James E McCabe Ltd v Scottish Courage Ltd

The defendant (SCL) makes three applications for summary judgment on the footing that, notwithstanding the late stage reached in these proceedings, the issues raised are questions of construction or law and that, since disclosure is virtually complete, there is no reason why these matters should not be dealt with in order to obviate the need for a trial or at least eliminate significant issues at it. The trial was originally fixed on an expedited basis for June 2005 but is now scheduled to take place in June of this year. It is said that the claimant (McCabe) has no realistic prospect of success on the various points which are raised and that nothing in any outstanding disclosure could impact upon these matters.

McCabe contends that the summary judgment applications should not be entertained because they are made so late, because two were issued two weeks after the time allowed by a Consent Order, because the issues raised are complex, lengthy, expensive and wholly unsuitable for summary determination and because the applications had previously been relied upon as a reason not to give disclosure. It is said that disclosure is still incomplete, that documents have been wrongly destroyed and that these matters would impact upon the trial of the action which is the appropriate place for all the issues to be determined. Moreover to determine the issues raised some 4 months before the trial, in circumstances where an appeal could not be heard or could only be heard with considerable difficulty on issues of law and construction before the trial takes place, gives rise to problems of case management. My attention was drawn to the note at CPR 24.4.2 which states that “a party intending to apply for a summary judgment should do so before or when filing his Allocation Questionnaire”. It was argued that these matters presented a “compelling reason why the case or issue should be disposed of at a trial” quite regardless of the “no real prospect” test set out in CPR 24.2.

In December 2005, when Andrew Smith J ordered these applications to be heard, he was well aware of their content and the potential impact of them on the trial. The applications were brought within a few weeks of the delivery by McCabe of the further information which is one of the subjects of summary judgment and which clarified the case being put by McCabe more generally. It was self evident that, should a decision be made against McCabe on any of these issues, and an appeal be launched, this could or would create case management problems for the trial.

It is plain to me that if SCL are correct in their stance that these applications raise only questions of law or construction of two contracts, and that McCabe has no realistic prospect of success on the points at issue, they should now be determined by this court, thus saving time and expense for all concerned, even if an appeal is possible which jeopardises the trial of the remaining issues. I was told that one of the applications had the prospect of obviating the trial in its entirety and although I have not found this to be the case, there must be some prospect that a decision on such issues would lead to resolution of the remainder. I bear in mind however the need for especial vigilance in applying the “no real prospects of success” test in an application made long after such applications are usually made, with the consequential problems that might be created, should there be any appeal. If there is truly no real prospect of success, there is equally no real prospect of success on appeal. If factual issues or issues of outstanding disclosure could affect the substance of the arguments then of course the position would be different.

The court’s approach to summary judgment is spelt out in CPR 24.2 and, as usual, I was referred to the decision in Swain v Hillman [2001] 1AER 91 (CA) and the decision of the House of Lords in Three Rivers District Council v Bank of England (No.3) [2001] UK HL/16 [2001] 2AER 513. The court must look to see whether there is a realistic as opposed to a fanciful prospect of success but should not conduct a mini trial on a summary basis. The process is designed to deal with cases that are not fit for trial at all. Furthermore, in accordance with other authority, it is clear that difficult factual disputes are not appropriately determined on such applications. Nonetheless, if the appropriate tests are met and any of the issues which are raised are not fit for trial at all, I cannot see that the lateness of this application creates a compelling reason for the matter to go to trial, notwithstanding the linkage of the summary judgment issues with others that was suggested by McCabe.

I will refer to the three summary judgment applications as the “Price Restrictions” Application, the “Multiple Retailer/Notice” application and the “Restraint of Trade” application, all of which relate to particular specified paragraphs in the statements of case.

The action arises out of the termination by SCL on 25 October 2004 of an Agreement between the parties dated 27 October 1998 (the Agreement) as amended by Amendment Agreement dated 23 June 2003 (the Amendment Agreement). Both Agreements concerned the sale by SCL to McCabe of Miller Genuine Draft Beer (MGD) in bottles and cans for distribution in Northern Ireland.

The Amendment Agreement was made after disputes had arisen between the parties which were the subject of mediation. The disputes covered much of the same areas which are now raised by McCabe in relation to its claim that the termination of the Agreement was wrongful. Claims made in these proceedings in respect of alleged breaches prior to 23 June 2003 were dismissed by a Consent Order dated 27 April 2005. The reason for this concession is to be found in the waiver of claims constituted by Clause 1 of the Amendment Agreement as set out later in this judgment. Much of the evidence put before the court in relation to the applications with which I am concerned relates to the period prior to 23 June 2003 or relates to allegations of express breaches of the Agreement which are not the subject of these applications and SCL invited me to find in its favour on the basis, essentially of arguments based on the construction of the two Agreements, the parties’ statements of case and on a limited number of authorities which were cited to me.

