After litigation is bought against a third party, the enforcement of a contract extending beyond reasonable bounds proves the undoing of a commercial tyre distributor, when the rules of English contract law move to narrow the scope of claim and protect those party to sub-contracts.
In 1911, the appellant tyre manufacturer set about establishing written agency distributorship agreements with a number of commercial outlets, in order to retain control over the sale value of its key products, while schedules 2 and 5 of those contracts required all participating agencies to agree that:
“(2) We will not sell or offer any Dunlop motor tyres, covers or tubes to any private customers or to any co-operative society at prices below those mentioned in the said price list…nor give to any such customer or society any…discounts or advantages reducing the same.
(5) We agree to pay to the Dunlop Pneumatic Tyre Co Ltd, the sum of 5l for each and any tyre, cover or tube sold or offered in breach of this agreement, as and by way of liquidated images and not as penalty, but without prejudice to any other rights or remedies you or the Dunlop Pneumatic Tyre Co Ltd may have hereunder.”
In exchange for this compliance, the agencies were granted a 10% discount and in some instances, annual rebates for high value orders.
On this occasion, the respondents had purchased a Dunlop tyre from an agency, who as consideration, were prevented from selling Dunlop products to any other firms or individuals for less than the standard list price.
However, they were also afforded a discretionary right to sell Dunlop products to other trade outlets at a maximum of 10% discount on the proviso that those purchasing had pre-signed a prohibitive contract similar to the one held by the agencies.
With this in mind, the respondents later sold a particular Dunlop tyre to a private customer at a seven and a half percent discount; and yet, when ordering the tyre from the agency, they were informed that no discount could be offered to the buyer without the completion of a signed price maintenance agreement (an act later executed by the respondents).
Having learned of this, the appellants sought an injunction and sued the respondents for breach of contract on grounds that the agency were acting under their principle control, therefore by selling the tyre to a prohibited party, they were liable for damages, as expressed in schedule 5 above.
In the first instance, the judge awarded in favour of the appellants, before granting the injunction as requested; while challenged in the Court of Appeal, the respondents argued that the contract between the agency and the appellants excluded the right to enforce it upon a third party, on grounds that no consideration had been given by the appellants when the price maintenance agreement was drafted between the respondents and the agency.
Having lost the appeal, the appellants pressed the issue before the House of Lords, who unanimously upheld the previous judgment, on grounds that a lack of consideration at the point the agreement was made, precluded the appellants any claim of right under English common law, while reminding the parties that:
“[O]nly a person who is a party to a contract can sue on it.”