appeal Mr Gemmell (who by then had given up possession) maintained his defences to both actions, although in the first he relied on misrepresentation rather than duress to avoid the tenancy at will. His defence to the second action was based on the contention that the beer tie was void under Article 85, and that he was entitled to set off, against the arrears of rent, a cross-claim under Article 85 for restitution of monies paid under the beer tie and damages arising out of the imposition of that tie.

Peter Gibson LJ, giving the leading judgment, noted that the argument before the court had gone considerably beyond the matters put before the Judge. He rejected the defence under the first action, holding that the tenancy at will superseded the previous tenancies, and was unaffected by misrepresentation. This was sufficient to dispose of the second action, which depended on the continued existence of the 1994 lease. However, he went on to deal with the issues that had been argued in relation to Article 85, prefacing this part of his judgment with the following comment:

"We have been invited to express our views on the points taken in the second action even if we were to dismiss the appeal in the first action. As we have heard full oral argument on those points as well as receiving very substantial written arguments and as we are aware that at least one case in the Chancery Division is awaiting the outcome of the second action, I will deal with those points."

As I understand it, that is intended as a reference to the proceedings before me.

He identified the disputes between the parties as:

"(1) Whether Article 85(1) applies at all to the agreements in question, (2) if so, whether the block exemption applies, (3) whether a party to an agreement rendered void by Article 85(1) and (2) can obtain a remedy in damages or restitution, and (4) if so, what are the consequences for the claim for rent arrears."

He answered the first two questions in favour of Gibbs Mew. He referred to the tests propounded by the European Court in the leading case of Delimitis v Henninger Brau AG [1991] ECR I-935, 987 para 27:

"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 effect on competition constitutes only one fact 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."

Applying these tests he found that the Gibbs Mew tie did not breach Article 85. In reaching that view, he noted that the Commission itself had found no ground for action, and, having regard to Gibbs Mew's position in the market, had found that the effect of its ties was de minimis. He held further, that, even if otherwise in breach of Article 85, the tie was covered by the block exemption.

Those conclusions are of no assistance in the present case. The Commission has specifically left the National Court to determine whether there is a breach of Article 85; and it is accepted that there is at least an arguable case.

Peter Gibson LJ went on to consider issue (3), that is, the remedies which would have been available had the beer tie been held to offend the prohibition in Article 85, including Mr Gemmell's claim for loss suffered by being prevented from buying beer on the open market at a much lower price. He accepted the submission, by Mr Green for Gibbs Mew, that Article 85(1) was designed to protect the competitors of the parties to the agreement, not the parties themselves. This view was supported by the frequent references in Delimitis itself to the effect on competitors, and the consideration that -

"... as Mr Green rightly said, the parties to a beer tie offending Article 85 are the cause, not the victims, of the distortion, restriction or prevention of competition."

He noted that similar claims for damages under Article 85 had been rejected by High Court judges in a series of decisions between 1993 and 1998, the latest being Trent Taverns Ltd -v- Sykes (see above); in his judgment "those judges were entirely right to do so".

Gibbs Mew had also relied on the principle of English law that a party to an illegal agreement cannot claim damages from the other party for loss caused to him by being a party to the illegal agreement. Of this, Peter Gibson LJ said:

"In my judgment 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 for damages. In Boissevain -v- Weil [1950] AC 327 the House of Lords rejected a claim for restitution arising out of an illegal contract, Lord Radcliffe (at p.341) saying of an act forbidden by statute, 'I do not think it can be a source of civil rights in the courts of this country'. In Tinsley -v- Milligan [1994] 1 AC 340 the House of Lords has laid down the applicable test for claims affected by illegal agreements, Lord Browne-Wilkinson (with whom Lord Jauncey and Lord Lowry agreed) saying (at p.376) of a plaintiff making a claim:

'he is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction'.

I do not see how Mr Gemmell can avoid relying on the beer tie, which for this purpose must be taken to be illegal. Mr Beloff's suggestion that Tinsley -v- Milligan does not apply because the source of Mr Gemmell's rights is Article 85 and not the beer tie is sheer casuistry. Mr Gemmell's case is that the illegal agreement compelled him to adhere to the beer tie and that caused him loss."

He rejected the argument that the parties were not in pari delicto, since the prohibition in Article 85 applied equally to all parties to the agreement; but, in any event, on the authority of Boissevain -v- Weil, that argument could not assist a party to an illegal contract.

Finally, he considered issue (4), the effect of a damages claim on the claim for rent arrears. Under that heading, the judgment mentions two submissions: first, a submission depending on the special provision of the lease whereby payment for beer was made a charge to the rent account; and, secondly, a submission that the exclusion of the right to set-off in the lease was inconsistent with Community law. There is no mention of any general discussion of the extent to which set-off would be available apart from that exclusion, or of any challenge to the reasoning on that issue of Blackburne J in Star Rider.

Peter Gibson LJ rejected both contentions, but in doing so he made some more general comments on the defence of set-off. He said this:

"A clause expressly excluding set-off is valid and enforceable. The payment of rent by direct debit precluded the operation of set-off (Esso Petroleum Co. Ltd -v- Milton [1997] 2 All ER 593). 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, unreported, 25th March 1997, Judge Peter Crawford QC, and Star Rider Ltd. -v- Inntrepreneur Pub Co. Ltd. [1998] 60 EG 140, Blackburne J)."

He concluded that the judge had been right to dismiss both actions, and that a reference to the European Court was unnecessary. Schiemann and Mantell LJJ agreed with his reasoning. The appeal was accordingly dismissed.