By a Letter Agreement in writing dated 27 October 1998 and signed for McCabe and SCL, SCL appointed McCabe as “ exclusive distributor for the promotion and resale of MGD in small packages such as bottles and cans (defined as the “Product”) in Northern Ireland (the Territory). The agreement included the following relevant terms:

By the Amendment Agreement dated 23 June 2003, the Agreement was amended to include the following express provisions:

In six separate sections of its Particulars of Claim, McCabe sets out breaches of the Agreement as follows:-

McCabe alleges that the termination of the Agreement was wrongful because it was effected in reliance upon the failure by McCabe to purchase the minimum quantity of MGD required in the Amendment Agreement between 1 July 2003 and 30 June 2004. The reason for the failure to purchase that quantity was, according to McCabe, a series of breaches of the Agreement by SCL, which are interconnected.

In answer to SCL’s counter claim that McCabe was in breach of Clause 7.1 of the Agreement in selling competing US beers in the shape of Budweiser and Coors during the currency of the Agreement, McCabe maintains, amongst other arguments, that Clause 7.1 of the Agreement is void as an unreasonable restraint of trade. Whilst SCL disputes this, it alleges in the alternative that if Clause 7.1 of the Agreement is unenforceable, then the amended Agreement as a whole is invalid and void so that neither McCabe nor SCL could maintain any claim for breach in respect of it. This constitutes the subject matter of the “Restraint of Trade” application.

McCabe alleged in para 6 of its Particulars of Claim that it was “implicit in the Agreement, alternatively an implied term of the Agreement that both parties would actively co-operate so as not to prevent or in any way inhibit the fulfilment of the minimum purchase requirements under the Agreement.” It alleged that such a term was to be implied by law and/or as a result of the presumed understanding of the parties and/or as a result of business efficacy

In response to requests for further information, McCabe stated that “the active co-operation” in question “requires both parties to take such steps as are necessary to make the contract workable and not to take steps which make the contract unworkable”. The term was to be implied by “virtue of the fact that the parties entered into a contract” and that both parties are “taken to contract on the footing that they wish the contract to be performed and accordingly have agreed that neither will actively prevent performance”.

At paragraph 9 of the Particulars of Claim, McCabe alleged that SCL “adopted a strategy calculated or likely progressively to render it impossible or exceedingly difficult for McCabe to operate pursuant to the Agreement and/or calculated or likely progressively to undermine the profitability of the Agreement for McCabe”. In support of that allegation McCabe relied upon the matters set out in Sections D1-D6 of the particulars. Those actions were also said to be breaches by SCL of their express obligations under the Agreement.

McCabe maintains that the express terms and the implied term have to be read together and “feed off one another”. It is self evident that any implied term of co-operation or prevention from performance can only be given shape in the light of the express terms which set out the obligations of the parties – see Mona Oil Equipment & Supply Co. Limited v Rhodesia Railways [1949] 2 AER 1014 at 1018, Luxor v Cooper [1941] AC 108 and Mackay v Dick (1881) 6 App Cas 251. A duty to co-operate in, or not to prevent, fulfilment of performance of a contract only has content by virtue of the express terms of the contract and the law can only enforce a duty of co-operation to the extent that it is necessary to make the contract workable. The court cannot, by implication of such a duty, exact a higher degree of co-operation than that which could be defined by reference to the necessities of the contract. The duty of co-operation or prevention/inhibition of performance is required to be determined, not by what might appear reasonable, but by the obligations imposed upon each party by the agreement itself.

In Section D1 at paragraphs 15 and 16 specific pleas were made of breaches in failing adequately to invest in marketing or to advertise appropriately and reference was made to Clause 5.4 of the Agreement. In Section D2 at paragraph 19, McCabe alleged that SCL had failed to give price support to McCabe since July 2002 in the shape of discounts or rebates and this affected McCabe’s ability to compete with cut-price Product originating from Great Britain. This diminished McCabe’s sales of MGD within the Territory. In the further information given under paragraphs 17-19 of the particulars, as refined in argument, McCabe contended that the price level charged to it should have been the same as that charged by SCL to the “multiples” Tesco and Sainsbury from its Great Britain distribution centres or alternatively SCL should have charged such lower price as did not make the Agreement unworkable. It was said that SCL should have discounted the sales price fixed in the Amendment Agreement on sales to McCabe for as long as was necessary to ensure that McCabe’s pricing was such as to allow it always adequately to compete within the market and ensure that the Agreement terms were profitable.

