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OUTER HOUSE, COURT OF SESSION
[2008] CSOH 13
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OPINION OF LORD MALCOLM
in the cause
CALOR GAS LIMITED
Pursuers;
against
EXPRESS FUELS (SCOTLAND)
LIMITED and D JAMIESON & SON LIMITED
Defenders:
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Pursuers: Forrester, Q.C., Sandison; DLA
Defenders: Johnston, Q.C,
Delibegović-Broome; HBJ Gateley
Wareing (Scotland) LLP
25 January 2008
[1] The
pursuers are Calor Gas Limited ("Calor").
Calor have traded since 1935.
They are the market leaders in the distribution and supply of bulk
liquefied petroleum gas ("LPG") and cylinder LPG in Great
Britain.
This action concerns cylinder LPG.
The cylinders come in a variety of sizes for industrial, domestic and
recreational purposes. About a third of
LPG is sold in cylinder form.
Three-quarters of the cylinder market consists of propane gas, intended
for outdoor use, with the bulk of the remainder being butane gas for indoor
use. The trade enjoyed a boom period in
the 1970s, largely because of the popularity of butane cabinet heaters. However in more recent years that market has
been in decline. Nonetheless Calor are
still the main player in the GB market, with a share of about 50%. Calor fills cylinders from filling plants
(the Scottish plant is in Grangemouth) and distributes them to a network of
independent dealers and retailers, and also to directly owned Calor centres,
for onward sale to the public.
[2] Dealers
enter into a contract with Calor which has two features of importance for the
purposes of this action. Firstly, for
the duration of the agreement dealers can purchase and sell only Calor cylinder
LPG. This is sometimes called a vertical
restraint, it being an exclusive agreement between a dealer and an upstream supplier
(it is also sometimes described as a single branding or non-compete
obligation). The second feature of
importance is that dealers undertake not to handle Calor cylinders after
termination of the contract. Such
dealers may well have switched to another LPG company. Thus if a customer visits the premises of a
former Calor dealer with an empty Calor cylinder, the dealer is prohibited from
accepting it in exchange for a full cylinder of a competitor's gas. As more fully explained later in this
opinion, if obeyed, amongst other things, this prohibition has the effect of
discouraging customers from purchasing gas produced by the dealer's new
supplier, and encourages them to visit another Calor outlet. In other words, in order to promote customer
retention, Calor has a commercial interest in enforcing the prohibition, while
former Calor dealers, who will be keen not to lose existing customers, have a
commercial interest in breaching this part of the agreement. The new supplier also has an interest in the
success of the new dealer's business. In
the trade in general, no doubt because of these commercial pressures,
restrictions of this kind are frequently disobeyed.
[3] In
1999 over 50 of the larger volume Calor dealers entered into what was termed a
principal dealer agreement. It contained
the said exclusivity and post-termination handling restrictions. In addition the principal dealer agreements
had a minimum duration of five years. (Previously main dealer contracts lasted for a
minimum of one year, with a three months notice period). Ordinary Calor dealers (some 600 in number
throughout Great Britain) entered into agreements lasting for three years, and
the 10,000 or so retailers (sometimes called "stockists") entered into
agreements with Calor for one year. In
2005, at least partly because of concerns raised by the competition authorities
in Northern Ireland
and the Republic of Ireland,
the duration of all of these agreements was standardised at two years. The most significant change was the reduction
in the minimum duration of principal dealer agreements from five to two years.
[4] The
defenders are associated companies with premises in the north-west of Glasgow. They are a family venture owned and managed
by David Jamieson and his family. They
operate as a single business entity supplying cylinder LPG. Until 2004 the defenders had a longstanding
business relationship with Calor, and in 1999 the first defenders entered into
a principal dealer agreement with them. Clause 2.1
provided:
"The agreement
begins on the commencement date (12th
July 1999) and then continues for the initial period (namely five
years from the commencement date).
