A recent decision of the Supreme Court has shed some light on the more difficult issues that arise out of contracts which brewers commonly enter in to, specifically in relation to discounts. This raises the question as to whether an agreement, through which a penalty is applied when a minimum purchase volume is not reached, is enforceable.
Whilst the cases in point on which this decision hinged (Cavendish Square Holding BV v Talal El Makdessi and Parking Eye Limited v Beavis) relate to enforceability of parking fines, the same principle holds true for drink supply agreements.
The cases related to the situation where you buy a ticket for two hours’ parking only to find that you run over and receive a penalty notice requiring you to pay a large fine (£85 in the Parking Eye case). A huge irritation in such a scenario is that if you over stay by just one minute you receive the same penalty as the person who has overstayed by several hours.
The legal issue turned on whether this could be construed as a penalty which would be unenforceable. This is based upon a long established understanding about the unenforceability of a penalty, where the financial penalty incurred as a result of the breach of an obligation bears no relation to the loss which the innocent party suffers.
Impact for brewers
Consider the following scenarios:
- Brewer (B) enters into a contract with customer (C) for B to supply and C to purchase 500 barrels in one year. B agrees a discount at a rate of £100 per barrel provided the annual volume of 500 over the year is met. In fact, C purchases 490 barrels. The consequence is that failure to buy the shortfall of 10 barrels over the year will lead to a very substantial loss of discount (applied literally this equals £100 x 490).
- Would it make any difference if it was a condition of the agreement that the 500 barrels had to be sold in outlets operated by C? This would mean that products purchased but secondarily wholesaled would not count towards the total. Yet in such a case, the intention and the attraction for B could be the showcase and shop window for its products and, in practical terms, the exclusivity or predominance of its brands in a retail location. Does this wider objective – which goes beyond volume sales – make a difference?
- B makes a free trade loan or advance of discount to C and agrees to waive all interest and offer a discounted price if C buys 120 barrels over the course of each year. Having received a better offer, C decides to pay off the loan or AOD after 10 months. At the time of repayment C has not met the target for that year, having purchased 100 barrels. Can B charge interest (disapplying the waiver of interest) and then disallow the discount so that C pays a penal rate of interest and the list price for the product? Some brewers have adopted the practice of applying the minimum purchase obligation pro rata over the course of the year – in this case C would have met the requirement. Does B have to do this, bearing in mind C chose the moment in time when he wanted to repay the loan or AOD?
- B reaches an agreement to supply C over a period of years, with C agreeing to purchase a minimum of 500 barrels in each year, discounted at an agreed rate. Because the margins for B are thin, B will only agree to this on the basis that the contract runs for minimum period of three years. This is not unreasonable as B has some material set-up costs – particularly in relation to fonts as well as cellar and raising equipment. These are sometimes called economic viability periods. If C wants to terminate in the final year of the three years (and before the 1500 barrels have been purchased) is there any reason why B cannot disallow the agreed discount and seek compensation for the lost barrels at the undiscounted rate?
A common theme in all of these cases is the possibility that B may end up in a better position if C breaches his contract than if C abides by the letter of his agreement. This would seem to fly in the face of the principle set out above – that the innocent party should not profit from the breach.
This was, however, exactly the position of Parking Eye. The case report makes it clear that one of the two main objects of the £85 charge was to provide an income stream for Parking Eye to meet the costs of operating the parking scheme and to make a profit. This means that Parking Eye relied on breaches by customers. Inherent in this is that Parking Eye was likely to make more money as a result of customers incurring fines than if customers complied with the terms of their parking ticket.
The interesting question for brewers entering into supply agreements is whether this principle can be applied to the scenarios referred to above.
Your trading agreements
If you would like answers to your own specific situation, please call us to discuss how you could approach the drafting of your trading agreements.
Peter Holden on 0345 271 6754 or email@example.com
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.