Irish Competition Authority Decisions

1. Notification was made to the Competition Authority with a request for a certificate, or, failing the issue of a certificate, a licence, by Irish Shell Ltd on 30 September 1992 in respect of its standard agreement of appointment and licence with licensees.

2. The Authority published notice of its intention to take a favourable decision in relation to the agreement in the Irish Times on 25 February 1994. A submission was received from the Association of Shell Retailers.

3. The decision concerns the standard appointment and licence agreement between Shell and the licensees at a number of Shell-owned petrol stations. Under the agreement, Shell appoints the licensee for the purpose of the reception, storage, dispensing and sale at the site of Shell products, and for the purpose of rendering and supplying such services and commodities as are commonly rendered and supplied at filling or service stations. The agreement provides for the exclusive sale of Shell motor fuels, on behalf of Shell, and for the payment of commission on sales to the licensee.

(b) The parties involved.

4. Irish Shell Ltd has as its ultimate parents The Royal Dutch Petroleum Company as well as The Shell Transport and Trading Company Limited. Shell is primarily involved in the marketing of motor fuels through a chain of retail outlets, most of which are owned by independent dealers, the remainder being owned by Shell. Around 20 of its company outlets are occupied by licensees who operate the station under the notified agreement. A number of outlets which also include a shop are operated by licensees under a different agreement, which is the subject of a separate notification.

5. The product with which the notified agreement is concerned consists of motor fuels, that is petrol and diesel for use in mechanically propelled road vehicles. The market was described in detail in the motor fuels category licence . [1]

6. Under the agreement, Shell appoints a person as agent and licensee for the reception, storage, dispensing and sale at a specified site of the company's products, particularly motor fuels, and generally for the purpose of rendering and supplying such other services and commodities as are commonly rendered and supplied at filling or service stations (recital (a), (d)(i)). The appointment is for a period not exceeding three years (recital (b)). Shell licenses the licensee to occupy and use the site and the equipment thereon, solely upon the conditions in the agreement ((d)(ii)). The main features of the agreement are as follows.

During the term of the Agreement, a licensee occupies and uses the site and equipment for the purpose of the reception, storage, dispensing, sale and distribution of Irish Shell's products (clause 2). A site may also be used for subsidiary and ancillary purposes provided Irish Shell gives prior written consent (clause 3).

The Agreement places certain responsibilities on the licensee:-

(a) the licensee must use the equipment solely for the reception, storage, sale and distribution by the licensee of Irish Shell's products (clause 4(a));

(b) the licensee must use its best endeavours to develop and extend the sale at the site of Irish Shell's products in such manner as Irish Shell may from time to time suggest (clause 4(b));

(c) in order to ensure the effective running of the site, the licensee must employ such staff and take all necessary measures to ensure the smooth running of the site (clause 4 (c) (i));

(d) the licensee must attend at the site for a certain period of time (clause 4(c) (ii)) and must not introduce any other equipment or vehicles onto the site (clause 4(d));

(e) the licensee must not do anything which would injure or damage the property or goodwill of Irish Shell (clause 4(e));

(f) the licensee must hold on trust for Irish Shell all monies received and lodge them to a bank account (clause 4(f));

(g) the licensee must maintain in good repair the equipment (clause 4(g));

(h) the licensee must keep records (clause 4(j));

(i) the licensee must indemnify Irish Shell against all actions and maintain adequate insurance cover (clause 4(k));

(j) the licensee must pay all charges for water, electricity, gas, telephone and other such public services and pay for stock losses above a specified level (clause 4(q));

(k) the licensee must notify Irish Shell of any change in the ownership of the licensee (clause 4(s));

(l) the licensee must sell each grade of motor fuel on behalf of Irish Shell at such price as Irish Shell may notify to the licensee from time to time (clause 4(v));

(m) the licensee must hold the proceeds of sale at its own risk (clause 4(y) but lodge as soon as may be the proceeds of sale to a bank account (clause 4(x)); and

(n) the licensee must bear the risk in respect of motor fuels (clause 4(z)).

The Agreement also places certain responsibilities on Irish Shell such as to:

(a) insure and keep insured the equipment against loss or damage (clause 5(a));

(b) repair the equipment (clause 5(b));

(c) supply the licensee with stocks of Irish Shell products (clause 5(c));

(d) pay a commission to the licensee (clause 5(d)).

The Agreement does not confer any exclusive right on the licensee to use the site or equipment, nor does it create a landlord and tenant relationship (clause 7).

7. The agreement also makes provision for termination of the agreement before it has expired, notice by the company of such termination, refusal to renew the appointment of the licensee on termination of the agreement, and for compensation and arbitration. These provisions are largely based upon the 1981 Restrictive Practices Order for motor spirits, [2] which was repealed on 30 September 1991.