Either party may terminate the agreement at any time after the end of
the initial period by serving at least twelve months written notice of
termination on the other party, the notice to expire on the last day of the
initial period or on any later date."
In terms of clause 6 the first
defenders agreed not to buy or offer for sale any competitor's gas, and to
order and obtain all gas supplies exclusively from Calor. Upon termination of the agreement the first
defenders undertook not to sell, supply, handle, distribute or install Calor
gas, equipment and cylinders (clause 10.4.7).
[5] This
action arises from the first defenders' termination of the principal dealer
agreement on 31 August 2004
and their subsequent dealership with a rival supplier, namely Flogas UK Limited
("Flogas"). Since termination of the Calor
agreement both defenders have continued to handle cylinders belonging to Calor,
notwithstanding the service of interim
interdict orders. Calor now seek damages
from the defenders for loss of business, and permanent interdict preventing the
repetition of such conduct. The
defenders are assisted in their defence by Flogas. Indeed it appears that Flogas are the
dominant force in the defence to the action.
The main line of defence is that, because of the single branding
obligation for five years and the post-termination cylinder handling restriction,
the principal dealer agreements entered into by Calor in the period from 1999
to 2005 are null and void because they are in breach of European competition
law. It was explained that no reference
is made to UK
competition law given that at the relevant time it did not address vertical
restraints.
[6] The
new revised Calor dealer agreements are not the subject-matter of the action,
but rather the historic arrangements between 1999 and 2005. The proof concentrated on those arrangements,
and what follows relates to the agreements in force during that period. Principal dealers were allocated a marketing
area, in the present instance the north-west of Glasgow. Dealers' businesses were not confined to their
particular area, however the economics of the distribution of LPG cylinders
militate against long-distance delivery of cylinders. Principal dealers were the strategic focus of
Calor cylinder gas activity in their area.
They handled a large volume of cylinders filled and supplied by
Calor. Calor helped to promote principal
dealers and assisted them in a variety of ways, including the provision of financial
support. Ordinary dealers handled a
smaller volume, with cylinder LPG as a sideline to other activities, such as
builders merchants or caravan parks.
Principal dealers sold directly to the public, and also supplied
cylinders to retailers and others. A
retailer is a purely sales outlet, for example a petrol filling station, a post
office, or a DIY corner shop. Throughout
the relevant period Calor also supplied cylinder LPG to large DIY/retail
"sheds" such as Homebase, B & Q, Focus, etc. In 1999 some 50/55% of Calor gas was sold
through dealers. As mentioned above, in
addition Calor own Calor Centres, which sell and supply only Calor appliances
and products, including cylinder LPG. Unlike
principal dealers and dealers, Calor Centres are not independent
businesses. However, so far as the
cylinder LPG market is concerned, they operate in a similar manner to principal
dealers. They are located in large
conurbations and have a mix of wholesale/retail operations. In 1999 there were 32 Calor Centres
throughout Great Britain. Since then that number has increased.
[7] During
the boom period for cylinder LPG for domestic cabinet heaters, which replaced
paraffin heaters in the 1970s/80s, a number of competitors emerged, though
throughout Calor have retained the largest share of the market. However, by the mid-1990s Calor's share had
fallen to about 45/46%. After the
introduction of the principal dealer agreements this grew to about 52/53%. Meantime Flogas acquired LPG gas supply
companies and considerably increased their share of the market. In the period 2001 to 2006 their market share
increased from 6% to 29%. Flogas also have
a network of dealerships and, alongside Calor, they are now a major national
supplier.
[8] For
Calor, their network manager in Scotland,
Mr Alistair Todd, explained the exclusive nature of the dealership
arrangements on the basis that Calor invest to support their dealers'
businesses. There are large overheads
for the filling plants, the supply chain, and the advertisement of the Calor
brand. Calor invest in the gas cylinders,
which are in the possession and control of dealers. He regarded the principal dealer agreement as
"mutually beneficial" and "not unreasonable".