In the written submissions made on behalf of McCabe and in the witness statements, different formulations of the application of this implied term to pricing were set out. At paragraph 12 of its lengthy skeleton argument, McCabe contended that the implied term “to actively co-operate so as not to prevent or in any way inhibit the fulfilment of the minimum purchase requirements under the Agreement” included “SCL operating the Agreement in such a way and at such prices as to render it commercially viable”. At paragraph 77 of the skeleton argument, it was said that the effect of the implied term was “such that if [SCL] chose to sell MGD to the mainland at lower prices than those specified in the Agreement, it was under an obligation to supply [McCabe] directly or indirectly at those lower prices”. At paragraph 78 it was said that SCL was under an obligation to supply McCabe directly or indirectly at lower prices that would enable it to compete with Tesco and Sainsbury. At paragraph 89 it was said that “all that is required is that if [SCL] chooses to offer discounted prices to the GB-based grocers, these should be matched by measures in respect of [McCabe] that ensure a level playing field (whether these be equivalent discounts on goods or general price support measures…”).

Other formulations talk about prices which are commercially viable, but the overall theme is that the prices charged to McCabe by SCL, should by one means or another, have enabled McCabe to sell enough Product at a profit to meet its minimum purchase requirement under the Agreement. In this connection it is worth pointing out that SCL could have no knowledge of McCabe’s overheads or administrative expenses and that, in its statements of case, McCabe has professed itself unable to allocate a proportion of such amounts to its distributorship of MGD. However the point is put, the implied term is said to require SCL to charge prices less than those fixed by the Amendment Agreement by way of price support or discount, so as to enable McCabe to compete with Product reaching the market from other sources and to make what McCabe considered to be a “workable” or “viable” margin by way of profit. McCabe’s concept of “workability” or “viability” and prevention or inhibition of the fulfilment of the minimum purchase obligations (MPO) under the Agreement involves a level of pricing which allows McCabe to make a profit on sales of the Product, although the specific margin is never put forward.

None of the formulations of the implied term, as applied to pricing, withstand serious examination in the light of the express terms of the Amendment Agreement. This provided for a fixed price of £12.08 per case (duty paid plus VAT) for the first year from 1 July 2003 – 30 July 2004 and for a RPI adjustment for the second year (Clause 4.1 and 4.2). Clause 4.3 provided for a discount to be applied to that price so that the price charged would be not less than 25p per case less than SCL’s net price to PRL, to whom it was specifically authorised to sell by the terms of Clause 3, as an exception to the exclusive nature of the distributorship given to McCabe.

Furthermore express provisions were included in Clause 5 in relation to the provision of marketing/price support, setting out the obligations of SCL with regard thereto.

Clause 5.3 of the Amendment Agreement concludes by stating that, subject to the provisions set out, “SCL shall not be obliged to provide additional advertising and promotion (including marketing/price support)”.

The terms of the Amendment Agreement are therefore clear in setting out a regime for pricing which does not allow any room for the application of any implied term of the kind alleged in relation to pricing. Moreover the background to the Amendment Agreement in the shape of the documents produced for the mediation reveals that the issue of pricing and price support in the context of discounted supplies to the multiples and competition from them in the Territory of Northern Ireland was very much to the fore. What the parties described as “parallel imports” was a known phenomenon. Without any breach of the Agreement, SCL would supply not only multiples, but also other wholesalers in GB at various discounts, in consequence of heavy leverage put on them by entities such as the multiples in negotiation, its appreciation of the market conditions and the strength of competing products. Those entities were then in a position, having purchased in Great Britain, to “export” to their own or other outlets in the Territory. Moreover, it appears that there may even have been some import from the Continent. This was a recognised problem about which little could be done, save to offer price support, which prior to July 2002, it appears that SCL, from time to time, did.

Although, in McCabe’s evidence and in the pleadings there was the suggestion of some understanding that a practice of price support would continue, it was never suggested that there was any contractual obligation to do so save by reference to this implied term which is wholly inconsistent with the terms of the Amendment Agreement. Not only does the Agreement contain in Clause 19.1 an entire agreement clause and in 19.4 a non waiver clause, the Amendment Agreement makes it clear that there is no obligation on SCL to provide additional advertising and promotion, marketing or price support of any kind.