The pleaded cases

The Crehan defence relies on the alleged illegality of the tie both as a defence to the claim by Courage, and by way of counterclaim for damages against Courage and IEL.

"The list price" is defined as -

"the Courage list price which sets out the prices at which Mr Crehan is obliged to pay for beer supplied by Courage Ltd"

"The market price" is -

"the price of beer which Mr Crehan would have paid for beer sold by him in the absence of the beer tie... which at all material items was substantially lower than the list price". (para 1)

The "beer tie" is the obligation under Clause 2(1) of the 1st Schedule to purchase beer requirements from the nominee at the list price (para 6).

The first part of the Counterclaim (para 5ff) is headed "lease contrary to Article 85(1)". It is alleged that the leases were in breach of Article 85 in that (inter alia) the beer tie prevented Mr Crehan from buying beers from the cheapest and most efficient sources and foreclosed the potential outlets available to suppliers of beers competing with Courage (para 7); and that accordingly the beer tie was "unlawful, void and unenforceable", and "a breach of statutory duty owed by IEL and/or Courage Group to Mr Crehan." (paras 9-10).

The next group of allegations is headed "Agreement or concerted practice contrary to Article 85(1)" (para 11ff), and relies on the agreements between the Courage and Grand Met groups in 1990. As one of the matters supporting the allegation, there is specific reference to the Beer Procurement Agreement. Other matters include allegations that Courage, as the nominated supplier, supplied beer to IEL tied lessees at Courage's list price, and that a sum approximately equal to the difference between the market price and the list price was split between IEL, Grand Met and the Fosters Group (para 11(3) and (4)).

Paragraph 12 asserts:

"As a direct result of the said agreement or concerted practice the agreements to lease between Mr Crehan and Courage Group and subsequently IEL contained the standard terms and conditions as set out in the IEL lease and also contained the said unlawful beer tie in favour of Courage Limited."

The agreement or concerted practice so defined is alleged to infringe Article 85 (para 13); the particulars define the breach by reference to the effects of the "beer tie" (in similar terms to those in para 7).

Paragraph 13a, introduced by a recent amendment, contains an alternative formulation of the concerted practice claim. It alleges that -

"... the agreement and/or concerted practice had as their object or effect unlawful price discrimination contrary to Article 85(1)(d)".

The alleged price discrimination is then particularised:

"(1) The agreement and/or concerted practice had as their object that Courage would charge substantially higher wholesale prices to tied IEL lessees than to their free trade competitors, including IEL free houses and managed houses, who could obtain Courage beer at the market price. Further or alternatively the agreement and/or concerted practice had this effect. In 1991 and 1992 the market price for Courage best bitter was 35 less than the list price, for Fosters lager was 40 less than the list price on a barrellage of 200; and approximately 45 less than the list price for Courage best bitter and 50 less than the list price for Fosters lager on a barrellage of 500.

(2) This discrimination in wholesale prices put the tied IEL lessees at a competitive disadvantage with their free trade competitors because the lower wholesale prices were reflected either temporarily or permanently in lower retail prices charged by the free trade competitors...".

Further particulars are given, including references to the large numbers of failed IEL tied lessees, and, more specifically, to the problems caused to Mr Crehan by the ability of his nearest competitors, the Angel and the Clarence, to buy Courage beer at the lower market price. It is alleged that this price discrimination was operated across the whole of the UK and thereby distorted the structure of competition in a substantial part of the Common Market (para 13b); and that IEL lessees were offered no or insufficient countervailing benefits to compensate for the price differential (para 13c).

It is then alleged that the infringement of Article 85 constituted "a breach of statutory duty owed to Mr Crehan jointly and severally..." by Courage, Grand Met and IEL (para 14). He claims damages based on the comparison between the prices at which he obtained beer and the price at which he would have been able to obtain it outside the tie, and further damages based on the contention that his inability to buy at the market price forced him out of business.

The Target claim relates to rent rather than goods supplied. The Defence and Counterclaim raise substantially the same issues as the Crehan pleading, albeit in slightly different language, including a claim to set off damages against rent (para 19). It contains a further contention, not reflected in the Crehan pleading, based on "implied terms". Paragraph 12 reads:

"The lease also contained implied terms as set out below. The said terms fall to be implied out of the express terms and/or as a matter of law and/or to give business efficacy to the contract set out in the lease and its schedules.

12.1 It was an implied term that the list prices required to be paid by the defendants for specified beers would be reasonable.

12.2 Further or alternatively and without limitation of 12.1 it was an implied term that the said list prices would not be maintained at an unreasonable margin above the corresponding open market prices for the same or similar products so as to render the defendant's business uncompetitive relative to free houses in its locality.

12.3 Further or alternatively and without limitation of 12.1 and 12.2 it was an implied term that the disparity between the said list prices and corresponding open market prices for the same or similar products would never be permitted to exceed the value of any advantages allowed to the defendants under the lease by way of discounted rent as against the market rent payable from time to time for equivalent premises free of tie."

Mr Swainston, who argued this part of the case on behalf of Target, accepted that paras 12.2 and 12.3 could be treated as particular instances of the general allegation in 12.1.

The counterclaim gives particulars of the alleged effects on the trade of the Market Tavern between June 1992 and November 1996: again competitors were able to buy Courage beer at lower prices (p 27ff); and there were no or insufficient countervailing benefits to compensate for the price differential.

 

Issues

The main issues argued before me can be summarised as follows -

1. Breach of Article 85 by co-contractor Does the tenant in either case have an action to recover damages against his co-contractor landlord for losses allegedly suffered as a result of his compliance with the tie, assumed for these purposes to be contrary to Article 85?

