Irish Competition Authority Decisions

1. Notification was made to the Competition Authority on 12 May 1995 of two standard form agreements, one regarding a hire purchase loan in respect of equipment supplied by Burmah Castrol (Ireland) Ltd to purchasers of its lubricating oils and the other regarding the loan of equipment. The notifications requested certificates under Section 4(4) of the Competition Act, 1991, or, in the event of a refusal by the Competition Authority to issue certificates, licences under Section 4(2).

2. These notifications relate to standard form agreements concerning the supplying of lubricating oil equipment on hire purchase terms and the loan of lubricating oil equipment by Burmah Castrol (Ireland) Ltd to certain resellers of lubricating oils. These agreements replace agreements which were notified to the Authority on 8 June 1992 (notifications nos. CA/37/92E and CA/38/92E) and in respect of which the Authority refused to issue a certificate or grant a licence (Decision No. 361 of 13 October 1994).

3. Burmah Castrol (Ireland) Ltd is an Irish registered company engaged in the manufacture, importation, marketing and distribution in the State of various petroleum products. The company is a subsidiary of Castrol Limited, registered in the UK, and its ultimate holding company is Burmah Castrol plc. The parent company is engaged worldwide in all stages of the production and supply of petroleum products. The Burmah retail motor fuel network consists of a number of company-owned outlets and a number of dealer-owned outlets operating under the Burmah brand. In addition, lubricating products are supplied to a large number of other outlets, including petrol stations supplied by other wholesalers and other outlets, and other customers.

4. The other parties to the notified agreements are car franchise main dealers, who undertake guarantee and servicing work, including servicing and oil changes, and other non-franchise vehicle workshops which undertake car servicing. These dealers generally do not sell petrol.

5. The product with which the notified agreements are concerned consists of lubricants, that is any oil-based product which is used for the lubricating of a motor vehicle. Almost all Burmah lubricating products are sold under the trade name 'Castrol'. While lubricating oils are to some extent interchangeable, the product is usually differentiated as follows:

(a) top engine oils;

(b) other multigrades;

(c) monogrades; and

(d) two-stroke oils.

Top engine oils appears to be the largest category of sales.

6. The characteristics of the market are described at length in the Authority's decision in respect of similar previous Burmah Castrol agreements. (Decision No. 361, paras 6 to 12).

7. Since outlets retailing lubricants are located throughout the State, the appropriate geographical market in this case is the State.

(i) Hire purchase agreement.

8. This agreement is used where Burmah Castrol supplies equipment on hire purchase terms. It provides for the initial payment and monthly rentals. It provides that the equipment shall remain the property of the owner until a certain sum has been paid, when it becomes the property of the hirer. It also requires the hirer to keep the equipment at a specified address and not to dispose of it, and to keep it insured for the full hire purchase price, and for inspection by Burmah Castrol. It contains standard terms in hire purchase agreements concerning the right of the hirer to terminate the agreement and a restriction on the owner's right to recover the goods. It also allows the hirer the option of purchasing the equipment during the term of the agreement. The Schedule lists the equipment and details of the financial arrangements. If the equipment is for use with lubricants, its use is restricted as follows:

´Where the garage equipment or any part thereof is for use with lubricants and brake fluids ("lubricant products") the hirer shall for a period of five years from the date of this agreement use and stock therein and supply therefrom to customers only the lubricant products supplied by the owner which shall be purchased direct from the owner and shall not keep or allow to be kept in the garage equipment or any part thereof or use or allow to be used therewith anything whatever except such lubricant products as aforesaid.' (Clause 7)

The agreement also provides that ´The hirer agrees that during the continuance of this agreement the equipment shall be used exclusively for use of lubricant products supplied by the owners.' (Clause 14)

The hire purchase agreement has a duration of five years.

(ii) Loan agreement (lube oil equipment).

9. The arrangements provide for Burmah Castrol to lend lubricating oil equipment to the reseller, the hirer. In return, the hirer agrees that the equipment shall be used exclusively for the dispensing of Burmah Castrol products. It contains the following main provisions:

(a) ´The owners will lend to the hirer for a period of 5 years from 27th January 1995 (commencement date) the equipment specified in the schedule to this agreement. The hirer shall have the option, provided that all payments due to the owners under this agreement have been made when due, to either (1) return the equipment to the owners on or after the fifth anniversary from the commencement date, or (2) purchase the equipment from the owners for the sum of IR£1.00 with effect from the fifth anniversary from the commencement date, in either case by giving not less than three months notice to the company, whereupon this agreement shall terminate and be of no further effect. The hirer acknowledges that the ownership of the equipment until the exercise of the said option shall remain vested in the owners.' (Clause 1)