There is no suggestion either that there was any breach by SCL in these circumstances, whether of Clause 1.1, 1.2.1, 1.2.2, 1.2.3 or 1.2.4 since SCL was not taking any active steps to sell within the Territory over which, subject to limited exceptions, McCabe was given an exclusive distributorship.

Not only therefore did the contract set out the price regime but it also set out specifically what SCL was to do or was forbidden to do in the context of sales to Northern Ireland. The phenomenon of “parallel imports”, in itself, does not give rise to any breach on the part of SCL and the suggestion that there should be price support to ameliorate its effect is specifically nullified by the terms of the Amendment Agreement to which I have referred.

I was referred to the decision of the Court of Appeal in Crehan v Courage Ltd [1999] Eu LR 834 and in particular to paragraphs 42-56 in the judgment of Morritt LJ. This decision related to a tied house and the implication of a term into the lease about the prices to be charged for the supply of drink. At paragraphs 51 and 54, Morritt LJ, giving the judgment of the Court, referred to earlier authority and to the implication of a term where an intention was imputed to the parties. Such was only to be made when it was necessary to imply a term to give efficacy to the contract and to make it a workable agreement in such manner as the parties would clearly have done if they had applied their mind to the contingency which arose – the “officious bystander” type of case. There, a term would be implied, not on the ground that it would be reasonable but only where it was necessary and could be formulated with a sufficient degree of precision.

In this case, as in Crehan the implied term sought in relation to pricing is not reasonable, let alone necessary and does not meet the tests set out. There are clear provisions for pricing and the parties have expressly applied their minds to the position, knowing of the existence of the phenomenon of “parallel imports”. To imply a term of this kind would be inconsistent with the parties’ express agreement.

Moreover the term, as appears from the different formulations made, cannot be framed with a sufficient degree of precision for it to be workable since the price reductions sought depend upon prices charged to others by SCL, the economics of those others with regard to arranging “parallel imports” and the market conditions in Great Britain and Northern Ireland when combined with the uncertain level of McCabe’s expenses and overheads and its desired profit margin. The price support which SCL would be obliged to give could not be known by it in advance in order to satisfy the implied term as formulated in paragraph 78 or 89 of McCabe’s skeleton argument. Equally, the implied term, as formulated in paragraph 77 of the skeleton argument is equally imprecise and unreasonable since it is uncertain whether what is required is for SCL to at all times reduce prices to McCabe’s to a level below the lowest price charged to any customer in Great Britain in a particular period of time or at any time.

McCabe argued that the price reduction issue could not be divorced from questions of positioning of the Product in the market but no breach of Clause 5.5 has been alleged. It maintained that the pricing issue could not be divorced from breaches in relation to marketing and advertising which are separately pleaded but this takes the matter no further in the light of the express terms of the Amendment Agreement to which I have referred. It matters not if there was a strategy adopted by SCL, as is suggested by McCabe, if the express terms of the Agreement were clear as to pricing and it was not in breach in relation to that. Whatever sinister motivation is attributed by McCabe to SCL, if it was entitled to do what it did, then this is of no relevance nor will further disclosure affect the issue.

As a matter of construction of the contracts in issue there is no room for an implied term of the kind alleged to operate in relation to pricing, whether or not that term is expressed as widely as it is put in paragraph 6 of the Particulars of Claim. In these circumstances I need not decide whether or not that term is too widely framed in using the words “so as not to.. in any way inhibit the fulfilment of the minimum purchase requirements under the Agreement”. However the implied term is phrased, there is no room for its operation in the context of marketing or price support outside the express terms of the Amendment Agreement which is exhaustive in setting out SCLs’ obligations in these respects. Whether there are other breaches of the advertising obligations as set out in Clause 5.3 is an entirely distinct matter.

In these circumstances I cannot see how it can be said that McCabe has any realistic prospect of success in relation to its allegation at paragraph 19 of its Particulars of Claim. Whether or not paragraph 6 of the Particulars of Claim is a term which can be implied into the Agreement in other contexts it cannot be implied into the Agreement in the context of pricing of the Product to McCabe. There can be no implied term of this kind in relation to pricing, for the reasons I have set out so that there can be no breach constituted by the allegation in paragraph 19 of the Particulars of Claim.