8. Shell submitted the following arguments in support of its request for a certificate:

'The preamble to the Act clearly states that the Act is to be interpreted by analogy with Articles 85 and 86 of the Treaty of Rome. Article 85(1) sets out the prohibition on agreements which prevent, restrict or distort competition.

It is essential under Article 85 that there are two "undertakings" acting in concert for the prohibition to operate. Undertaking has been given a broad meaning covering virtually every natural or legal person engaging in economic activity. Notices and decisions of the European Commission and decisions of the European Court of Justice indicate that the relationship of principal and agent in its normal economic context does not breach Article 85(1) as the agent is merely an auxiliary and extension of its principal and is not an undertaking, unlike an independent trader. In Hydrotherm V Compact, the ECJ said:

"In competition law the term 'undertaking' must be understood as designating an economic unit ... even if in law that economic unit consists of several persons legal or natural."

In 1962 the European Commission issued its Notice on Exclusive Dealing Contracts with Commercial Agents ("the Notice"). [3] The purpose of the Notice is to set out the circumstances where the Commission considers Article 85(1) inapplicable to an agency contract. Certain requirements must be met in order for a contract to benefit from the Notice:-

(i) the commercial agent must not act as an independent trader during the course of commercial operations;

(ii) financial risks related to the transaction must remain with the principal;

(iii) the commercial agent must not be required to keep a large stock of contract goods as its own property;

(iv) the commercial agent must not be required to organise, maintain or ensure at his own expense a substantial service to customers free of charge; and

(v) the commercial agent may not be vested with discretion to determine prices or business terms.

The over-riding element in a positive determination of agency in the Notice is the absence of risk on the agent's part when conducting business on behalf of the principal. The European Commission's decisions in Austin Rover Group (ARG)/Unipart and Fisher-Price/Quaker Oats - Toyco illustrate the importance of this point.

However, later developments show that assumption of risk is not the only criterion to be applied in deciding whether or not Article 85(1) is applicable. In Pittsburgh Corning Europe, the European Commission held that the use of the word "agent" is not the critical factor and that economic reality took precedence over legal form especially where the so called agent was not in the position of economic dependence on the other party. In the Suiker Unie case the European Court of Justice followed this line of thinking in holding that traders who acted as agents for each other as well as principals on their own account in the same level of the sugar market could not benefit from an exemption from Article 85(1). Similarly, in VVR the Court rejected the idea that travel agents were auxiliary organs where they transacted business for a multitude of tour operators.

The European Commission published its Preliminary draft Notice on Commercial Agency Agreements ("the draft Notice") in 1990 as a first step to amending the Notice.

Under the guidelines the mere use of the label "agent" is insufficient to judge whether an exemption should apply.

In assessing the relationship the Commission will disregard the general financial risk resulting from the conduct of the intermediary under the agreement, e.g. responsibility for personnel or professional liability. Instead the risks taken into account are those connected with the performance of the transactions negotiated by the intermediary in respect of the product in question. For an exemption to apply an intermediary must not assume primary responsibility for the performance of the transactions by his principal, i.e. profit or loss resulting from the performance of these transactions must, in the first place accrue to the principal.

A genuine agency relationship will not exist where the intermediary determines the principal's product and marketing strategy. Clauses obliging an agent to negotiate or conclude transactions on behalf of his principal only at prices, terms and conditions provided by the principal or subject to approval by the principal, do not restrict competition in the context of a genuine agency relationship.

The restrictions imposed by a principal on an agent can only be justified where the agent is integrated into the distribution or purchasing system of the principal. Integration means a situation where the agent has a particularly intensive link with the principal which leads him to subordinate his interests and to dedicate his operations in the field of the product covered by the agency agreement to those of the principal and which leaves customers or suppliers with whom the agent deals not to expect autonomous commercial behaviour from the agent but to identify him with the principal.

Where the agent has interests outside the agreement with its principal which do not prevent a close identification of the agent with the principal, the concept of integration will apply.

This will only occur where the outside interests are:-

(i) limited, and

(ii) do not interfere with the subject matter of the agency agreement.

An obligation in an agency agreement on the part of the agent not to handle competing products for the duration of the agreement does not infringe Article 85(1) where it is intended to achieve integration.

It is submitted that the appointment and licence constitutes an agency relationship and does not offend against section 4(1) of the Act.

The only "undertaking" involved in the Arrangements within the meaning of section 4 of the Act is the Applicant as the Licensee is merely an auxiliary not having the status of an independent trader.