(b) ´At the expiration of this agreement the value of the equipment shall be payable forthwith by the hirer to the owners and shall be the value shown in the schedule hereunder less a depreciation allowance of 20% for every completed year which has elapsed since the date of commencement of this agreement. Alternatively, should the hirer decline to purchase the equipment at the expiration of the agreement the owner shall be entitled to take possession of the said equipment in accordance with the terms contained in Clause 5 of this agreement.' (Clause 6)

(c) ´The hirer agrees that for a period of five years from the commencement date, the equipment shall be used exclusively for use of lubricant products supplied by the owners.' (Clause 4)

The agreement also provides that the hirer keep the equipment in good order and repair, and that he will keep the equipment insured for a specific replacement value. It permits the company to have access to the equipment at all reasonable times in order to inspect its state of repair and maintenance. Provision is made for the owner to terminate the agreement, on seven days' notice, and to take possession of the equipment, and for the hirer to be responsible for all costs and expenses of repair and reinstatement to his property. The Schedule lists the equipment and its value.

10. In support of its request for a certificate, Burmah Castrol submitted that the arrangements did not restrict, distort or prevent competition within the meaning of Section 4, referring to their arguments which were given in Decision No. 361. They stated that, in that decision, the Authority made assumptions regarding the effect of these agreements in concluding that they contravened Section 4(1). It was accepted that there was no general presumption under the Act either in favour of or against exclusive use of equipment obligations, and that each case had to be examined on its merits in the light of the prevailing economic circumstances. It remained to be shown whether, in any individual case, the agreement did or did not contravene Section 4(1).

11. In support of its request for a licence, Burmah Castrol stated that the Authority had set out, in Decision No. 361, its views on how the agreements formerly notified could fulfil the requirements of Section 4(2), assuming Section 4(1) to apply. They submitted that the present notified agreements fulfilled these criteria and the criteria in Section 4(2).

12. Section 4(1) of the Competition Act, 1991, 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.

13. Burmah Castrol and the resellers who are party to the notified agreements are all engaged in the supply and distribution of lubricating oils for gain, among other activities, and they are therefore ´undertakings' within the meaning of Section 3(1) of the Act. The notified agreements are all agreements between undertakings. The relevant product market is that of lubricating oils for resale, and particularly that part which is supplied to franchised and non-franchised motor vehicle workshops. The relevant geographical market is the State.

14. The main feature of both the hire purchase agreement and the equipment loan agreement is that the equipment shall be used exclusively for the five year term of the agreements for stocking and supplying only Burmah Castrol products purchased direct from the owner, and the hirer shall not keep or allow to be kept in the equipment, or use or allow to be used with the equipment, any lubricants other than those supplied by Burmah Castrol.

15. The equipment which is the subject of the hire purchase agreement is initially supplied by Burmah Castrol, but is supplied on foot of a hire purchase agreement. The hirer makes regular payments to Burmah Castrol, and eventually becomes outright owner of the equipment. The agreement has a duration of five years. The equipment which is the subject of the loan agreement is owned by Burmah Castrol, is loaned to the dealer, and may be reclaimed by Burmah Castrol if any breach of the terms of the agreement occurs. The agreement has a duration of five years. At the expiry of the agreement the hirer has the option of purchasing the equipment for £1 or returning it to Burmah Castrol. Since the equipment supplied is owned by Burmah Castrol, they have a significant proprietorial interest in the equipment. The Authority quite clearly accepts that Section 4(1) does not call into question the existence of the property right. The exercise of a property right, however, may be anti-competitive in nature, and may therefore fall within the scope of the activity prohibited by Section 4(1).

16. Suppliers of goods for resale do not usually also supply equipment for the storage of the goods or from which they are dispensed or sold. Where such equipment is supplied, however, there is often a requirement that the equipment be used exclusively for the supplier's goods, and not for other goods, particularly competing goods.

17. The essential feature of the arrangements under review is that Burmah Castrol supplies equipment to another party, on loan or hire purchase terms, in return for which the latter agrees to use the equipment exclusively for Castrol products. There can be no general presumption under the Competition Act either in favour or against exclusive use of equipment obligations, and each case must be examined on its merits in the light of the prevailing economic circumstances. An obligation on a reseller to use equipment supplied by the supplier only for the storage and sale of the supplier's goods would not, in the view of the Authority, per se offend against Section 4(1), unless it had the effect of ensuring that only the goods of that supplier could be sold by the reseller. The use of equipment for the goods of a competitor results in the latter getting a ´free ride' in, and a competitive advantage from, the use of equipment for which the competitor did not pay. If exclusive use of the equipment, however, meant, in a particular set of circumstances, that the goods of only one supplier could be handled by the reseller, this would amount to exclusive purchasing. The reseller could not purchase competing goods from other suppliers, nor could competitors sell to that reseller.

