Irish Competition Authority Decisions

1. Notification was made to the Competition Authority with a request for a licence by Artane Service Station Ltd on 22 September 1992 in respect of its standard agreement with contractors. On 23 February 1994, the notification was amended for the purposes of obtaining a certificate or, in the event of a refusal by the Authority to issue a certificate, a licence.

2. The Authority published notice of its intention to take a favourable decision in relation to the agreement in The Irish Times on 15 April 1994. No submissions were received from interested parties.

3. The decision concerns the standard contractor agreement between Artane Service Station and the contractors at a number of Esso-owned petrol stations. The contractor agreement provides for engaging the services of an independent contractor to carry on the operation of a service station on behalf of Artane, which leases the service station from Esso Ireland Ltd. It provides for the exclusive sale by the contractor of petroleum products and other goods which are the property of the company, and the contractor is remunerated on a commission basis related to the sales and profitability of the station. The other goods are sold in a convenience grocery shop which is situated on the petrol station premises.

4. Artane Service Station Ltd is a wholly owned subsidiary of Esso Ireland Ltd, and is primarily involved in the marketing of motor fuels through the Esso chain of company owned service stations. Esso Ireland Ltd is one of the major suppliers of motor fuels in the State. It is a wholly owned subsidiary of the Exxon Corporation of the USA. Esso is primarily involved in the marketing of petroleum products to the motoring public through a chain of retail outlets, most of which are owned by independent dealers, the remainder being owned by Esso. Artane occupies 41 Esso company stations under a tenancy agreement with Esso, these being the stations with a substantial volume potential. Each station is managed by an independent person referred to as a 'contractor' who is engaged by Artane, and who sells motor fuels for Artane's account.

5. The product with which the main part of 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. The convenience shop primarily sells grocery goods, confectionery, newspapers, cigarettes, etc. The market consists of all retail outlets selling goods of a similar character.

7. The introduction to the agreement between Artane and the contractor states that Artane is the legal occupier of the specified service station and is desirous of engaging the services of an independent contractor to carry on the operation of the business on its behalf, but so that the contractor shall in no way be regarded as an employee of Artane. The appointment is evergreen, but may be terminated subject to certain conditions.

Clause 1 states that the contractor is to be remunerated on a commission basis, and it provides that:

'The Contractor must at all times ensure the proper operation of the business at the Service Station and in this regard his duties may be delegated by him to other persons and for such time as Artane shall first approve. The Contractor may not carry on any business on or from the premises other than as Contractor for Artane in accordance with this Agreement'.

Clause 2 obliges the contractor to maintain a bank account in his name through which he will transact all business expenditures. The contractor must allow Artane to inspect his books and records.

8. Clause 3 provides for accounts between Artane and the contractor, as follows:

A. The Contractor shall lodge to the credit of Artanes' Bank Account the gross receipts received at the Service Station less cash payments authorised by Artane in accordance with the terms of this Agreement......

B. The Contractor shall be responsible for all expenses incurred in the operation of the Service Station except payments in respect of rates and such other items as are the liability of Artane as the legal occupier of the site.

Artane may at any time measure and check the stocks of all products kept at the Service Station. In the absence of any negligent act or omission of the Contractor or his staff, Artane will bear the cost of any motor fuels, monies, property and equipment belonging to Artane which are lost......

C. The Contractor shall during the currency of this Agreement furnish an invoice to Artane in respect of his monthly operating costs hereunder.....

D. The Contractor shall keep proper books of account relating to the operation of the Service Station.

E. Artane will calculate the Contractor's commission in the terms of this Agreement as soon as possible following the calendar month end and will submit to the Contractor a statement of account......

9. Clause 5 requires the contractor to pay the insurance costs discharged by Artane on his behalf.

Clause 6 provides for the operation of the service station, as follows:

The Contractor shall employ persons of such a quality as to ensure a service of the highest standard. Such persons being employees of the Contractor, are subject to the Contractors control and direction and the Contractors shall be fully responsible for their acts or omissions and for any losses or damages resulting therefrom.

10. Under Clause 7A Artane and the Contractor may terminate the agreement at any time upon giving the specified period of notice. The rest of Clause 7 provides for the termination of the agreement without notice by Artane in the event of certain occurrences and provides for the contractor to leave the service station. It also provides for the payment of compensation if Artane terminates the agreement for reasons other than those stated, and for arbitration in case of dispute. These provisions are largely based upon the 1981 Restrictive Practices Order for motor spirits [2], which was repealed on 30 September 1991.

11. Clause 8 provides for extended sick leave of the contractor, and Clause 10 states that:

The Contractor shall not during the period of this Agreement or during the period of six months after the termination hereof for any reason whatsoever be associated whether as principal or agent or employee in the business of retail sales of petroleum products within a radius of three miles of the Service Station without the prior written consent of Artane.

Under Clause 11:

This Agreement may not be assigned or transferred by the Contractor without the prior consent in writing of Artane. In the event of Artane not consenting to assignment or transfer of this Agreement no reason shall be furnished by Artane.