In regard to the parallel application of the Notice to section 4, clauses 4(a), 4(b), 4(f), 4(o), 4(t), 4(v) and 4(x) of the Licence prevent the Licensee from acting as an independent trader during the course of commercial operations. [4]

Recital (d) of the Licence by appointing the Licensee the Applicant's agent vests the financial risk for the sale of Motor Fuel in the principal vis a vis third parties.

The Licence provides that the Applicant is the owner of the site and Equipment (Clause 7) and accordingly the Licensee is not required to organise, maintain or ensure at its own expense a substantial service to customers free of charge.

The Licensee can not determine the price of Motor Fuel by virtue of Clause 4(v) of the Licence.

In overall terms, the Arrangements constitute an agency agreement between two parties each in different positions in the business chain. The Applicant has a turnover of [ ] and the Licensee [ ]. In terms of economic dependence the Licensee is bound to the Applicant and is incapable of influencing price or supply in the automotive fuel market. If the concept of agency defined in terms of economic dependence as set out in the European Court of Justice decisions in Pittsburgh Corning and VVR is applied to section 4(1), then it is submitted that the Arrangements do not infringe the said section.

The provisions of the draft Notice, if applied in parallel to section 4(1) of the Act, contains a number of criteria for determining whether an agency agreement is genuine and outside the scope of section 4(1).

The draft Notice considers it essential for the profit or loss resulting from the performance of the transactions with customers to accrue in the first place to the principal. The effect of Clauses 4(f) and 4(x) of the Licence requires the proceeds of sale of Motor Fuel to be lodged to the Applicant's bank account. It is only when this occurs that commission is paid to the Licensee.

The draft Notice does not envisage exemption of an agreement from the competition rules where the intermediary can determine the principal's product and marketing strategy. Under the Licence the Applicant determines the range of products for which the Licensee acts as agent and the Applicant outlines the marketing strategy (Clause 4(b)).

Clauses obliging an agent to negotiate or conclude transactions on behalf of its principal only at prices, terms and conditions provided by the principal and subject to approval by the principal, do not restrict competition in the context of a genuine agency relationship. This is clearly the situation under the Licence, for example, see Clauses 4(v) and 4(w).

One of the critical factors in the draft Notice for determining the competitive effect of an agreement is the concept of integration. Clause 4(a) of the Licence obliges the Licensee to use the Equipment on the Site solely for reception, storage, sale and distribution of the Company's products. This accords with the idea of dedicating operations to the sale of one particular brand.

For the reasons outlined above and by analogy with European Community Law, it is submitted that the Licence does not infringe section 4(1) of the Act'. Shell also submitted arguments in support of the grant of a licence which are not relevant to this decision and are not considered here.

9. The Association of Shell Retailers responded to the notice of intention. It claimed that its members were unable to confirm whether Shell regarded them as lessees, licensees, agents, partners or employees. While Shell might have notified a standard licence agreement, they believed that Shell were applying dissimilar conditions, in prices for example, which were not based on objective criteria. It claimed that Shell had the ability and were becoming more powerful to direct customers to particular sites. The Authority has taken account of the Association's comments insofar as they are relevant to the notified agreement.

10. Section 4(1) of the Competition Act, l99l prohibits and renders void all agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State.

11. Shell and the licensees are engaged in the sale of motor fuels for gain, and they are therefore undertakings within the meaning of Section 3(1) of the Competition Act. The Authority does not accept the argument of Shell that an agent is not an undertaking, or that there is any EC precedent for this view. In particular, neither the l962 Notice, nor its draft revision, states that an agent is not an undertaking, and this is not the reason for regarding an agreement between a principal and an agent as not being in breach of Article 85(1). The position is similar to that of a parent firm and a subsidiary, where the EC Commission has held that both are undertakings, even though a restrictive agreement between them may not infringe Article 85(1). A similar view has been taken by the Authority in its decision in AGF-Irish Life [5]. The standard licensee agreement is an agreement between undertakings. The relevant product market is that for motor fuels. The relevant geographic market is the State.

12. In operating the petrol station premises and selling motor fuels, the licensee is not an employee of Shell and there is no contract of employment or service between them. He is a self-employed contractor. At the same time, the licensee does not purchase motor fuels from Shell for resale to the public. Unlike the Shell independent dealer, the licensee sells motor fuel, not on his own account, but on behalf of Shell. He does not pay for the motor fuels, and the motor fuels remain the property of Shell until they are sold at retail, even though they are held at the licensee's risk. All receipts from the sale of motor fuels must be lodged to Shell's bank account. Out of his commission, the licensee must pay for certain outgoings, such as labour, insurance and other costs, the balance representing the licensee's remuneration. The licensee is responsible for employing staff. Shell determines the prices at which the motor fuels are to be sold. The petrol station is effectively under the operational control and direction of Shell, and is operated for Shell's own account, and the licensee is obliged to obey Shell's instructions. The relationship between Shell and the licensee is an ongoing one, and the agreement may have a duration of up to three years.

