MD Foods v. Baines and Others

The House of Lords held that section 9(3) of the Restrictive Trade Practices Act 1976 requires that, for the purpose of determining registrability, a term of a supply agreement which relates exclusively to goods supplied under the agreement must be disregarded in substance and not by a narrow linguistic test. The court rejected an approach which gave primacy to the precise grammatical form of a clause over the substantive scope of the restriction.

Accordingly clause 4(3) of the milk supply agreement had to be analysed by reference to the circumstances in which it could operate; the part of the clause that related exclusively to milk supplied under the agreement was to be disregarded under section 9(3), permitting the paragraph 2 exemption in Schedule 3 to apply and rendering the agreement non-registrable. The House therefore restored the judge's decision and set aside the Court of Appeal's contrary order.

Background and facts:

• Mr Andrew Baines, a milk roundsman, entered a five-year exclusive milk supply agreement with Associated Dairies Ltd (now MD Foods plc) in August 1989. The agreement required him to purchase all milk for his business from the company and contained mutual non-competition clauses. Clause 4(3) provided that, during the agreement, Mr Baines would not, except with prior written consent, sell milk by way of retail to any customers of the company.
• Due to price increases by the company, Mr Baines obtained milk from other suppliers from January 1992. The company sought and obtained interlocutory injunctive relief. One defence was that the agreement was void for non-registration under the Restrictive Trade Practices Act 1976.

Procedural history: At first instance Sir John Vinelott (Chancery Division) held that, applying section 9(3), the part of clause 4(3) relating exclusively to milk supplied under the agreement should be disregarded and that the agreement was therefore exempt under Schedule 3 paragraph 2; he declined to discharge the injunction ([1995] I.C.R. 296). The Court of Appeal ([1996] I.C.R. 183) reversed, holding the agreement registrable and ordering an enquiry as to damages. The company obtained leave to appeal to the House of Lords.

Issues:

• Whether section 9(3) applies to a clause which, in form, encompasses both goods supplied under the agreement and goods not supplied under the agreement; and
• Whether, once section 9(3) is applied, the paragraph 2 exemption in Schedule 3 operates to render the agreement non-registrable.

Reasoning and decision: The House favoured a substantive approach to section 9(3). The court concluded that “term” should be understood so as to permit disregard of the part of a contract term that relates exclusively to goods supplied under the agreement even where that obligation is expressed within a larger linguistic provision. A form-based or linguistically separable test would produce arbitrary and commercially unacceptable results and was inconsistent with the Act’s scheme. Applying section 9(3) in substance left only the element of clause 4(3) relating to goods acquired elsewhere, which fell within Schedule 3 paragraph 2 and so the agreement was not registrable. The House allowed the company's appeal, set aside the Court of Appeal order and restored the judge's order.

Wider comment: The court emphasised that the statutory test for registration must be simple and operate by reference to the substance of restrictions rather than their precise drafting; registrability should not turn on syntactical choices.

Appeal allowed. The House of Lords held that section 9(3) of the Restrictive Trade Practices Act 1976 requires that terms which relate exclusively to goods supplied under the agreement be disregarded in substance when assessing registrability; a purely form-based or linguistically separable test was rejected. Applying section 9(3) to clause 4(3) allowed Schedule 3 paragraph 2 to operate and rendered the agreement non-registrable. The House restored the judge's decision and set aside the Court of Appeal's order.

Chancery Division (Sir John Vinelott) [1995] I.C.R. 296 (judge held section 9(3) applied and the agreement was exempt under Schedule 3); Court of Appeal [1996] I.C.R. 183 (held agreement registrable and ordered enquiry as to damages); House of Lords [1997] UKHL 7 (allowing the appeal and restoring the first instance judge's order).