Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd

133 CLR 288
1 ALR 385

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(Decision by: Menzies J)

Amoco Australia Pty Ltd
v Rocca Bros Motor Engineering Co Pty Ltd

Court:

Judges: McTiernan ACJ
Menzies J
Walsh J
Gibbs J
Stephen J

Subject References:
Trade practices
Restraint of trade
Exclusive supply agreement
Whether restraint reasonable

Hearing date: ADELAIDE 25 September 1972; 28 September 1972
Judgment date: 11 October 1973

Melbourne

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Decision by:
Menzies J

The judgment appealed against is one whereby the Full Court of the Supreme Court of South Australia reversed a decision of Wells J. to the effect that a restraint of trade in favour of the appellant ("Amoco") accepted by the respondent ("Rocca") was reasonable. His Honour granted injunctions enforcing this restraint.

The restraint in question is one of a common kind, i.e., to ensure that the oil products of one company should for a term, be the only products supplied from the service station of another company. Amoco is a supplier of petroleum products; Rocca is the owner of a service station. At the time when the preliminary agreement was made, Amoco-a United States company-was endeavouring to establish itself in Australia and Rocca was in a position to become the owner of a piece of land suitable for a service station at Para Hills, a district outside Adelaide which was then about to be developed as a suburb. The restraint actually in question was effected by means of provisions in an underlease. Rocca, as owner, leased the site to Amoco for a term of fifteen years. Amoco granted Rocca an underlease for the same term less one day. The essence of the restraint was that Rocca would purchase from Amoco at a fixed rebate on current prices its full requirements of petrol and oil for sale at the service station and would not, except in special circumstances, sell at that service station the products of any other oil company. There were other less important stipulations relating, inter alia, to the times and manner of the operation of the service station and the payment of accounts. There was also a limitation in relation to assignment. All these were in favour of Amoco. Amoco, for its part, undertook to pay for certain work at the service station and to lend Rocca plant and equipment for its operation. When the station was ready to be opened in December 1964, Amoco had spent about $7,000 upon it. Later, further money was spent. Although the original agreement had been completed by June 1964, the lease and the underlease were not executed until May 1966. The term of the lease was fifteen years from 30th November 1964. In September 1969, the parties executed extensions of the lease and underlease for an additional five years. The consideration of Rocca agreeing to this extension was that Amoco should pay for certain further improvements to the service station and should increase the amount of the rebate for the extended term. In all, Amoco spent about $19,000 upon Rocca's garage.

In 1971, Rocca wanted to re-negotiate these arrangements with Amoco. When Amoco refused to do this, Rocca started negotiations with another oil company, I.O.C. Australia Pty Ltd (I.O.C.). On 12th November 1971, Rocca ordered Amoco to remove some of the equipment that it had installed at the service station. When Amoco did not comply with these demands, Rocca began itself to remove the petrol pumps and illuminated sign, and to replace them with I.O.C. equipment. Amoco thereupon commenced proceedings in the Supreme Court and obtained interlocutory injunctions.

An order was then made for a trial without pleadings of certain issues. These issues were:

"1.

Is the defendant entitled to assert that the covenants contained in Memorandum of Underlease no. 2775160 or any of them are in restraint of trade, and unenforceable?

2.

Are the covenants contained in Memorandum of Underlease no. 2775160 or any of them an unreasonable restraint of trade and unenforceable?

3.

If the covenants in Memorandum of Underlease no. 2775160 or any of them are unenforceable is the whole of the said Memorandum of Underlease void?

4.

If the said Memorandum of Underlease is void is Memorandum of Lease no. 2775159 also void?

5.

All questions of consequential relief for either party arising from the resolution of the above issues shall be deferred for later consideration."

The learned trial judge determined the second issue in the negative upon the basis that the first issue should be answered in the affirmative.

The Full Court was of the opinion that both issues should have been determined in the affirmative. Upon this appeal it was argued for the appellant that the Full Court was wrong in its determination of both issues.