13. The Authority considers that the question of agency is quite complex, and that each case must be examined on its own merits in relation to the Competition Act, in the light of certain general considerations. In the first place, it is not relevant that one party is referred to as an 'agent' in the agreement, since he may not perform the functions of an agent in any real sense. Conversely, it does not matter if the agreement states that there is no relationship or contract of agency between the parties. This may be done, for example, to ensure that one party is not empowered to undertake binding obligations on behalf of the other, without the latter's knowledge or consent. From the point of view of the Competition Act, the Authority is concerned with whether the relationship between the two parties is such that one of them may be termed a 'commercial agent' of the other. It is not intended that the views of the Authority about whether a person is commercial agent or not should have any implications for the legal relationship between the parties.

14. The Authority considers that a commercial agent is a self-employed intermediary between the principal and a purchaser or seller. The commercial agent concludes the sale or purchase of goods and services on behalf of the principal, on a continuing basis. The commercial agent is an auxiliary organ, forming an integral part of the principal's business, and is bound to carry out the instructions of the principal, and his position is similar to that of an employee. Being integrated into the principal's business, the commercial agent can undertake no autonomous commercial behaviour, under the agreement, and certain restrictions on him are fundamental to the relationship. The Authority considers that profits or losses essentially accrue to the principal and not to the commercial agent.

15. The relationship between Shell and its licensees has been summarised in para. 12. Shell has argued that the licensee is an auxiliary and that the agreement does not offend against Section 4(1).

16. The licensee is a self-employed intermediary between Shell and the purchasers of Shell motor fuels. He concludes the sale of goods on behalf of Shell, on a continuing basis, for up to three years. He does not own the stocks, the resale prices are set by Shell, and the licensee lodges the proceeds of sale to the credit of Shell's bank account. While the licensee accepts some risk, in relation to stock losses, and is responsible for hiring and paying employees, the profits and losses of the motor fuels business as a whole accrue to Shell, and the licensee must obey Shell's instructions and may undertake no autonomous behaviour in respect of the operation of the petrol station. The Authority considers that the licensee, in operating the petrol station and selling Shell products, is an auxiliary organ, forming an integral part of Shell's distribution business, and it concludes that he can be considered to be a commercial agent.

17. The Authority considers that undertakings are entitled to decide how to operate their distribution systems, and, in particular, to appoint commercial agents to sell their goods on their behalf. Suppliers of motor fuels are free to choose to sell their products through independent dealers or through company-owned outlets; these latter may be operated by lessees, licensees, employees or by consignees and commercial agents. Since the commercial agent is an auxiliary organ, similar to an employee, the agreement between a principal and a commercial agent does not, in principle, offend against Section 4(1) of the Competition Act.

18. In the present case, the Authority has concluded that the licensee is a commercial agent. It considers that the agreement between Shell and the licensee, insofar as it creates a relationship between the principal and a commercial agent, does not offend against Section 4(1).

19. Even though the basic arrangement of commercial agency might not offend against Section 4(1), certain clauses in the agreement might occasionally do so. In the case of motor fuels agreements, the Authority has published a category licence, which permits the imposition of certain obligations upon resellers of motor fuels and upon their suppliers. The Authority considers that the obligations which are not regarded as offending against Section 4(1) in the case of independent traders would equally not offend in the case of commercial agents. More fundamentally, the Authority recognises that there are certain features of commercial agency agreements which define and confirm the relationship, and are intrinsic to the commercial agency. Since the commercial agent is closer to being an employee than an independent trader, the Authority considers that certain restrictions may be imposed upon a commercial agent without offending against Section 4(1), whereas they would offend against Section 4(1) if they were imposed on an independent trader. In the Authority's opinion, none of the provisions in the notified agreement offend against Section 4(1).

20. In the Authority's opinion, Shell and its licensees are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified standard licensee agreement for the operation of a Shell-owned petrol station constitutes an agreement between undertakings. In the Authority's opinion, the licensee is a commercial agent of Shell, and the arrangements do not have, as their object or effect, the prevention, restriction or distortion of competition. The standard Shell licensee agreement does not, in the Authority's opinion, offend against Section 4(1) of the Competition Act, l99l.

The Competition Authority has issued the following certificate;

The Competition Authority certifies that in its opinion, on the basis of the facts in its possession, the standard agreement between Shell and its licensees for the operation of a Shell-owned petrol station (notification no CA/261/92E), notified on 30 September l992, under Section 7, does not offend against Section 4(1) of the Competition Act, l99l.

For the Competition Authority

Patrick M. Lyons

Chairman

5 May 1994