During the relevant period he was aware of new dealers entering the
market place, for example One Stop in Perth;
and of dealers switching from one
supplier to another, for example, Lothian Trades changed from Calor to
Flogas. Latterly Mr Todd had
responsibility for the defenders. He
explained that, although two companies, they are in effect one family business
operating from two locations under the management of David Jamieson, along with
his son Andrew and daughter Linda. Mr Todd
treated them as one business. Cylinders
moved between the two businesses, and they operated in close association with
each other. Mr Todd met the
Jamiesons on a regular basis, and they were often visited by a Calor
salesman. However, Calor's contract was
with the first defenders alone.
[9] On
31 August 2004 Mr David Jamieson wrote to the sales and marketing director
of Calor, Mr Alex Davies, to inform him that on receipt of the letter
"both Express Fuels (Scotland) Limited and D Jamieson & Son Limited
will no longer be trading with Messrs Calor Gas Limited." The explanation given was that the industry had
"changed dramatically" and that the defenders were "territorially boxed" into
an area with insufficient trade to support their needs. Calor was blamed for not having supported the
businesses, which were prejudiced by the East Glasgow Calor Centre and other
factors. Contrary to the agreement, no
notice was given of the intention to terminate the arrangement with Calor. Mr Todd met Mr David Jamieson to discuss
the matter. According to Mr Todd,
Mr Jamieson was concerned as to the profitability of his business, and
also that the East Glasgow Calor Centre at Shettleston had taken business from
him. He believed that Calor were not
supporting his business. Flogas had
assured him that he would have their support.
Mr Todd found Flogas cylinders in the yard. He told Mr Jamieson about the notice
provisions in the contract. Mr Jamieson
said that he had received advice that no notice was required. The terms of Clause 10.4.7 were
discussed. Mr Jamieson was asked to
reconsider the matter and take independent advice. Mr Todd was of the view that
Mr Jamieson would be aware of Calor's policy that after termination former
dealers should not handle Calor cylinders, but he presumed that
Mr Jamieson would have his own "commercial reasons" for continuing to take
possession of Calor cylinders. In other
words, if a customer returned with a Calor cylinder, Mr Jamieson would
swap the customer over to Flogas by taking the empty Calor cylinder in exchange
for a full Flogas cylinder. There were
other Calor outlets nearby, and Mr Jamieson would be concerned that if the
customer took his empty bottle elsewhere he would lose the sale and the
customer.
[10] Subsequently Calor ingathered evidence that the defenders
continued to handle Calor gas cylinders, despite the termination of the
agreements and the terms of clause 10.4.7.
This prompted the current action and, so far as the pursuers are
concerned, remains the focus of it. On
the other hand, the defenders concentrated on whether the Calor principal
dealer agreements were valid and enforceable in the first place. In particular it is contended that they are
void as being in breach of Article 81(1) of the EC Treaty, and thus Calor
are not entitled to the remedies sought against the defenders.
The Post Termination Handling Restrictions
[11] Much of the proof was
taken up with the following:
(1) What was the real purpose
of clause 10.4.7?
(2) Did the defenders breach
clause 10.4.7?
(3) Is there general
acceptance in the cylinder LPG industry of a practice whereby cylinders are
accepted by and repatriated to their owners by former dealers? In any event, is such repatriation a good
thing?
(4) Why did the defenders
terminate the agreement, and were the pursuers in breach of it themselves?
[12] The evidence on these issues included the following. Mr Stewart Wooley, a general manager
with Calor, was asked, what is the problem with receiving a cylinder which has
been returned by a former dealer? He had
no convincing answer, other than that it denied the customer the right to
repurchase a Calor cylinder. Mr Roger
Marshall, an investigator for Calor, having said that abandonment was not a
frequent occurrence, accepted that, although not condoned by suppliers,
handling of other companies' cylinders did go on. When pressed as to the perceived problem with
repatriation, he suggested that Calor lost a customer.