At paragraphs 3-10 of the Particulars given in respect of paragraphs 11-16 of the Particulars of Claim, there are similar allegations with regard to the creation of a parallel import market which is said to have undermined McCabe’s ability to position MGD in the Territory as a premium packaged lager by reason of the supply by SCL of MGD at heavily discounted prices on the mainland. Oddly, this information is given by way of particularisation of the breaches set out in paragraphs 15 and 16 of the Particulars of Claim which allege failure to invest in marketing or advertising and failure to advertise appropriately. Insofar as McCabe alleges at paragraphs 3-5 of those Particulars that it was a breach by SCL to charge different prices in the GB market to those charged to McCabe in Northern Ireland, that plea is unsustainable. At paragraph 6 of these Particulars, it is alleged that SCL failed to camouflage the effect of the pricing differential because it used the same packaging in distributing MGD to the Great Britain multiple grocery market as that used in the off-licence trade in the Territory. That contention is also unsupportable because packaging is part of the Product supplied under the Agreement, is specifically a matter for SCL under Clause 9 and by Clause 5.5, the Product is to be positioned as a premium lager brand which means that it could not be packaged in such a way as to disguise it, as is suggested by McCabe.

The issue which arises in paragraphs 3-10 of these Particulars is in reality one of pricing not of packaging or advertising at all and, in consequence, for the reasons already given, it is one where McCabe has no realistic prospect of success.

In addition to the parallel imports phenomenon which arose where SCL sold Product to entities in GB, which then exported it to Northern Ireland, Clause 1.4 of the Agreement allowed SCL to make direct sales to retailers in Northern Ireland itself. The circumstances in which such supply took place and the extent of it are matters in dispute between the parties and, by reason, it appears, of some misunderstanding, the actual figures for the direct supply and proportionate disclosure in respect of it have not been produced. McCabe makes much of allegedly deficient disclosure in this context.

As pleaded in paragraphs 20-22 of the Particulars of Claim, McCabe’s case is that SCL sold MGD in packaged form directly to parties in the Territory from its distribution centres in Great Britain but, in breach of Clause 1.4, failed to give notice, or adequate notice, of any such sales with the consequence that McCabe was unable adequately to gauge the continuing extent of its obligations under the MPO, which was not then reduced by particular supplies which fell within the terms of Clause 1.4 and Clause 13.1.4.

As matters developed in the evidence adduced by McCabe’s on 20 February and in argument, a further point emerged in relation to the need for a “request” from a retailer in the Territory, because the wording of Clause 1.4 refers to this. It was said that there is no evidence of any request nor any disclosure given in relation to such requests. It is accepted by McCabe that it had knowledge of supplies being made to retailers but was never given proper notice and did not know the basis upon which such supplies were made nor the extent of them.

SCL sought summary judgment on the basis that it had given notice which was not required to be in any particular form and that the notice was adequate: SCL also said that in any event, at all material times, McCabe knew of such facts as enabled it to protect the interest which the notice provision was designed to serve and that it could not conceivably have suffered any loss by not having received notice, if such was not given. SCL also maintained that, however Clause 1.4 was interpreted, the total reduction from the MPO to which McCabe was entitled, on its own figures, was 2,555 hectolitres (based on its previous year’s supply) which would not make good the shortfall in the MPO which was the basis of termination of the Agreement.

The position is however more complicated than SCL maintains, since McCabe alleges direct supply by SCL or by its associated company B&C in Eire which was not permitted by Clause 1.4. On McCabe’s case, this is not just a question of the impact of such sales on the MPO but also a straight question of breach in making such supplies which caused damage to McCabe and deprived it of sales which it would otherwise have made to those self same customers.

The first sentence of Clause 1.4 allows SCL to make direct sales to retailers in Northern Ireland in the circumstances there set out, thus creating an exception to the prohibition upon it so doing under Clause 1.1 and Clause 1.2 and its sub-clauses. The bar against such sales to entities in Northern Ireland was removed for sales to retailers in Northern Ireland who requested the Product from a distribution centre in Great Britain where notice of the intention to make such sales was given by SCL to McCabe. In order to comply with the terms of the Clause it would appear that there should be no active solicitation by SCL and that there had to be a request from a retailer in Northern Ireland for the supply. The request had to be made to an SCL distribution centre situated in Great Britain and since the notice required was one of intention to make the sale, that notice would have to be given prior to the sale taking place. This part of Clause 1.4 applies whether or not the retailer in question had previously been a customer of McCabe. McCabe contends that any supply by SCL or B&C to a customer, whether distributor, wholesaler or retailer in Northern Ireland, where there was no compliance with this Clause, was unlawful and that the question whether such customer had previously been a customer of McCabe is irrelevant. That indeed appears to be the effect of this part of the Clause.