2. Concerted practice. Does he have such an action against one or more of the parties to the Beer Procurement Agreement?

3. Implied term. Is there a term in the form set out in paragraph 12.1 of the Target Defence to be implied into the standard lease?

4. Set-off. If Target has a claim for damages under any of the preceding heads, is such a claim sufficiently connected to the claim for rent to give rise to a defence of equitable set-off?

Breach of Article 85 by co-contractor

The first issue must be decided against the tenants if I am to follow the Court of Appeal in Gibbs Mew. However, that part of the judgment of Peter Gibson LJ was unnecessary to the decision, and is not strictly binding on me as a matter of judicial precedent. Mr Vaughan, for both Crehan and Target, urged me not to follow it. There were two main strands to his criticism:-

(1) The Court of Appeal were wrong to hold that Article 85 was concerned with the effects only on competitors and not on the parties to the agreement.

(2) The special rules relating to illegal contracts under English law should not be allowed to inhibit the fundamental principle under Community law of effective reparation for loss resulting from breach of directly applicable rights.

In support of the first submission, Mr Vaughan argued that the Court of Appeal were wrong to attach special significance to the lack of references in the Delimitis judgment to effects on the parties to the tie, since in that case there was no complaint by the parties. More generally, he relies on a passage in the judgment of the Court in Italy -v- EEC Council [1966] ECR 389, 406 (immediately before a passage cited by the Court in Gibbs Mew, at transcript p 28):

"Neither the wording of Article 85 nor that of Article 86 justifies interpreting either of those articles with reference to the level in the economy at which the undertakings carry on business. Neither of these provisions makes a distinction between businesses operating in competition with each other at the same level or between businesses not competing with each other and operating at different levels. It is not possible to make a distinction where the Treaty does not make one.

It is not possible either to argue that Article 85 can never apply to an exclusive dealing agreement on the ground that the grantor or grantee thereof will not compete with each other, for the competition mentioned in Article 85(1) means not only any possible competition between the parties to the agreement, but also any possible competition between one of them and third parties...".

This passage, says Mr Vaughan, shows that Article 85 is concerned with the effects of the agreement at all levels of competition, and does not exclude adverse effects on the parties themselves.

Mr Vaughan also referred me to a case (Holleran -v- Daniel Thwaites plc [1989] 2 CMLR 917), in which Peter Gibson J (as he then was) accepted the general principle that -

"... the Court has power to prevent a person from abusing his rights, whether conferred on him by statute or contract, in order to create a breach of Community law." (para 51).

In that case he granted an interim injunction to restrain the defendant brewer from serving a notice to quit in relation to two of its tied houses whose tenants refused to accept a new lease containing a tie agreement, which arguably infringed Article 85. So, in the present case, as Mr Vaughan submitted, the lessors are abusing their rights under the tie, by seeking to enforce it in circumstances which involve unfair discrimination as between the lessees and their competitors, without any compensating benefits. The corollary of the injunctive power exercised in that case, is a right in this case to damages for past loss (see Garden Cottage v Milk Marketing Board [1984] 1 AC 130, 144).

The second submission was supported by a number of authorities confirming the principle of effective remedies under European law (eg Factortame (No.4) [1996] QB 404, 502 para 73). The strict illegality rule, exemplified by Tinsley v Milligan, should, it was submitted, be regarded as inconsistent with that principle. The Court should instead have followed the more flexible approach adopted in a comparable context by the US Supreme Court (see Permalife Mufflers -v- International Parts [1968] 392 US 134); and by the High Court of Australia (see Nelson -v- Nelson [1995] 132 ALR 113).

Mr Vaughan's submissions gained some force from the fact that the Commission, when rejecting the IEL tenants' complaints regarding the old lease (in the passage already quoted) clearly assumed that the tenants would have a claim for damages under English law, if a breach of Article 85 were established. The Commission may also have had in mind that, while the landlord's notification was being considered by them Commission, the agreements enjoyed "provisional validity" (see Delimitis judgment para 48); and the tenant was deprived in practice of any other means of establishing the legal position or obtaining redress through the courts.

Notwithstanding these arguments, I have no doubt that I should follow the guidance of the Court of Appeal on this issue. Although strictly obiter, the Court made clear that it was dealing with these issues after full argument, and specifically in order to give guidance to the lower courts. Furthermore, it was confirming a consistent line of authority in the High Court itself. Although there are factual differences between this and the other cases, the basic issue - whether a party to a tie agreement can sue for breach of Article 85 - is common to all. The Court of Appeal has given a clear ruling on that issue.

 

Concerted practice

As developed in argument, the concerted practice issue was based principally on the effect of the Beer Procurement Agreement. The parties to it include a number of different members of the groups but for present purposes it will be sufficient to treat it as an agreement between IEL as the intended landlord of the properties and Courage as the intended nominee.

By Clause 3(1) Courage undertook to pay to IEL an "annual amount" calculated in accordance with a formula set out in Schedule 5. By clause 3(2):

"The parties acknowledge, (for the avoidance of doubt) that the annual amount is a special financial and commercial advantage provided by (Courage) to (IEL) to enable (IEL) to grant and operate Inntrepreneur leases and thereby seek to improve the distribution of brands and sales of beer through the tied Inntrepreneur outlets."

By Clause 3(5) the parties agreed that the annual amount would be reviewed and adjusted quarterly, upwards or downwards, by such amount as was agreed to be necessary -

"....in order to ensure that IEL receives an appropriate rate of return seeking to maximise the distribution of brands and sales of beer through the tied houses, consistent with the costs incurred by IEL in granting and operating Inntrepreneur leases".