[13] Mr Todd assumed that Mr Jamieson had his own
commercial reasons for continuing to handle Calor cylinders. He would take the customer, and avoid the
risk that the customer would go to a nearby Calor outlet. From the quantity of cylinders returned to
Calor, it was clear that the defenders were delivering Flogas cylinders and
collecting Calor equipment. He saw Calor
cylinders in the defenders' yards. Test
purchases were carried out, and they demonstrated breach of the agreement. Mr Todd strenuously denied any predatory
conduct on the part of Calor towards the defenders. I accept his evidence in this regard as
credible and reliable. I do not consider
that either Mr Todd, or Calor in general, deliberately set out to
undermine the defenders' businesses.
Importantly, Mr Todd spoke to a "rule of thumb" that if
clause 10.4.7 was obeyed, 75% of the former dealer's customers would
remain with Calor. If it was disobeyed,
that percentage fell to about 25%. For
dealers there is a "churn rate" of about one-quarter of customers each
year. In other words each year on
average 25% of customers will be new customers, and the business of 25% will be
lost. Mr Todd denied that the
handling restriction is a disincentive to switching suppliers, however I did
not find his answers convincing. On the
assumption that it will be obeyed, clause 10.4.7 seems to me to be an
obvious and substantial disincentive to quitting Calor and setting up with a
new supplier. The evidence from
Mr Todd indicates that 75% of the dealer's existing business is likely to
be lost. Mr Todd denied that
commercial considerations were an element in the handling restriction, but I
did not accept that part of his evidence.
Mr Alexander Mintie spoke to test purchases at the defenders'
premises. They clearly demonstrated that
the defenders continued to handle Calor cylinders after the termination of the
Calor dealership.
[14] Mr David Shillam, a general manger for Flogas, spoke to
dealers trading in other brands of cylinders as part of the general trade. He indicated that one would wish to avoid
cylinders in the waste stream. He talked
of a general practice to this effect in the industry which goes on all the
time. He used to drive for Calor, and he
saw competitors' cylinders in their yards.
He described it as a natural and responsible thing to do, because dealers
know how to handle cylinders. There is
also a commercial element, in that if a customer's empty cylinder is refused,
he may not buy from that outlet.
Repatriation of empty cylinders to their owners by former dealers is
advantageous to owners, otherwise cylinders could end up anywhere. Customers are not interested in being told to
take their empty cylinder away. They just
want the dealer to do everything for them.
I had no difficulty in accepting Mr Shillam's evidence. It was supported by Peter Ablett, a finance
director of Flogas, who explained that cylinder exchange is widespread, and
that repatriation by former dealers to the owners of the cylinders is the most
common position. Flogas allow a
reasonable time for a former dealer to return the cylinders. The commercial advantage for the former
dealer is that it allows him to retain the customer. So far as clause 10.4.7 was concerned,
Mr Ablett could see no benefit to Calor other than customer retention.
[15] In certain circumstances a Calor customer returning an empty
Calor cylinder will be entitled to a refund.
In response to the suggestion that this is a reason for
clause 10.4.7, Mr David Jamieson indicated that such refunds were
"extremely rare". He explained his
grievances regarding "The Gas Man"; the
Calor Centre's pricing policy; and the
problems of the territorial restriction in his dealership area. His business was at risk. He thought that he would hold onto his
regular customers, despite switching to Flogas.
It can be inferred that if he had thought that he could not keep his
customers, that would have been a significant disincentive to changing to
another supplier. Mr Jamieson said
that customers were not interested in his contractual arrangements with Calor,
and just left the cylinders with him.
People wanted gas, and were simply not bothered about the particular
brand. From time to time in his evidence
Mr Jamieson did seek to rely on an alleged abandonment of the cylinders by
customers outside his premises, but he did not maintain that position
throughout his evidence. It was
contradicted by the evidence as to test purchases from his business. And when pressed in cross-examination, all
such pretence fell away. He accepted
that he took other companies' cylinders for commercial reasons. If he thought he detected a test purchaser,
he would send him away with the cylinder.