The second part of the Clause deals with a different situation although the provision for notice in the first half provides the “bridge” to this part and to Clause 13.1.4 which is referred to in it. This deals with the situation where the retailer in question had previously been a customer of McCabe and the supply of the Product is transferred from McCabe, to be carried out by SCL. It is in those circumstances that the MPO is diminished in accordance with Clause 13.1.4. This latter clause provides for the situation where the supply is transferred from McCabe to SCL with a resulting reduction in the MPO of the quantity of Product supplied by McCabe in the previous 12 months before the transfer took effect. That reduced quantity was to apply in each year and pro rata for any part of the year until such time as the supply of the Product to such customer was transferred back to McCabe.

SCL argued that the only purpose of the notice provision was to enable the calculation to be made of reduction in the MPO and that the giving of a notice under Clause 1.4 was not a pre-condition to supply being made under it. If there was knowledge on the part of McCabe as to what was taking place, so that the MPO could be calculated, that was enough. McCabe would thus be protected against wrongful termination under Clause 13.1 or loss of exclusivity under Clause 13.4.

The issues which arise do not simply constitute a question of construction of Clause 1.4 however. There are clear issues about the giving of notice and the making of requests by retailers in Northern Ireland (although not clearly pleaded) which give rise to disputes of fact which cannot be resolved on a summary basis. Moreover, as appears from the Particulars given by McCabe (the truth of which is assumed for these purposes) Makro began trading with SCL in January 1999 having previously purchased 246 hectolitres of Product from McCabe but have continued thereafter to buy from McCabe. Equally, Safeway is said to continue to trade MGD with both SCL and McCabe. It appears that both these retailers have been obtaining supplies from SCL and McCabe, without giving their custom as a whole to one or the other. In these circumstances, every time a new projected supply was to be made by SCL, the requirement of notice would have to be satisfied.

There is no suggestion in the documents that any specific notice was ever given, in any particular form and it is therefore plainly arguable that there has been a breach of this provision regardless of the general state of knowledge of McCabe that supplies were being made. The exact nature of that knowledge is unclear, in any event, since most of the correspondence relied on by SCL in this connection appears to relate to knowledge of parallel imports, rather than direct sales.

I am satisfied that this is a matter which is inappropriate for summary judgment since difficult issues of fact relating to notice, knowledge and requests have to be resolved in a situation where the disclosure which has so far been given does not reveal what the true factual situation is. Whilst McCabe’s position with regard to “requests” has not been pleaded, this is plainly now an issue between the parties and the whole question of direct supply from SCL or its associated companies into Northern Ireland is a matter of considerable dispute between parties. The extent to which Clause 1.4 allows for such imports is hotly contested and can only, in my judgment, be resolved at trial, whatever its true construction

It does not matter that only 2,555 hectolitres are revealed as being supplied by McCabe to retailers in the year before SCL first made direct sales since the claim is made of a much wider breach in making direct sales outside the ambit of Clause 1.4 with consequent damages in the context of lost sales equivalent to those actually made by SCL.

For these reasons the Multiple Retailer/Notice application fails.

This is an unusual application in the sense that I am asked to proceed upon the basis of an assumption. In its counter claim, SCL alleged a breach of Clause 7.1 of the Agreement by McCabe in selling competing US beer. In response McCabe contended that Clause 7.1 was unenforceable as being an unreasonable restraint of trade but alternatively went on to assert waiver of the breach or estoppel preventing pursuit of the allegation. In reply to that, SCL pleaded that the doctrine of restraint of trade was inapplicable to the Agreement, alternatively that Clause 7.1 was reasonable, valid and enforceable and, by way of further alternative that if Clause 7.1 was unenforceable then the Agreement as a whole (as amended) was invalid and void in its entirety so that neither McCabe nor SCL was entitled to maintain any claim for breach of it.

During the course of argument I expressed some unhappiness at the idea of proceeding on the basis of this assumption that Clause 7.1 was an unreasonable restraint of trade, since it appeared to me, at first blush, from the material I had seen, that this was an unlikely conclusion to reach. Nonetheless the parties wished me to determine whether Clause 7.1 could be severed from the rest of the Agreement if it fell foul of the restraint of trade doctrine. SCL asked me to dismiss McCabe’s claim on the footing that it was McCabe’s primary case that Clause 7.1 was unenforceable which meant that the whole Agreement fell with it. McCabe maintained that all I could decide was whether or not Clause 7.1 was arguably severable from the rest of the Agreement, should it be an unreasonable restraint. The most I could do, if I was against McCabe, would be to make a conditional declaration of non-severability.