Clause 4(1) provided as follows:

"Courage agrees with (IEL) that throughout the currency of the Agreement and in relation to Beer delivered to each Tied House by (Courage):

(a) the price of such beer shall:

(i) be as stated in the relevant Price List for the time being in force and applicable to the Tied House to which such Beer is delivered;

(ii) be, in any event, generally competitive judged over a period of at least one year at any time ... with the prices charged for the same or similar Beer to the tenants situated in broadly comparable regions to those of the tenants of Tied Houses by three other brewers who are each a member of a large brewery group ...".

Clause 5(2) provided:

"(Courage) shall make available to tied houses a wide range of high quality beer in line with consumer demand for time to time and shall do so on a long term basis and in a competitive manner."

By clause 7 the agreement was to last until 31st March 1998, subject to provision for earlier termination under Clause 14. Schedule 2 contained a definition of the "company's price list" as -

"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 lessees' level of distribution."

Mr Vaughan's skeleton argument on behalf of Crehan and Target asserts:

"Discrimination arose because Courage and Inntrepreneur agreed that Courage would not grant the Inntrepreneur tied tenants the discounts which were granted to other public houses (eg Inntrepreneur free houses) ...".

The pleaded case, however, does not allege that the agreement itself constrained Courage to discriminate between tied tenants and other customers in respect of discounts, and there is nothing in the agreement to support that allegation.

The defence itself asserts that the "unlawful beer tie" resulted directly from the concerted practice(para 12), and that it was that which prevented or discouraged lessees from buying beers from the cheapest and most efficient source, as they would under normal conditions of competition (para 13(1)). Thus it relies specifically on the effect of the "unlawful beer tie". That reflects the reality that the Beer Procurement Agreement by itself has no effect on Crehan, and that the Crehan lease and the beer tie it are essential to complete the link. So expressed, however, the allegation comes into direct conflict with the illegality principle applied by the Court of Appeal in Gibbs Mew. The beer tie on which Crehan relies is an essential part of the allegation of illegality, and therefore cannot found a claim in the English court.

Paragraph 13a avoids an express reference to the beer tie, and alleges that the concerted practice had the object, or the effect, that Courage would charge substantially higher prices to tied lessees than to free trade competitors. In my view this formulation does not assist the case. Again it depends on the causal link between the agreement and the beer tie, and therefore comes up against the same illegality problem.

It is in fact a feature of a number of similar cases previously decided against tenants that the landlord was alleged to be operating in concert with others. For example, in Trent Taverns -v- Sykes , the beers were supplied, not by the landlord, but by other brewers including Whitbread plc and Scottish and Newcastle plc. The allegation under Article 85 was that -

"the offending provisions and/or the lease form part of a network which the plaintiff and/or connected undertakings including but not limited to Scottish and Newcastle plc and Whitbread plc had concluded with a large number of separate undertakings...".

In Gibbs Mew itself the tenant relied on the former landlord's supply agreements, with breweries such as Scottish and Newcastle and Bass, in support of his argument that there was a significant effect on the market (transcript p 20).

I conclude accordingly that, applying the reasoning of the Court of Appeal in Gibbs Mew, the concerted practice alleged in the statement of claim does not in law provide a basis for a claim in damages for either Crehan or Target.

Implied term

As has been seen, Target's lease required them to purchase from IEL or its nominees all their requirements of "specified beers". IEL was required to -

"use its best endeavours to supply the lessee 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..." (Sched. 1, para (12)).

"Company's price list" was defined as

"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 lessees' level of distribution" (para (1)(iii)).

In summary, Target contends that there is to be implied into that clause a requirement that the list prices are reasonable.

Mr Swainston, who presented this part of the Target case, relied on the long line of authority in English law, dating back at least to Catt -v- Tourle (1869) 4Ch App 654, to the effect that exclusive supply arrangements of this kind must be operated reasonably. As a modern summary of the applicable principles, he relied on the judgment of Nourse J in King -v- King [1980] 41 P&CR 311. Having referred to what he called "the tied house cases", he said:

"The effect of those cases is that there will be implied in a conveyance or lease of a tied house a term that the beer which the publican is required to purchase from the brewer will be of a reasonable quality and sold at a reasonable price; although it must be said that in none of them was that implication made in the face of an express provision that the beer should be sold at a price to be agreed.

Nevertheless, I will assume it to be the law that where there is an agreement between the parties to a conveyance or lease of land for the sale of beer, petrol or suchlike on an exclusive basis at a price to be agreed and no more it will readily be implied that in default of agreement the price should be a reasonable one, which will if necessary be fixed by the court. In my judgment, such an implication would wholly accord with the principles which the court has always applied to commercial contracts of this nature. Those principles have recently been restated by the House of Lords in Liverpool City Council -v- Irwin, from which I take the rule to be that a term will only be implied if it is necessary to give business efficacy to the agreement; a standard which is met if both parties being reasonable men, would have unhesitatingly agreed to its inclusion. In my judgment, that standard is prima facie met in the beer and petrol cases, because it can only be assumed that reasonable commercial men would unhesitatingly agree that the commodity should be sold at the reasonable price from time to time. In that kind of long-term, exclusive relationship the parties cannot be taken to be in business to make an agreement on any other basis."

As appears from that extract, Nourse J was assuming, rather than determining, that to be the state of the law.

Mr Swainston also relied on section 8 of the Sale of Goods Act 1979, which provides:

"(1). A price in a contract to sell may be fixed by the contract, or may be left to be fixed in a manner agreed by the contract, or may be determined by the course of dealing between the parties.