12. The First Schedule refers to products for resale, as follows:

(i) Deliveries of motor fuels, and other products as shall be made by Esso Ireland Limited ("Esso") and other named suppliers to the Service Station during normal hours of operation and in such quantities as to ensure that adequate supplies of product are available to meet the normal requirements of the Service Station.

(ii) The Contractor shall sell those grades of motor fuels, and other products specified at prices notified by Artane to the Contractor from time to time. Where selling prices are not notified by Artane to the agent the Contractor shall sell products only at the suppliers recommended retail prices.

(iii) No other product (petroleum or otherwise) or services whatsoever other than those supplied or approved by Artane shall be stored handled sold or distributed on or from the Service Station without the previous written consent of Artane.

The named supplier in (i) is a supplier named and authorised by Artane for the supply of goods to the service station.

13. The Second Schedule provides for insurance. Artane is responsible for the insurance of buildings, plant and equipment, public liability, and engineering. The contractor is liable for employer's liability, personal accident for the contractor, and for other persons undertaking duties connected with the business.

14. The Fourth Schedule specifies the rates of commission to be paid to the contractor in respect of the sales of motor fuels and other products and the turnover from the car wash with an allowance based on the image and appearance of the service station.

15. Artane made a number of submissions in respect of its request for a licence to be granted for the contractor agreements, but these are not considered here.

16. In response to a letter from the Authority on 23 November 1992, Esso made the following submission on 25 August 1993:

'It is submitted that notwithstanding that Section 4(1) of the Competition Act is based upon Article 85(1) of the Treaty Irish Competition Law stands alone and independent from E.C. Regulations and Decisions. The agreement the subject of the notification does not affect trade between Member States.

The Authority did not regard, in our clients' view correctly, our clients exclusive purchasing agreements as a category of agreements exempted by E.C. Regulation 1984/83 being the Block Exemption relating to such agreements.

Our clients submit that these agreements must be considered in the construction of the Competition Act and while E.C. Regulations and Decision may give guidance, they need not necessarily be followed where trade between Member States is not involved.

Our clients contend that the definition of "undertaking" in the Act does not by itself exclude a commercial agent and the test is whether both parties to the agreement are engaged for gain in the production, supply or distribution of goods.

The agreements are between Artane Service Station Limited and the Contractor.

We presume it is accepted that our clients are so engaged.

Our clients contend that the Contractor who is a commercial agent and not an employee, is also so engaged.

Notwithstanding that the Contractor does not keep a stock of his own and may deal in products supplied or approved by Artane only and he must sell the goods at prices specified by Artane, he is engaged in the business of operating and managing the business for his own benefit. He is responsible for operating expenses incurred in excess of such expenses approved by Artane and by promoting and fostering the business at the Service Station he is able to increase the commission earned. He is also able to increase his earnings by savings in the standard operating costs agreed with Artane. He is also able to conserve his commission by not allowing the operating costs exceed the amount allowed by Artane for such costs.

The Contractor is in control of the business of operating the Service Station by selling the goods of Artane to his best possible advantage by increasing sales and reducing operating expenses thereby increasing his earnings by increased commission on sales and by a surplus on the standard operating expenses allowed by Artane.

The Contractor accordingly benefits directly from any increase in the business and savings in the operating costs and is pursuing his own economic interests.

It is submitted that on these facts the Contractor is engaged for gain in the distribution of goods though such goods may not be his own property'.

17. In response to a further letter from the Authority on 8 September, Esso stated, in a letter of 25 November, that they confirmed that all goods for resale at the service station, including the convenience shop, were purchased and sold for the account of Artane, and not for the account of the contractor. In the absence of a specific instruction from Artane, goods were to be sold at the supplier's recommended retail price so that, in the absence of a specific instruction, the contractor was aware of the approved resale price. They emphasised that this provision was seldom used and the notified resale prices were determined in accordance with competition in the locality of each service station.

18. In response to another letter from the Authority on 11 February 1994, concerning the post-termination non-compete provision in clause 10 of the agreement, Esso suggested that the contractors were commercial agents, and not exclusive distributors or employees. They also stated as follows:

"In the case of the notified agreement the Contractor does not place his capital at risk as Artane provides the service station, the retail shop and also the motor fuels and shop products for resale. Artane accordingly risks a loss of its considerable investment in the business in the event that the Contractor sets up a similar business immediately upon termination of the Agreement and within the same locality. The Contractor by reason of being entrusted with the operation and management of the business for his own benefit creates, particularly if he is successful, a personal reputation with the customers. The post-termination non-compete clause which is for a period of 6 months and within a radius of three miles of the service station is not unduly restrictive on the Contractor and it gives Artane the opportunity of enabling the new Contractor to establish a reputation with the customers."

Esso submitted that the situation was similar to the protection which might be reasonably required by a purchaser of a business, and that this clause did not offend against Section 4(1).

19. The EC Commission first gave its views on exclusive dealing contracts with commercial agents in a Notice published in l962 [3]. In this it stated that it considered that contracts made with commercial agents, who acted on behalf of an enterprise, did not fall under the prohibition in Article 85(1) of the EC Treaty. It was essential that the commercial agent should not engage in activities proper to an independent trader. The decisive criterion, according to the Commission, was that the commercial agent should not assume any risk resulting from the transaction.

