Insights

Restraint of trade and lease’s restrictive covenants: UK Supreme Court overrules majority, in favour of minority, in Esso Petroleum [1968] AC 269 (HL)

In Peninsula Securities Ltd (Respondent) v Dunnes Stores (Bangor) Ltd (Appellant) (Northern Ireland) [2020] UKSC 36, [2020] 3 WLR 521, the UK Supreme Court (“UKSC”) tackled the issue of whether the restraint of trade doctrine applied to a restrictive covenant in a lease granted by the respondent’s predecessor in title to the appellant. In a unanimous decision, the UKSC overruled the so-called “pre-existing freedom” test laid down by the majority of the House of Lords (Lord Reid, Lord Morris of Borth-Y-Gest, Lord Hodson and Lord Pearce), in favour of the so-called “trading society” test proposed by Lord Wilberforce, in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269.


The Facts

The salient facts were summarised by Lord Wilson JSC (delivering the leading judgment – regrettably “likely to be his last substantive contribution to the jurisprudence of this court” (per Lord Carnwath JSC at §58)) in his Lordship’s characteristically elegant and pithy style (at §2):

“A developer of a shopping centre leases part of it to a well-known retailer. He covenants with the retailer that he will not allow any substantial shop to be built on the rest of the centre in competition with the retailer. In due course he assigns his interest in the centre to a company. The company considers that the centre is ailing and that the covenant is stunting its ability to revive it. In these proceedings brought against the retailer, the company seeks a declaration that the covenant by which it is currently bound engages the doctrine; that it is unreasonable; and that it is therefore unenforceable.”

Discarding the “Pre-existing Freedom” Test

To determine this issue, the UKSC had mainly to consider whether (not) to apply the “pre-existing freedom” vs the “trading society” tests, the former having hitherto been the authoritative legal test for cases of this kind over the last half a century. The “pre-existing freedom” test was recalled at §23 of Lord Wilson’s judgment ([1968] AC 269, per Lord Reid at 298):

“It is true that it would be an innovation to hold that ordinary negative covenants preventing the use of a particular site for trading of all kinds or of a particular kind are within the scope of the doctrine of restraint of trade. I do not think they are. Restraint of trade appears to me to imply that a man contracts to give up some freedom which otherwise he would have had. A person buying or leasing land had no previous right to be there at all, let alone to trade there, and when he takes possession of that land subject to a negative restrictive covenant he gives up no right or freedom which he previously had. I think that the ‘tied house’ cases might be explained in this way, apart from Biggs v Hoddinott [1898] 2 Ch 307, where the owner of a freehouse had agreed to a tie in favour of a brewer who had lent him money…. In the present case the respondents before they made this agreement were entitled to use this land in any lawful way they chose, and by making the agreement they agreed to restrict their right by giving up their right to sell there petrol not supplied by the appellants.

The UKSC proceeded critically to analyse the (lack of) justification of the “pre-existing freedom” test and to review selected overseas jurisprudence, before concluding that the test should be discarded for the principal reasons below:

(1) “[T]he reasoning is hard to reconcile with the emphasis placed on the Esso case itself on the element of public interest; for restrictions on the use of land may cause harm to the public where they are imposed at the time when the land is acquired, no less than where they are imposed later” (§43, citing Treitel on “The Law of Contract”(15th ed, 2020), §§11-151; see also the UKSC’s analysis of the Australian jurisprudence in §§38 to 42).

(2) No public policy (the restraint of trade doctrine’s foundation) explanation exists as to why a restraint should engage the doctrine if the covenantor enjoyed a pre-existing freedom, but why an identical restraint should not engage it if he did not do so. The “pre-existing freedom” test does not deserve its place in the doctrine (§44).

(3) “Apart from the fact that even at the time Lord Wilberforce chose not to associate himself with it, the objections to the [‘pre-existing freedom’] test are that it has no principled place within the doctrine; that it has been consistently criticised for over 50 years and, although in some quarters loyally applied, the reasoning behind it has, to the best of my knowledge, scarcely been defended; and that the common law has been limping between the continuing authority of the test in our jurisdiction and its rejection in Australia and in parts of Canada” (§50).