(2). Where the price is not determined as mentioned in subsection (1) above the buyer must pay a reasonable price.

(3). What is a reasonable price is a question of fact dependent on the circumstances of each particular case."

As has been seen, the pleading gives examples of potential unreasonableness: first, if list prices are maintained at a margin above corresponding open market prices, so as to render the tied tenant's business uncompetitive relative to free houses in the locality; secondly, if the disparity between the list prices and corresponding open market prices is allowed to exceed the value of any advantages allowed to the tenants under the lease.

Mr Goldsmith submits that the cases on which Mr Swainston relies have no application where, as here, the lease incorporates express terms regarding the price at which Target is to purchase beer. Thus, section 8 of the Sale of Goods Act makes clear that the implication of a standard of reasonableness does not apply where the price is fixed by the contract.

He relies also on what was said by Diplock LJ in Esso Petroleum Company -v- Harper's Garage [1966] 2QB 514 in the Court of Appeal. That was the well-known case in which the House of Lords later upheld exclusive purchasing agreements limited to periods of five years ([1968] AC 269). The Court of Appeal held that even that period was too long to be reasonably necessary to protect the suppliers' own trade outlets. The agreement in that case required the dealer to buy from the supplier its total requirement of motor fuel at the supplier's "wholesale schedule price to dealers ruling on the date of delivery". One of Esso's arguments in defence of the restriction was that the provision relating to the price would be subject to an implied term of reasonableness in order to give it business efficacy, as in the brewery cases (see p 559B). This argument was rejected by Diplock LJ (p573):

"....there was express provision that the price paid by Harper's for motor fuels is to be 'Esso's wholesale scheduled price to dealers ruling on the date of delivery' less a rebate of 1d per gallon. I see nothing in this which prevents Esso from fixing its wholesale scheduled price to dealers at whatever figure it thinks fit from time to time. No doubt it must be a genuine price at which it offers to sell motor fuels to dealers generally, but it leaves no room for any implication that, in fixing the price (less rebate) to be charged to Harper's, regard has to be had as to any circumstances peculiar to Harpers or to the particular terms of the Mustow Green solus agreement."

Although they did not refer in terms to this argument, the other members of the Court of Appeal implicitly agreed with Diplock LJ's approach. Lord Denning MR referred to the provision as to price:

"One of the striking features about it .... is that Esso, whilst price maintenance was lawful, took unto themselves a power to fix the 'wholesale price' and the 'retail price'.... Such a power may be tolerable in an agreement for a short term, but it may become intolerable if it is contained in agreement for a considerable period from which the dealer has no escape." (p 563 E-G).

He noted also that Esso were able to supply direct to independent suppliers at less than their scheduled wholesale prices, enabling them to re-sell to the public at cut prices:

"This power may be reasonable over a short term but it would not seem right if it were to continue over a considerable period, for Esso could undermine a dealer's trade by such means." (p 564 A-B).

Another petrol case, in which arguments for an implied term of reasonableness were deployed, this time on the part of the dealer, was Shell UK -v- Lostock Garage Ltd [1976] 1WLR 1187. To understand what precisely was decided it is necessary to summarise the facts. Lostock was a small country garage which had entered into a 20-year service agreement with Shell on terms that they would only sell petrol supplied by Shell; the agreement was terminable on 12 months' notice after 1971. The garage operated in competition with four neighbouring garages, two of which were tied to Shell. Following the oil crisis in 1975, independent suppliers were selling petrol at lower prices. This caused a drastic fall in Lostock's sales. It also emerged that the two neighbouring Shell garages were able to sell at lower prices because they benefited from a temporary price support scheme operated by Shell, which was not applicable to Lostock. The garage notified Shell that they would obtain supplies elsewhere. Between January and March 1976 they were able to obtain cheaper supplies from another source, but as the result of intervention by Shell (so it was alleged - see p 1191D), the other company refused to continue supplies after 5th March. Shell commenced proceedings for an injunction to restrain Lostock from obtaining fuel outside the tie. By its defence and counterclaim Lostock claimed that the original agreement was unenforceable and counterclaimed for damages. Among other contentions, they argued that the agreement was subject to implied terms that Shell "should not discriminate against the defendants in favour of competing and neighbouring retailers... in fixing prices, rebates and/or discounts...", or that they should not "so discriminate in such a way as to render the defendant's petrol sales not economically viable" (p 1190H).

Kerr J held that the effect of the support scheme was to inflict unreasonable and unforeseen hardship on Lostock and that Shell were not therefore entitled to enforce the tie while the hardship lasted. Under the counterclaim he awarded 482 damages, described in the report as -

"...agreed damages... representing the actual loss suffered by (Lostock) between December 1975 and January 1976 by adhering to the terms of the sales agreement."

The appeal and cross appeal to the Court of Appeal were both dismissed. The ratio of the decision is difficult to pinpoint, since each of the three members of the Court adopted different reasoning. Lord Denning MR defined the question of principle: "was the tie binding while Shell operated their support scheme?" He held that the tie, although reasonable at the time of the contract in 1966, ceased to be so at the end of 1975, when Shell started to subsidise two neighbouring Shell garages to such an extent that they were able to undercut Lostock.

It was "most unfair and unreasonable, so much so that I think the court should decline to enforce it" (p 1199C). Lostock were entitled to compensation -

"... for their loss during the period March to April 1976 when as the result of pressure by Shell they were unable to obtain fuel from the alternative supplier." (p 1199H-1200B).