I was referred to a number of authorities but can for present purposes refer to the decision in Byrne v Inntrepreneur Beer Supply Co. Limited [1999] Eu LR 834 and the judgment of court at paragraphs 157-179. The correct approach to the question of severability has been variously described in the cases as that judgment sets out. A number of different formulations have been made of the test, of which the following are commonly used in relation to the effect of excision of the relevant offending clause:-

All of these formulations appear in paragraphs 157-159 of the judgment of the court in Byrne where the court went on to consider the effect of the offending clause and found that its excision would fundamentally alter the nature of the agreement since the offending clause had to be viewed as at least one integral aspect of the substance of the consideration, without which the agreement would amount as a whole to something quite different.

At paragraph 167 the court also stated that the issue was not how significant the condition was on the facts of any particular case, but whether as a matter of interpretation and law the condition went to the substance of the consideration or to substantially the whole or main consideration.

SCL contended therefore that the matter could be approached as a question of law alone without the necessity for any factual evidence but, to the extent necessary, relied upon facts pleaded by McCabe:-

SCL maintained that it was necessary to approach the question as a matter of substance not form (as Byrne states) but although it was a question of interpretation or construction of the Agreement, each Agreement had to be viewed in the light of its nature and form and in the context of the relevant factual matrix. No evidence of factual matrix had been adduced by SCL. Here there was no evidence as to the importance of Clause 7.1 in the context of this Agreement and no factual or expert evidence to show what the effect would be of selling competing US beers on the sales of MGD. In its Amended Reply and Defence to Counter claim, McCabe had gone so far as to say that, by selling American beers, it was able to promote MGD at the expense of other American beers – an apparent reference to the sale of US beers with free promotional MGD thrown in, in order to encourage future purchase.

It was open to the parties to adduce evidence of factual matrix for this application but neither chose to do so and I must therefore assume that there is nothing for me to consider beyond the facts pleaded by McCabe, which are assumed, for this purpose, to be correct. Courts have previously proceeded on an interlocutory basis in making determinations of this kind on hypothetical assumptions of fact, accepted by the parties as the basis for the argument. That in itself therefore presents no reason against determination of the question and there appears to be minimal scope for any relevant evidence to be adduced at trial in relation to the question of severability that could not have been adduced for the purpose of this application. It is not necessary, in order to determine whether or not the provision is sufficiently fundamental to invalidate the whole Agreement, if excised, to know exactly how the sale of Budweiser or Coors (both of which are admitted) impacts upon the sales of MGD since it is made plain in Byrne that the issue is not how significant the condition is on the facts of any particular case.

Arguments on the issue of severability not only centred on the inter-relationship between Clause 7.1 and the exclusive right to purchase given in Clause 1.1 and the requirement for minimum purchases in Clause 1.6 but also on the express link made between those elements in Clause 13.4. In addition heavy reliance was placed upon Clause 18 by McCabe which, it said, provided expressly for severance. This was, if not decisive on the recent authorities, at least to be strongly influential in the court’s determination of the question.

In my judgment Clause 18 does not assist McCabe for a number of reasons. The first is that it is plainly directed at the decisions of “any competent authority” which in the context must mean the regulatory authorities referred to in Clause 17, namely the European Commission or the OFT, or their successors. The whole language of Clause 18.1 is not directed to any decision of the court but is directed to the situation where an agreement is notified to such regulatory authorities and a process of consultation and negotiation is pursued in order to arrive at a contract which is acceptable to those authorities. The fact that “regulatory intervention” is the phrase used reinforces the language of Clause 18.1.1 and 18.1.2 with their references to indications, discovery, formal or informal declarations by any competent authority and the ensuing phrase in the Clause requiring the parties to meet with a view to reaching agreement upon amendments which would be acceptable to that competent authority. None of this arises save in a regulatory context.

Under the terms of Clause 18.1.2, it is only if there has been a decision of some kind by such a competent authority that the Agreement provides for the offending provision to be severable from all other provisions of the Agreement which would continue in force unaffected. On its own terms therefore I consider this Clause is inapplicable to any decision made by this court where the ordinary common law rules of severance, as set out in Byrne apply. Clause 18.3 lends force to this in as much as it provides for a different situation from the tests set out, since it does not provide for automatic unenforceability of the Agreement in any circumstances but provides for termination at the instigation of one party if the effect of regulatory intervention is significantly to reduce the benefit of the Agreement as a whole to that party.

The essential question therefore which I have to decide in this context is whether McCabe have any realistic prospect of success in contending that the excision of Clause 7.1, on the assumption that it offends restraint of trade principles, would fundamentally alter the nature of the Agreement so as to change its character as not to be the sort of contract that the parties intended to enter at all. Was Clause 7.1 at least one integral aspect of the substance of the consideration without which the Agreement would amount, as a whole, to something quite different?