Adopting the “Trading Society” Test

In contrast, the UKSC favoured Lord Wilberforce’s “trading society” test, recounted at §26 ([1968] AC 335):

“… I think one can only truly explain them by saying that they have become part of the accepted machinery of a type of transaction which is generally found acceptable and necessary, so that instead of being regarded as restrictive they are accepted as part of the structure of a trading society.”

This test was admittedly not as neat or precise or detailed as the “pre-existing freedom” test, but the UKSC upheld it for the following main reasons:

(1) The common law “is a law built by the judges on behalf of the people over seven centuries. It has been generated from below, not imposed from above…. [T]he common law is inevitably a patchwork; and in it we will search in vain for perfect congruity. This is a truth which Lord Wilberforce’s pragmatic test recognises…. [T]he phrase ‘trading society’ aptly describes the test. For it reflects the importance attached on the one hand to freedom to trade and on the other to the enforceability of contracts in the interests of trade. It is the former which generates the doctrine and the latter which keeps it within bounds” (§45).

(2) “Under the trading society test a covenant which restrains the use of land does not engage the doctrine if, in the words of Lord Wilberforce in the Essocase at p 333, it is of a type which has ‘passed into the accepted and normal currency of commercial or contractual or conveyancing relations’ and which may therefore be taken to have ‘assumed a form which satisfies the test of public policy’. But the proper rooting of Lord Wilberforce’s test in public policy itself generates a need to qualify it. In giving the judgment of the Judicial Committee of the Privy Council in Vancouver Malt and Sake Brewing Co v Vancouver Breweries Ltd [1934] AC 181 Lord Macmillan observed at p 189: ‘It is no doubt true that the scope of a doctrine which is founded on public policy necessarily alters as economic conditions alter. Public policy is not a constant. More especially is this so where the doctrine represents a compromise between two principles of public policy….’ Lord Wilberforce himself recognised, also at p 333, that a change in society’s circumstances might precipitate a change in public policy which would require re-examination of whether a type of covenant should continue not to engage the doctrine or… whether, by contrast, it should continue to engage it” (§46).

Conclusion

On the facts of the instant case, the UKSC ultimately concluded (at §51) that “[t]he application of the trading society test to the facts of the present case is straightforward; there is no need to remit the case for inquiry into it…. [I]t was not uncommon to find negative covenants in leases in favour of anchor tenants. This was especially so in long leases as the landlord, having received a premium, had no financial interest thereafter in how the centre traded. It was therefore the tenant who had everything to lose if the landlord put in competition…. [A]cross the common law world it has long been accepted and normal for the grant of a long lease in part of a shopping centre to include a restrictive covenant on the part of the lessor in relation to the use of other parts of the centre. There is no ground for considering that social changes require re-examination of the conclusion that, by reference to the trading society test, the covenant has at no time engaged the doctrine.”

Lord Carnwath contributed a separate, 11-paragraph concurring judgment (§§58 – 68).


Thomas WK Wong, FCIArb, FHKIArb


Thomas is a seasoned civil litigator who was called to the Bar and joined Chambers in 2018.  Prior to that, Thomas had practised for seven years as a civil litigation solicitor at three top-tier litigation Firms.  Cases he has conducted include Cuvelier Jacques R v Chen Qizhi [2019] HKCFI 2386
, where he obtained summary judgment for the Plaintiff in a dispute concerning the Partition Ordinance (Cap 52), and Cheung Shun Yee v Rich Resource Development Ltd [2019] HKCFI 2835 (led by Mr Denis Chang SC), where he acted for an experienced property investor against a wholly-owned subsidiary of a major Hong Kong property investor in a High Court Action concerning the sale and purchase of an entire shopping mall (which was settled at the last minute, after two Pre-trial Review hearings both conducted by Thomas (as led Junior Counsel) and less than 1 month before the scheduled trial). Thomas is also a Fellow of the Chartered Institute of Arbitrators and of the Hong Kong Institute of Arbitrators. Explore his profile for further details.

Disclaimer: This article does not constitute legal advice and seeks to set out the general principles of the law. Detailed advice should therefore be sought from a legal professional relating to the individual merits and facts of a particular case. The picture which appears in this article is included for decorative purposes only and should not be taken as a depiction of any matter to which the case is related.