He appears thus to have treated the agreed damages of 482 as referable to the period after March 1976, rather than to the earlier period (between December 1975 and January 1976) before Lostock began to obtain supplies outside the tie. Thus, in his mind at least, the claim for damages appears to have rested on the view that Shell had improperly persuaded the alternative supplier not to deal with Lostock, not that Shell was in breach of any obligation under the contract.

Ormerod LJ agreed that Shell should not be permitted to enforce the tie by injunction, but on the grounds that equity would not give relief by way of injunction where it would inflict undue hardship. He considered that Shell were entitled to a remedy in damages.

Bridge LJ agreed with the Master of the Rolls in holding the tie unenforceable, but on entirely different grounds. The agreement in relation to price should be subject to an implied term the effect of which would be to prohibit price discrimination -

"...such as to render the defendant's commercial operation of their petrol sales business impracticable". ( 1204H).

He acknowledged the difficulty of defining precisely the criterion to be embodied in the implied term, but he considered that to be consistent with the -

"...pragmatism....entrenched in the common law's approach to a multitude of legal problems".

This case illustrates the extreme difficulty the courts have found in identifying an acceptable legal solution to the problem, which arises where a tie operates unfairly vis--vis competitors who are able to buy cheaper supplies free from the tie. However, it cannot be taken as authority supporting the implied term solution advocated by Bridge LJ. This was expressly rejected by the other two members of the Court. Lord Denning referred to the then recent decision of the House of Lords in Liverpool City Council -v- Irwin [1977] AC 239. He considered the possibility of an implied term that Shell would not "discriminate abnormally against the buyer". He said:

"It might be a reasonable term, but it is not a necessary term nor can it be formulated with sufficient precision."

Ormerod LJ reached the same conclusion.

Much more recently, similar issues to those in the present case came before His Honour Judge Kershaw (sitting as a High Court Judge) in Matthew Brown plc -v- Reid (6th July 1998, unreported; I have been shown only an unapproved version of the judgment). That was another case of a tied tenant of a public house resisting forfeiture for arrears of rent, on the grounds of breaches of Article 85 and of implied terms. The lease contained a clause requiring the tenants to buy at prices specified in the nominated brewer's current price list. The tenants submitted that it was an implied term of the lease that the price for the beer in the purchase contracts would be reasonable. The learned judge accepted the landlord's submission that the express provision relating to prices excluded any implied term. As to the particular term suggested, he said:

"The implied term for which the tenants contend would have to be one whereby either the landlord impliedly covenanted that it would procure that the current list prices of the trading companies would be reasonable ... or one whereby the tenants should not be bound to the landlord to buy from trading companies if the prices in their current price list were not reasonable as between the landlord and the tenant having regard to all the circumstances, including that common intention. Trading companies other than the landlord could not be affected by a term, express or implied, in the lease.

I reject any suggestion that an implied term of the first type should be implied. It does not go without saying in all the circumstances (including the common intention) and business efficacy does not require it. Even if (which I do not accept) a term of second type could be implied it would not help the tenants in this case, because on that basis if the prices in this current price list to the trading companies were unreasonable they have bought beer from the trading companies which they were under no legal obligation to do so."

It is difficult to extract any clear guidance from these authorities. The Lostock case supports the view, that even where the tie contains specific provision as to price related to the supplier's current price list, there must be some limitation on the supplier's freedom to undermine the retailer's position by selling to his competitors at cheaper prices. I would also agree with Nourse J that such considerations are particularly important in the case of a lease for a substantial period (as was acknowledged by Lord Denning MR in the Harpers case). The fact that the lease itself is not subject to the principles of restraint of trade makes it all the more necessary to ensure that any tie within it is operated reasonably. Nor would I wholly accept the proposition that, merely because there is a provision as to price in the lease, it is impossible to imply any further qualification. In this case the price list is defined as the list for drinks offered "to purchasers at the lessee's level of distribution". It must be implicit that there is some relationship between the prices which the tenant pays under the tie and those paid by purchasers at the same level of distribution. Unfair discrimination in relation to prices charged to the purchasers would seem to be directly contrary to the purpose of that provision.

However, the fatal objection to Mr Swainston's argument seems to me to be the second point identified by Judge Kershaw, arising out of the fact that the nominated supplier is not a party to the lease. I agree with the judge that 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 which could be implied would be one which 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.

Accordingly, I hold that Target does not have a valid claim for damages for breach of any implied term in its lease with IEL.

 

Set-off

Having reached the conclusion that the tenants have no claim for damages under any of the various alternative formulations, it is strictly unnecessary for me to deal with the question whether such a claim if established would give rise to a right of set-off. However, in view of the extensive argument addressed to me by Mr Brock on behalf of Target, I think it right to comment on the main issue raised, that is whether there is a sufficient connection to support a right of set-off.

On this issue I would not regard the Court of Appeal decision in Gibbs Mew as conclusive. As I have already explained, there was a specific clause in the agreement in that case precluding set-off. This meant that the tenant's case depended on bypassing or undermining that provision. It was to those attempts that the Court's reasoning was directed. The general comments on the availability of set-off were by way of background rather than considered decision. In the Star Rider case also there was an express term precluding set-off (see p 142 column 2). Thus the learned judge's comments on the availability of set-off apart from such a clause, including the discussion of the sufficiency of connection (p 143), were obiter. Furthermore, the circumstances were somewhat unusual, since the counsel for the tenant, despite having prepared a substantial skeleton argument, changed his stance during the hearing, and advanced no argument on this issue (p 142 Col 1).