In this context McCabe points to the difference between this type of Clause and those with which the courts are commonly concerned, inasmuch as the offending Clause in most cases of this kind relates to the product which is supplied under the agreement rather than to the purchase of competing product. McCabe maintains that this distinction is fundamental and that the quid pro quo for the exclusivity of McCabe’s distributorship (with the limited carve-outs) is not Clause 7.1 but the exclusive purchase obligation imposed on McCabe by Clause 2.1 and the minimum purchase obligation imposed by Clause 1.6. Clause 7.1 only prevents the purchase of “competing beer”, being “any brand of beer which originates or purports to originate, or which in its product positioning implies an origination from North America”. It does not apply to other beers or lagers from different origins such as Belgium – e.g. Stella Artois. Clause 7.2 also allows the stocking and selling of “competing beers” provided that this is done passively by McCabe in response to unsolicited orders from any customer who is obliged to purchase all its requirements of beer from McCabe, provided always that McCabe is not in any way involved in marketing or promoting such competing beers at all.

Clause 13.4 is, on any view, significant in relation to the arguments adduced. What the Clause does is to link the question of minimum purchase with the exclusive rights of distributorship and with the obligation not to compete. A failure to meet the MPO not only allows termination of the Agreement by SCL but alternatively allows SCL to give notice of the loss of McCabe’s exclusivity rights which carries with it the freedom of McCabe to purchase competing beers. To my mind, this provision is of critical importance, inasmuch as it directly links the right of exclusive distributorship with the right to compete, although both are subject to limited exceptions.

It appears to me to be self evident that exclusivity in purchasing rights (even with exceptions), which McCabe regards as of critical importance, is closely tied to the requirement of loyalty in promoting the sales of the Product in the Territory (as required by Clause 1.6) and not promoting competing products as Clause 7.1 provides. The linkage between these matters and with the MPO is critical. The fundamental nature of the Agreement involves loyalty on both sides (subject to the limited exceptions to exclusivity in both directions). If Clause 7.1 was excised as an unreasonable restraint of trade, that would represent an integral aspect of the substance of the consideration for which the exclusive rights to purchase had been granted and upon which McCabe places such weight.

In my judgment, the non-compete obligation is part and parcel of the exclusive right and duty to purchase MGD from SCL and is directly connected with the exclusivity given by SCL to McCabe. The importance of the matter is highlighted by the fact that Budweiser is recognised to be the main competitor to MGD. The only product covered by the Agreement and Amendment Agreement is MGD and Clause 7.1 provides that there should be no competition with that sole Product by positive action taken by McCabe. McCabe’s own pleadings emphasise the importance of this competition with Budweiser, in alleging that, whereas MGD had previously outsold Budweiser by reason of McCabes’ efforts, the alleged failures of SCL had resulted in a turnaround whereby Budweiser had replaced MGD as market leader.

Although I recognise that an anti-competition clause of this nature may be instrumental in inducing one party to enter into a contract without this leading to the conclusion that it is not severable, if the matter is approached as a question of substance and not of form and Clause 7.1 represents an unreasonable restraint of trade, that restraint is integral to the main consideration or the whole or substantially the whole consideration for the promise of exclusive distributorship. It cannot be severed from the sole distributorship and the mutual obligations of loyalty without damaging the fundamental nature of the Agreement in its amended form.

I am therefore driven to the conclusion that if, contrary to my initial impression, Clause 7.1 is an unreasonable restraint of trade and is void, then the whole Agreement (as amended) is likewise void, since there is no possibility of severance without destroying the character of the Agreement.

It would not, in my judgment, be right to proceed on the basis of this hypothesis and to dismiss the whole claim made by McCabe on this ground when there are a range of other conclusions which the court might reach on the issues which arise in relation to Clause 7.1. Nonetheless, having reached the conclusion that McCabe has no realistic prospect of success in arguing that Clause 7.1 is severable from the rest of the Agreement, if it does offend restraint of trade principles, it is right that I should give a declaration of non-severability, the form of which can be discussed, and that, within a short period, for the effective case management of this matter, McCabe should be put to an election whether or not they wish to maintain their plea that Clause 7.1 is unenforceable.

Thus in essence SCL succeed on two out of the three applications and any costs order I make should reflect that degree of success. Issues of case management arise which should also be determined on the formal handing down of this judgment when I will deal with costs issues and give future directions although I hope that much of this can be agreed in advance by the parties.