20. It has long been recognised, by the Commission and others, however, that the l962 Notice is limited in scope, and that it no longer reflects economic reality and is also legally obsolete. It also needed revision in the light of the 1986 harmonisation Directive relating to self-employed commercial agents [4]. The Commission has been preparing, therefore, a revised Notice on commercial agents, which has not yet been finalised.

21. The EC Court of Justice considered the question of agency in the Suiker Unie case, where it stated:

'If such an agent works for his principal he can in principle be regarded as an auxiliary organ forming an integral part of the latter's undertaking bound to carry out the principal's instructions and thus, like a commercial employee, forms an economic unit with this undertaking' [5].

22. 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.

23. Artane and the contractors are engaged in the sale of motor fuels for gain, and they are also engaged in the sale of other products for gain, and they are therefore undertakings within the meaning of Section 3(1) of the Competition Act. The standard contractor agreement is an agreement between undertakings. The relevant product markets are those for (a) motor fuels, and (b) the products sold in the shop on the petrol station premises. The relevant geographic market is the State.

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

25. The position is the same in respect of the operation of the convenience shop. The other goods are purchased and resold for Artane's account, at prices determined by Artane. Gross receipts, less authorised cash payments, are paid into Artane's bank account. While the contractor is responsible for employing and paying staff, the shop is under the operational control and direction of Artane. The relationship is ongoing, and lasts as long as the contractor operates the petrol station.

26. 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 conclusive 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 a commercial agent or not should have any implications for the legal relationship between the parties.

27. 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 in this respect 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.

28. The relationship between Artane and its contractors has been summarised in paras. 24 and 25. The agreement also states that there is no contract of employment between the parties. Artane has argued that the contractor is a commercial agent.

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

30. 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.

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

32. 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 to being 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, whether relating to the petrol station or to the convenience shop, offend against Section 4(1).

33. The Authority, however, had some initial concerns in respect of the provision preventing the contractor from being engaged in the sale of petroleum products (but not other products), for a period of six months after the agreement terminates, within a radius of three miles of the petrol station. The Authority has tended to oppose the imposition of post-termination non-compete clauses in exclusive dealing agreements. They are not permitted under Article 5(f) of the motor fuels category licence, nor under Article 3(i) of the exclusive distribution category licence [6]. The Authority has indicated that such clauses in employment contracts would offend against Section 4(1) where the former employee attempted to set up in business in competition with the former employer [7]. In the case of a sale of business, however, the Authority has accepted that a post-termination non-competition clause is essential to ensure the transfer of the goodwill. Provided that it is limited in terms of duration, geographic coverage and subject matter to what is necessary to ensure the transfer of the goodwill, such a clause would not offend against Section 4(1). In General Semiconductor, the Authority considered that a restriction of two years would generally be regarded as being sufficient for the complete transfer of the goodwill of a business [8].

34. The notified agreement is not an exclusive dealing agreement under the terms of the two category licences mentioned above, nor is it an employment contract. It is clearly not an agreement for the sale of business. At the same time, the Authority recognises that Esso is the owner of the petrol station, and it has invested a very large amount of money in the station. It also has a special relationship of commercial agency with the contractor. While the location of a petrol station is extremely important in securing sales of petrol, the operator can also have an influence in attracting customers. If the Esso contractor were permitted to be involved in the petrol business after his contract terminated in a station close to the one which he operated, he could initially attract a significant amount of custom away from the former station, thus having a significant adverse effect on the Esso investment. The Authority is aware that the EU Directive on commercial agents provides that, where a commercial agent is entitled to an indemnity after termination of the agency contract, there may be a ´restraint of trade clause'. Such a clause is valid so long as it relates to the geographical area or the group of customers and the geographical area entrusted to the agent and to the kind of goods covered by his agency, and provided it extends for not more than two years after termination of the contract.

35. In the Esso contractor agreement, the non-compete clause is limited to motor fuels (and does not cover shop products), it is confined to an area within a three-mile radius of the Esso station, and it is for a period of six months after termination. The agreement provides for the payment of compensation to the contractor if the agreement is terminated by Artane for reasons other than those stated in the agreement. Only a relatively small number of persons are affected by this non-compete clause. The former contractor can enter into competition with Esso for the sale of motor fuels immediately after termination of the agreement outside the three mile radius from the original station, and after six months within this area. In all the circumstances, the Authority concludes that this clause does not offend against Section 4(1) of the Act.

36. In the Authority's opinion, Artane and its contractors are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified standard contractor agreement for the operation of an Esso-owned petrol station and convenience shop constitutes an agreement between undertakings. In the Authority's opinion, the contractor is a commercial agent of Artane in both the service station and the convenience shop, and the arrangements do not have, as their object or affect, the prevention, restriction or distortion of competition. The standard Artane contractor 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 Artane and its contractors for the operation of an Artane-owned petrol station and convenience shop (notification no. CA/101/92E), notified on 22 September, l992 under Section 7, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick M. Lyons

Chairman.

19 May 1994