As Mr Brock submits, the history and nature of the remedy of set-off in the context of landlord and tenant law is fully explained in the judgment of Forbes J in British Anzani -v- International Marine Management [1980] QB 137. It is clear that the mere existence of cross-claims is insufficient to constitute a defence; there must be a sufficiently close connection between the claim and cross-claim to make it inequitable or "manifestly unjust" to allow the plaintiff to obtain judgment on the claim regardless of the cross-claim. Similarly, Lord Denning MR said in Federal Commerce and Navigation -v- Molina Alpha Inc [1978] QB 927, 974-5:

"...It is not every cross-claim which can be deducted. It is only cross-claims which 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 is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim."

At first sight, I would agree with Mr Brock that there is a clear connection between the covenants for rent and the covenants relating to the tie. The tie places a direct restriction on the operation of the public house business, which is the principal purpose of the lease. If its operation seriously affects the viability of that business, it has a direct effect on the tenant's ability to pay the rent. Considerations such as these led the courts long ago to hold that such a covenant runs with the land so as to be enforceable by a purchaser of the reversion (see Clegg -v- Hands (1890) 44 ChD 503). The connection is clearly recognised by the practice under Article 85, which involves a comparison of the economic effects of the tie and the reduced rent.

In Star Rider, Blackburne J took the contrary view. It had been submitted by Mr Field on behalf of IEL in that case that -

"It is only a claim which relates to the quality of occupation of the demised premises which should be recognised as establishing a set-off against outstanding rent".

He relied on the fact that the reported English authorities in the field of landlord and tenant law were all cases of breach of a landlord's repairing obligations. He also relied on an analogy with the shipping cases relating to time charters. Blackburne J said that without the benefit of contrary argument he was unwilling to attempt a definition, but that he would "ordinarily expect the nature of the claim to be as Mr Field submits". Of the beer-tie itself, he said:

"The tie the existence of which grounds the cross-claim does not prejudice or hinder the plaintiff's physical use and occupation of the premises, much less does it affect the physical condition of the premises themselves nor does it affect the quality of the tenant's use of those premises. At most it affects the extent to which the plaintiff is able to derive profit from his use of the premises."

Mr Brock has argued persuasively that the rules developed in shipping cases are themselves anomalous, and in any event should not be treated as qualifying the principles set out in British Anzani. He also relied on a case in the New Zealand Court of Appeal, not cited to Blackburne J (Grant -v- NZMC Ltd [1989] 1 NZLR 8). The plaintiff had leased premises from NZMC subject to a provision that rent was to be paid "clear and free of exchange or any deduction whatsoever". They failed to pay rent, but, on the application by NZMC for summary judgment, they asserted a right of set-off, in that they had been induced into the lease by promises made by NZMC of referrals of panel beating work for their panel beating company, which promises had not been kept. The Court held that, if the alleged collateral contract leading to the lease were established, the cross-claim would qualify for a set-off. Having reviewed the authorities, the Court said:

"The principle is we think clear. The defendant may set-off a cross-claim which so affects the plaintiff's claim that it would be unjust to allow the plaintiff to have a judgment without bringing the cross-claim into account. The link must be such that the two are in effect inter-dependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary nor decisive that cross-claim arises out of the same contract" (p 12-13, per Somers J giving the judgment of the Court).

Thus, a right of set-off was allowed, even though the cross-claim affected the business on the premises rather than their physical state.

I see no reason why the same approach should not be applied in this country. Accordingly, I accept Mr Brock's submission that in principle there is a sufficient connection between the lessor's claim for rent and the claims in respect of the tie to give rise to a right of set-off.

However, Mr Brock has other obstacles, factual and legal, to overcome. In particular, there is the further problem that the lease contained a requirement for payment by direct debit. In Esso Petroleum -v- Milton [1997] 1 WLR 938, the Court of Appeal, by a majority, held that such a provision precluded a right of set-off. Mr Brock made a persuasive case for preferring the dissenting judgment of Simon Brown LJ on this issue, or in any event for distinguishing this case on its facts. These arguments are best left for consideration if and when it is decided that there is a valid counter-claim which could be subject to set-off.

 

Conclusion

For all these reasons I conclude that the tenants have no arguable basis for a claim for damages arising out of the imposition of the beer tie or the Beer Procurement Agreement, whether by virtue of Article 85 or under an implied term. I will hear argument as to the consequences of these findings for the cases before me and the incidental issues which arise. I will also consider the application relating to the stay in the Pavilion case.

 

 

Appendix 1

Provisions of Community Law

Article 85

"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 not 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."

 

Commission Regulation 1984/83

This provides exemptions in accordance with Article 85 (3), including provisions relating to beer supply agreements. Article 6 contains the "block-exemption" for agreements satisfying specified requirements including "special commercial or financial advantages" ("SCOFA"), subject to qualifications and restrictions in Articles 7 and 8.

Article 6

"Pursuant to Article 85(3) of the Treaty, and subject to Articles 7 to 9 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 the according of 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."

 

Article 14

"The Commission may withdraw the benefit of this Regulation... when it finds in a particular case that an agreement which is exempted by this Regulation nevertheless has certain effects which are incompatible with the conditions in Article 85 (3) of the Treaty, and in particular where ...

(c) the supplier without any objectively justified reason:

1. Refuses to supply categories of resellers who cannot obtain the contract goods elsewhere on suitable terms or applies to them differing prices or conditions of sales;

2. Applies less favourable prices or conditions of sale to resellers bound by an exclusive purchasing obligation as compared with other resellers at the same level of distribution."

