UK Supreme Court narrows the scope of the restraint of trade doctrine in landmark ruling

Out-Law Analysis | 14 Oct 2020 | 10:32 am | 4 min. read

The UK's highest court has overturned a previous House of Lords ruling, deciding that the surrender of a pre-existing freedom is an acceptable criterion for engagement of the restraint of trade doctrine.

The Supreme Court was ruling in a case relating to a restrictive covenant given by the developer of a shopping centre in a lease that it granted to retailer Dunnes Stores over part of the centre.

The developer, a Mr Shortall, wanted to develop a shopping centre on land he owned in Londonderry. To assist with the success of the centre, Shortall wished to secure an ‘anchor tenant’, and so he granted a lease to Dunnes, a subsidiary in a Dublin based group of retail companies.

In the lease, Shortall covenanted that any development on the site would not contain a unit of 3,000 square feet or more whose purpose was for the sale of food or textiles. Upon agreement between the parties, the store was subsequently built and the centre opened.

Some time later, Shortall assigned his freehold interest in the land, together with the burden of the covenant to property holding company Peninsula Securities, which he managed and owned with his wife.

Over time, the success of the shopping centre declined and Peninsula brought a claim in the High Court of Northern Ireland for a ruling (among other things) that the covenant in the lease was in breach of the doctrine of restraint of trade. It said the covenant was unreasonable and therefore should not be enforced.

Cormican Deidre

Deirdre Cormican

Legal Director

Covenants containing restrictions are commonly included in the relationship between a landlord and tenant. The outcome of the case was eagerly awaited by legal practitioners and academics and the clarification provided is welcome

At first instance the trial judge, Madam Justice McBride, dismissed Peninsula's claim. She held that, following the decision of the House of Lords in the 1968 case of Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd, it was necessary, in order to determine whether the restraint of trade doctrine engaged, to ask the question as to whether Shortall or Peninsula had surrendered a “pre-existing freedom” to use the land which they had surrendered when entering into the covenant.

The trial judge held that whilst Shortall had surrendered such pre-existing freedom, Peninsula had not and therefore when Shortall assigned the lease to Peninsula, the doctrine had stopped being engaged.

Peninsula took this decision to the Court of Appeal, which allowed the appeal and held that the covenant had engaged the doctrine both before and after the assignment.

Pinsent Masons, the law firm behind Out-Law, which acted for Dunnes in both the High Court and Court of Appeal in Northern Ireland, was instructed to appeal the decision to the Supreme Court. In a unanimous judgment the Supreme Court allowed the appeal and dismissed Peninsula's common law claim.

Pre-existing freedom test

In giving the lead Supreme Court judgment, Lord Wilson, together with Lord Lloyd-Jones, Lady Arden and Lord Kitchin considered the “pre-existing freedom” test laid down by Lord Reid (and supported by the majority) in the Esso case, in light of questions of logic and public policy.

The Supreme Court held that there was no logical reason why the restraint should engage the doctrine if a covenanter enjoyed a pre-existing freedom, but an identical restraint not involving a pre-existing freedom should not. The test has also been heavily criticised and rejected by courts in Australia and parts of Canada.

In overruling the endorsement in the Esso case of the pre-existing freedom test, the panel of judges also considered an alternative test that was put forward by Lord Wilberforce, known as the “trading society” test, under which a covenant restraining the use of land does not engage the doctrine if 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”.

The Supreme Court held that whilst the "pre-existing freedom" test set down in the Esso case should be overruled, the "trading society" was consonant with the doctrine. On the facts in Esso, the trading society test meant that the restraint engaged the doctrine.

However, applying it to the facts of the present case, the Supreme Court held that it did not. It has long been accepted and normal for the grant of a lease in part of a shopping centre to include a restrictive covenant on the part of the landlord in relation to the use of other parts of the centre. It follows that the covenant in this case has at no time engaged the doctrine.

The Supreme Court also noted that Peninsula sought an alternative remedy under the Property (Northern Ireland) Order 1978, which gives the Lands Tribunal or the High Court the power to make an order modifying or extinguishing the covenant if it constitutes an impediment to the enjoyment of land. That is a more satisfactory vehicle for resolution of the issues in this case and Peninsula's claim under the Property NI Order 1978 should now proceed to be heard.

Providing a concurring judgment, Lord Carnwath agreed with the majority that the pre-existing freedom test should be discarded in favour of the trading society test and that the appeal should be allowed.

He added that the doctrine is an exception and should not be extended without good justification beyond those categories already established by the case law. The present case should be distinguished from those agreements between traders that are considered in the case law.

Rather, it concerns a transaction in land. The only trade which might be inhibited by it is that of a potential future occupier. There are no public policy reasons or legal basis for protecting that mere possibility covered by the caselaw. Lord Carnwath therefore concluded that the covenant in this case does not restrict, but rather facilitates, the developer’s business.

Covenants containing restrictions are commonly included in the relationship between a landlord and tenant. The outcome of the case was eagerly awaited by legal practitioners and academics and the clarification provided is welcome.

 Property litigation expert Deirdre Cormican of Pinsent Masons worked on the case in all three courts. Property litigation expert Meghan Kirk also contributed to this article.