The contention that the first issue should have been answered in the negative was based principally upon the submission that the doctrine of unlawful restraint of trade did not apply to restrictions contained in the underlease from Amoco to Rocca simply because it was in a lease restricting the use of leased premises rather than the activities of a trader. The argument was based principally upon the judgment of the Court of Appeal in Cleveland Petroleum Co Ltd v Dartstone Ltd ^[F1] . It seems to me that the basis of that decision was that a person who was out of possession of premises and who was let into possession of premises by an oil company on its terms, i.e., to tie himself to that company for supplies, cannot rely upon the doctrine of restraint of trade. This conclusion was supported, so the Court of Appeal found by what was said by three members of the House of Lords in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd ^[F2] . In the circumstances here as stated, it would, however, be artificial to conclude that it was Amoco that let Rocca into possession of the service station. The service station was erected by Rocca upon land to which Rocca was entitled. Rocca, in the course of negotiations, had refused to sell the land to Amoco. The lease and the underlease were in no way a sham, but it would be wrong merely to look at the underlease as a source of Rocca obtaining possession of the land. At the beginning of the negotiations, Rocca owned the land and was entitled to possession of it. Once the lease and the underlease had been given, it is true in a sense that Rocca's possession was as under-lessee, but the substance of the matter is that Rocca, by granting a lease and taking an underlease, did not acquire possession of land. It was never out of possession of its land. The lease and the underlease were merely the machinery whereby the parties effected their purpose of arranging for the supply of petrol to a service station with a tie in favour of the supplier. This tie restricted Rocca in its trading upon its land.

Accordingly, it is not necessary to determine whether Cleveland Petroleum Co Ltd v Dartstone Ltd ^[F3] is a correct application of what was said in the House of Lords in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd ^[F4] . Nor do I think that the doctrine based upon public policy which requires a restraint of trade to be reasonable can have no application where the covenant in restraint of trade is given by someone starting a new business in relation to future trading. In Queensland Co-operative Milling Association Ltd v Pamag Pty Ltd ^[F5] a covenant given in such circumstances was subjected to the test of reasonableness.

In my opinion, the first issue was rightly determined in the affirmative, and the tie to be enforceable must be found to have been reasonable in the circumstances.

In the course of a very full, learned and powerful judgment, his Honour, the learned trial judge, reviewed the law relating to restraint of trade since Mitchel v Reynolds ^[F6] , and set out the principles which he extracted from the review of authorities in a number of propositions. The law, which he so stated, he applied to the facts which he found in careful detail to conclude that the restrictions to be found in the underlease did not constitute an unlawful restraint of trade because, upon the whole, they were reasonable both as between the parties and as between the parties and the public. His Honour's judgment was, no doubt, intended as an application of the following statement from Mitchel v Reynolds ^[F7] :

"In all restraints of trade, where nothing more appears, the law presumes them bad; but if the circumstances are set forth, that presumption is excluded, and the Court is to judge of those circumstances, and determine accordingly; and if upon them it appears to be a just and honest contract, it ought to be maintained."

The Full Court reversed the decision not, as I understand it, because of any error by the learned trial judge in the formulation of the law which he applied, but because the Full Court came to a different conclusion upon the question whether the restraints were reasonable.

It was the basis of the decision of the trial judge that when parties negotiate a commercial arrangement from positions where one does not have the other at an unfair advantage and do, after hard bargaining, reach an agreement which each finds in its interests to accept, the Court will not readily find that their bargain is unreasonable as between themselves, notwithstanding the well-established policy of the law against restraints of trade. The course of his Honour's reasoning was the same as that stated persuasively by Ungoed-Thomas J. in Texaco Ltd v Mulberry Filling Station Ltd ^[F8] where another petrol tie was under consideration. In 1963, Rocca could and did freely negotiate for a supply of petroleum products for the service station which it desired to establish and after contact with at least one other supplier of petrol made the best bargain that it could at a time when there was competition among oil companies to secure solus outlets and, at a time when Amoco was in a disadvantageous position vis-a-vis its competitors in that it had only entered the Australian market in 1961. His Honour altogether rejected the suggestion that Rocca had been in any sense overborne into making an agreement to its disadvantage. His view was that Rocca had itself driven a hard bargain and had won the acceptance of favourable conditions which it required. His Honour accordingly weighed the advantages that Rocca had obtained against the disadvantage it suffered by tying itself to Amoco for fifteen years.