 

Council Regulation 17

This provides provisions for the enforcement of Articles 85 and 86 by the Commission. Article 15 enables the Commission to fine undertakings or associations of undertakings if they "either intentionally or negligently" infringe Article 85 (1). By Article 15.5, fines may not be imposed for acts taking place between notification to the Commission under Article 85(3) and its decision.

 

Appendix 2

Relevant Provisions of Standard Lease

Clause 3: the lease is for a 20-year period. The rent is payable quarterly in advance, and subject to review (upwards only) in accordance with the 3rd Schedule.

Clause 4(1): the lessee covenants to pay the rent -

"... without deduction by variable direct debit or such other means as the company may from time to time specify...".

Clause 4(34): the lessee covenants to comply at all times with the terms of the first and second schedules.

Clause 5(3): the lessor covenants -

"to observe and perform (or procure the observance and performance of) the obligations on the part of the company contained in the first schedule to this lease".

Clause 6(9): there is provision for "an additional review of the rent", in accordance with the provisions of the 3rd schedule, if for any reason the company is unable to enforce any of the purchasing obligations or is required by law to vary its pricing structure relating to lessees subject to exclusive purchasing obligations. On the review the provisions which have been varied or become unenforceable shall be disregarded for the purposes of that or any subsequent review.

 

1st Schedule - "Terms of Trading".

"Specified beers" are defined. "Nominees" are defined as the persons or companies specified from time to time to the lessee. "Company's Price List" is defined as -

"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."

By paragraph 2 the Lessee is required to purchase from the lessor or its nominees all its requirements of specified beers; and by paragraph 3, subject to certain exceptions, it is prohibited from bringing onto the premises specified beers from other sources. Paragraph 9 imposes a minimum barrellage requirement.

By paragraph 12, the lessor is required to -

"... use its best endeavours to supply the Lessee 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..."

By paragraph 13, the lessor may -

"... at any time by notice indicate that supplies of beers under this Schedule shall in future (or for the period specified in the notice) be supplied by Nominees appointed by the Company and not by the company... and references to the Company's Price List shall be references to the current price list of such nominees."

An appendix to the First Schedule sets out the types of beer "specified in the lease".

 

2nd Schedule

The second Schedule includes covenants not to change the name of the house, and to comply with all reasonable requirements of the company regarding the presentation of the company's name or its nominees, and as to the method of sale and storage of the company's goods.

Paragraph 8(1) requires the lessee to pay for goods and services supplied by the company or its Nominees at the current price list, and to comply with the terms and conditions upon which they are supplied; and to pay by direct debit, or such other method as the lessor or nominee may specify.

 

Appendix 3

Crehan - Agreed Issues

QUESTION 1

Assuming that

(1) The beer tie referred to in the Re-Amended Defence and Counterclaim forecloses the retail outlets available to the suppliers of beer competing with Courage : and

(2) The beer tie prevented Mr Crehan from buying beer for sale at the tied premises from what would otherwise have been cheaper sources available to those of Mr Crehan 's competitors who were free of any beer tie: and

(3) The facts assumed in (1) produced the legal consequence that the beer tie infringed Article 85.

Questions

(1) Does the assumed infringement of Article 85 give rise to a claim for damages by Mr Crehan for breach of statutory duty (as pleaded by Mr Crehan) to compensate him for damage of which he complains in his Counterclaim, and if so,

(a) against which of the Defendants to the Counterclaim?

(b) does the fact that the beer tie is prohibited by Article 85(1) deprive Mr Crehan of his right of action or otherwise reduce his damages?

(2) Does the assumed infringement of Article 85 give rise to a restitutionary claim by Mr Crehan to recover the difference (if any) between the price he paid for beer under the tie and the price he would have paid had he not been subject to the tie, and if so,

(a) against which of the Defendants to the Counterclaim?

 

(b) does the fact that the beer tie is prohibited by Article 85 (1) as assumed above deprive Mr Crehan of his claim or otherwise reduce the amount recoverable?

(c) does the fact that Mr Crehan received the beer the subject of his restitutionary claim and re-sold it at a price in excess of that which he paid Courage deprive Mr Crehan of his claim or otherwise reduce the amount recoverable?

QUESTION 2

Assuming that:

(1) The beer tie referred to in the Re-Amended Defence and Counterclaim foreclosed the retail outlets to suppliers of beer competing with Courage: and

(2) The beer tie prevented Mr Crehan from buying the beers for sale at the tied premises from what would otherwise have been cheaper sources available to those of Mr Crehan's competitors who were free of any beer tie.

Questions

(1) Do the facts and matters assumed in (2) produce the legal consequence that the beer tie infringed Article 85. If so,

(2) Does such an infringement of Article 85 give rise to a claim for damages by Mr Crehan for breach of statutory duty (as pleaded by Mr Crehan ) to compensate him for the damage of he which pleads in his counterclaim, and if so,

(a) against which of the Defendants to the Counterclaim?

(b) does the fact that the beer tie is prohibited by Article 85(1) deprive Mr Crehan of his right of action or otherwise reduce his damages?

(3) Does such an infringement of Article 85 give rise to a restitutionary claim by Mr Crehan to recover the difference (if any) as between the price he paid for beer and the tie and the price he would have paid had he not been subject to the tie, and if so,

(a) against which of the Defendants to the Counterclaim?

(b) does the fact that the beer tie is prohibited by Article 85(1) deprive Mr Crehan of his claim or other wise reduce the amount recoverable?

(c) does the fact that Mr Crehan received the beer the subject of his restitutionary claim and re-sold it at a price in excess of that which he paid Courage deprive Mr Crehan of his claim or otherwise reduce the amount recoverable?

 

 


© 1998 Crown Copyright


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