18. In the present case, the requirement that the equipment only be used for the dispensing of Castrol products, while it means that it cannot be used for the products of competitors, does not necessarily have the object or effect that the user of the equipment must purchase lubricating oils exclusively from Castrol. While in many workshops there would be space for the installation of equipment for storing and dispensing the oil of one or more competitors, equally, in many instances there would not. What space there is may be better used for other commercial purposes. The existing equipment may be geared to the outlet's total requirements, and it cannot be expected that sales of lubricants would increase if additional equipment were installed. While workshops could return the equipment, they face strong disincentives to doing so. It would be possible to stock the products of competitors which are supplied in small containers, but this might not provide effective competition to oil from dispensing equipment, since it would be less convenient and would be more costly. In these circumstances, the Authority considers that the exclusive use of equipment requirement would in many cases represent an exclusive purchasing requirement. While a single agreement of this type would have no impact on competition in the relevant market, a network of such agreements, as in this case, would restrict competition to some degree. The standard agreements to supply equipment provided it is used exclusively for Castrol lubricants, therefore, offend against Section 4(1).

19. Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which, ´having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question'.

20. In the opinion of the Authority, the hire purchase and equipment loan agreements fulfil the conditions necessary for the grant of a licence under Section 4(2) of the Act. Both the hire purchase and equipment loan agreements contain an explicit requirement that the equipment be used exclusively for Castrol lubricants. As explained above, the Authority considers that such exclusive use of equipment requirements, in the circumstances, represent exclusive purchasing requirements in return for the loan of money or equipment. Nevertheless, the Authority can take a more favourable view of such arrangements than it could in the case of exclusive purchase arrangements on their own.

21. In the case of the Burmah Castrol agreements, the Authority does not consider that there are any benefits in the way of economies of bulk distribution from an equipment exclusivity requirement, since the agreements relate to only a small proportion of Burmah Castrol's lubricants for resale and deliveries appear to be in relatively small volumes. There would appear to be no, or only a minimal, reduction in distribution costs which could be shared with consumers. The Authority accepts that in some cases high quality equipment has been supplied, and that high quality technical services are provided by Burmah Castrol, which promote technical progress, and that these benefit consumers. An interest rate subsidy is provided in the case of the hire purchase loan, and equipment is provided in the other case. It is likely that the particular equipment supplied or financed would not have been installed in the workshops unless exclusive use of the equipment had been a requirement. Burmah Castrol would have been unlikely to provide such loans or equipment if they could have been used freely for competitive products. In this respect, exclusive use for a period of time can be regarded as indispensable to securing the benefits from the supply of the equipment, which may be shared fairly with consumers.

22. Nevertheless, the two agreements still have a limited foreclosure effect, because they represent exclusive purchasing, and thus they have the possibility of substantially limiting competition. In the case of both agreements, however, the problem of foreclosure is considerably reduced since the equipment becomes the property of the workshop once the hire purchase agreement has terminated and the equipment loan agreement provides the hirer with the option of purchasing the equipment for a nominal amount when the agreement is terminated. At that stage, the equipment can be used for any lubricants of the workshop's choosing. The Authority considers therefore that, as the period of the exclusive use of equipment requirement is limited to the period of the agreements, which have a maximum duration of five years, this does not afford the possibility of eliminating competition to a substantial degree. In these circumstances, since all the conditions of Section 4(2) have been fulfilled, a licence can be granted for the agreements.

23. Burmah Castol and their customers who are party to the standard hire purchase and standard equipment loan agreements (notifications no. CA/19/95 and CA/20/95) are undertakings within the meaning of the Competition Act. The notified agreements are agreements between undertakings, and they operate within the State. The Authority considers that the notified agreements have the object or effect of preventing, restricting or distorting competition, that they offend against Section 4(1) of the Act, but that they satisfy the conditions set out in Section 4(2) of the Act, and it grants a licence to the notified agreements. The Authority considers that, given the five year duration of the agreements, the licence should be granted for a period of ten years from the date of notification, to expire on 11 May 2005. The Authority does not consider it necessary to attach any conditions to the licence.

24. The Competition Authority has granted the following licence:

The Competition Authority grants a licence under Section 4(2) of the Competition Act, 1991 to the standard Burmah Castrol (Ireland) Ltd hire purchase agreement (notification no. CA/19/95) and equipment loan agreement (notification no. CA/20/95) notified under Section 7 on 12 May 1995, on the grounds that, in the opinion of the Authority, all the conditions of Section 4(2) of the Competition Act, 1991 have been fulfilled.

The licence shall apply from 12 May 1995 to 11 May 2005.