Woolworths prevails in test of ACCC enforceable undertaking

In Woolworths Limited v About Life Pty Ltd [2017] NSWSC 1117, Woolworths tested the scope of the enforceable undertakings it, and a number of other supermarket operators, gave to the ACCC not to include, or give effect to, restrictive provisions in supermarket lease agreements. Woolworths ultimately prevailed in this case.

• clarifies what is to be regarded as a “lease agreement” for the purpose of the undertakings; and
• provides guidance on the effect of a lease agreement if there were a breach of the undertakings.

Background to the enforceable undertakings

In 2009, the Australian Competition and Consumer Commission (‘ACCC’) accepted enforceable undertakings, made in accordance with section 87B of the Competition and Consumer Act 2010 (‘the Act‘), from a number of supermarket operators, including Woolworths.

These undertakings provide that those supermarket operators would not give effect to certain defined “restrictive provisions” contained in existing “lease agreements” nor enter into new “lease agreements” containing those provisions. The intention of the ACCC was to ensure that potential competition in retail grocery markets would not be substantially lessened by supermarket operators misusing their role as “anchor tenant”.

The case

In this case, Emmet AJA held that Woolworths was entitled to restrain About Life from assigning the lease over its Double Bay premises (‘Premises‘) to Harris Farm Market Double Bay Pty Ltd (‘Harris Farm‘). This was the result of a deed between Woolworths and About Life which granted Woolworths a first right of refusal to any proposed lease of the Premises.

Background to the decision

In December 2011, Woolworths and the Council of the Municipality of Woollahra (‘Council’) entered into a deed regarding the development a new shopping centre in Double Bay, Sydney. Under this agreement, Woolworths (as tenant) would take separate leases from the Council (as landlord) over two premises where it would respectively operate a flagship supermarket and a Thomas Dux branded grocery shop.

In 2013, Woolworths elected not to establish a Thomas Dux store at the Premises and instead assigned its interest under the lease to About Life. As part of this transaction, Woolworths and About Life entered into a side deed (‘Deed‘) under which About Life granted Woolworths a first right of refusal to lease the Premises.

On 21 April 2017, About Life entered into a contract for the sale of business with Harris Farm (‘Contract‘). The Contract provided for the assignment of About Life’s lease of the Premises to Harris Farm.

In these proceedings, Woolworths sought an order restraining this assignment on the basis that it breached the first right of refusal provisions of the Deed.

Harris Farm contended that Woolworths’ first right of refusal was in breach of the undertaking and as a result was void and unenforceable.

Decision

Emmet AJA found in favour of Woolworths and gave orders restraining About Life from assigning its interest under the lease to Harris Farm. His Honour addressed two key questions relating to the undertaking:

1. Whether the first right of refusal contained in clause 2.5 of the Deed constituted a breach of the undertaking.
2. If so, whether the first right of refusal was void and unenforceable as a result.

Breach of the undertaking

His Honour held that clause 2.5 of the Deed did not breach the undertaking. The decision turned on the fact that the Deed was independent of the lease agreement over the Premises. Consequently, the undertaking did not apply to the Deed.

“Lease agreement” is defined broadly in the undertaking as:

“a contract, arrangement or understanding relating to proprietary rights in respect of supermarket space and includes without limitation letters of agreement, agreements for lease and registered leases.”

Emmet AJA, however, held that a common thread in the “restrictive provisions” listed under clause 7 of the undertaking was that they all constituted a prohibition on conduct by a lessor. In his Honour’s view, a lessor could only be a shopping centre owner, therefore, the term “lease agreement” must be understood to refer to an agreement between a lessor owner and a lessee tenant of a supermarket space.

As the Deed was between two tenants, it was not contemplated by the undertaking and clause 2.5 was therefore not a ‘restrictive provision’ as defined in the undertaking.

Potential consequences of breach

Given the above, it was unnecessary for the Court to consider this question, however, it chose to do so nonetheless. Again, Emmet AJA found in favour of Woolworths stating:

“In the present case, breach of the Enforceable Undertaking would entitle the [ACCC] to seek orders from the Federal Court in respect of the breach. That itself involves an exercise of discretion. The Federal Court then has a further discretion as to what, if any, orders should be made.”

Therefore, a breach of the undertaking would not have automatically rendered the restrictive provision void and unenforceable. Rather, section 87B of the Act confers on the ACCC the power to apply to the Federal Court for orders, if the ACCC considers a breach to have taken place. The Federal Court then has the discretion to decide what orders it wishes to give.

Observations

This decision highlights that, notwithstanding the broad drafting of the definition of “lease agreement” in the undertakings, the focus should be on a document that relates to the grant or prospective grant of proprietary rights between a landlord or potential landlord and a lessee or potential lessee. This reflects the context in which the undertakings were first obtained, with the ACCC being concerned about supermarket operators’ potential to leverage their position as a potential anchor tenant to obtain favourable restrictive provisions.

It also highlights that, even if there were a contravention of the undertaking, a lessor cannot assume that the restrictive provision is automatically void. The cause of action for breach of an undertaking rests with the ACCC, and therefore the outcome of a contravention very much depends on the ACCC’s intentions and, if enforcement action is taken, the view of the courts in the circumstances. The practical outcome may ultimately be the same, in that the supermarket operator may be ultimately restrained from relying on the provision, however that cannot be assured.

It should be noted that this case turned on its own facts and will be directly applicable to relatively few (if any) other supermarket leases in the traditional sense. However, Emmet AJA’s observations regarding the lack of immediate consequences for breaching an enforceable undertaking serve as a reminder to shopping centre owners not to agree to restrictive provisions in the expectation that, if such a provision contravenes the enforceable undertaking, it will be simply be void.

We will await to see if this decision is appealed.