I agree entirely with his Honour's approach to this problem of reasonableness as between the two parties, and consider that, despite the severe restrictions which Rocca accepted-restrictions which the Full Court regarded as unnecessary and harsh-there was not, applying Edwards v Noble ^[F9] , sufficient to warrant interference with the conclusion that the learned trial judge reached. For my own part, I regard it as a circumstance of considerable weight that five years after making the original arrangement and with the experience of its working during that time, Rocca should, in 1969, in consideration of Amoco paying for further work at the service station and increasing the rebate, have agreed to extend the terms of the lease and underlease for a period of five years. This hardly suggests that Rocca, having agreed to a term of fifteen years, considered itself to be thereby the victim of an unreasonable restraint of trade. The members of the Full Court did direct criticism to the use that his Honour made of certain evidence tendered by Amoco to show that a tie of fifteen years would do no more than provide it reasonable protection for its legitimate interests, i.e., the protection of its distributing system based upon a number of assured outlets. I think that his Honour gave expert evidence on this point more attention than I would have had I been trying the case, but this was but one matter which he took into account in reaching his conclusion. The Full Court did emphasize that a restraint cannot be justified simply as a means of maintaining a favourable competitive position. That is the law but it must, I think, be recognized that every restraint which has been upheld has afforded some measure of protection against competition, and the presence of this element does not spell invalidity. Surely it would not be an unlawful restraint of trade for the owner of an actually established service station to stipulate with its sole supplier that it would not for some substantial period of time during its contract, supply another station within the same locality. Such a restriction would, of course, be little more than protection against competition, even if it were to be expressed as the protection of an investment in the service station. Again, where solus agreements have been sustained, their effect has been as a protection against competitors notwithstanding that it can be expressed as a protection of the supplier's outlets. To pronounce and apply a dictum in favour of unlimited competition hardly determines whether or not a particular restriction is reasonable or unreasonable.

To the members of the Full Court the critical matter was the period of the tie, and it was thought that fifteen years was too long to be reasonable. It is not possible, however, as a matter of law to fix some maximum length of time as the period within which a restriction may be regarded as reasonable. What seems to me of vital importance is what the person who accepts the tie expects to gain by doing so. Indeed, the real problem for a court is to weigh the advantages and disadvantages as they must have appeared to those who entered with their eyes open into the commercial arrangements involving restrictions upon future trading. The decision is one of mixed fact and law to be decided upon all the circumstances of the particular case. Here, the trial judge found that Rocca not only made the best bargain that it could to obtain a supply of petrol for the service station which it was minded to establish, but that the bargain which was made-including the provisions which members of the Full Court regarded as unnecessary and harsh-was as a whole fair to both sides. In doing so, he did not suggest that like restrictions would be reasonable in other cases; his decision was simply that taking the agreement as a whole the restrictions were reasonable in this case. In my opinion, the Full Court ought not to have substituted its own opinion for that of the learned trial judge as to these matters.

In dealing with the issue whether the restraint was injurious to the interests of the public, his Honour quite properly laid stress upon the interest of the public in the carrying out of commercial arrangements entered into freely by parties who may be trusted to see and appreciate their own interests. His Honour took into account the consequence of destroying a commercial contract under which the party who was rejecting it had taken substantial benefits both at the time of making the contract and over a period of years subsequently.

It is a matter of common knowledge that over the past fifteen years, the selling of petroleum products to the public has been through service stations operating in one way or another under solus agreements with suppliers. The restrictions that are implicit in such a system of trading are an accepted element of commercial life. The law recognizes this, and in any particular case, the essence of the problem is to decide whether or not particular restrictions are reasonable in all the circumstances, taking into account the interests of the public. What is reasonable, taking the interests of the public into account as well as the interests of the parties, is not injurious to the public.

The cases show that it has become a matter for judgment after weighing the relative advantages and disadvantages of what has been agreed to decide whether a trade tie is reasonable in the sense already indicated. This, despite the differences that are apparent in the speeches of the members of the House of Lords in the Esso Case ^[F10] is the essence of the decision in that case upholding one tie and condemning the other. Once this position has been reached, it seems to me that a great regard should be accorded to the judgment of a trial judge who has, without error of law, applied his mind after a careful review of the facts to the correct question. The judgment of the learned trial judge in this case is, to my mind, an excellent instance of the application of the right judicial method, viz., the application of the relevant law formulated clearly, and, as I think, correctly, to a carefully found factual situation. The Full Court, nevertheless, for reasons which seemed good to it, decided that the primary judge was in error in his assessment of that situation. I, with respect, do not share this view and would allow the appeal and restore the judgment of Wells J.