He would not do anything which would prejudice a purchase. He was "there to serve them with the
product". His son and daughter were
aware of the agreement. In practical
terms the two defenders were one family business. His drivers would collect Calor cylinders
when delivering Flogas bottles. He knew
he should not handle Calor cylinders. He
accepted that he continued to do this, even after receipt of the interim interdict orders. He justified this conduct by saying that he
regarded the cylinders as abandoned by their owners. The cylinder was thereby left in a safe
environment. He considered that the
court orders were unjust.
[16] Mr Jamieson explained that he had discussions with people
who gave him to understand that his agreement with Calor came to an end automatically
after five years. It seems clear that
these people were representatives of Flogas, who were keen to obtain the
defenders' business. Mr Jamieson came
to the view that after five years of the principal dealer agreement he was a
free agent. In his letter of termination
he told Calor why he had decided to leave them.
Speaking generally about his business, Mr Jamieson was concerned that
the butane market was no longer profitable, and that he had never managed to
develop the propane side. He was "going
out of business". It would appear that
things had not improved since a similar picture was painted in a business
development plan prepared in conjunction with Calor in 2001 (6/96 of
process). So far as the current action is
concerned, Mr Jamieson had simply answered questions put to him by the
lawyers. He had never given any
instructions.
Conclusions
[17] My conclusions from the
evidence on the issues set out in paragraph 11 can be summarised as
follows. Clause 10.4.7 achieved a
number of objectives so far as Calor were concerned. Their cylinders are a valuable asset and
they, along with others in the industry, wish to retain title to and ultimate
control of them. There have been
examples of theft, unlawful export, and of unsafe practices, such as
over-filling by unscrupulous operators.
Under-filling could also be damaging to a company's commercial
reputation, since their name may well remain on the cylinder. A variety of factors demanded that on the
expiry of a dealership, Calor cylinders should be returned to Calor. However, in my view many of those objectives
could be achieved by allowing a former dealer to obtain possession of the cylinders
and return them to Calor. The
alternative of the dealer refusing to even touch Calor cylinders risked
non-return of the cylinder, which might then rust away in a garage, or worse,
be abandoned, which would also increase the risk of theft, unsafe practices,
etc. I was persuaded that safety
considerations favour allowing experienced persons, such as the defenders, to
take possession of the cylinders. I also
accept the evidence that it was common in the industry for dealers to handle
competitors' cylinders, and then to repatriate them to their owners. It can also be noted that Calor sent the
first defenders bills for unreturned cylinders, something which is difficult to
reconcile with their primary position on clause 10.4.7.
[18] In the end of the day, the main advantage of a complete
restriction on former dealers handling Calor cylinders was a substantial
increase in customer retention for Calor, and a reduction in the dealer's
prospects for a seamless transition to a new supplier. In other words, clause 10.4.7, if obeyed,
meant that it was more likely that customers would remain with Calor. It made life more difficult for a dealer, and
caused him loss of business if he switched to another supplier. It follows that, unless it was ignored, the
clause was a strong disincentive to a decision to switch to another
supplier. No doubt the clause had other
objectives and benefits for Calor, but the evidence pointed to the commercial
interests of Calor as being the major factor.
[19] The evidence overwhelmingly proved that after termination of
the agreement with Calor, the defenders did continue to handle Calor cylinders,
including after service of the interim
interdict orders. Mr Jamieson, when
pressed, did not pretend otherwise. Many
cylinders were collected by his drivers after delivering Flogas cylinders. For customers through the door, at best, a
form of "abandonment" was engineered, but the reality was that the commercial
benefit of keeping the customer was uppermost for the defenders. Cylinders taken into the defenders'
possession were returned to Calor by them, and any conscience could be salved
by reference to the hazards of genuinely abandoned cylinders.
[20] Mr Jamieson did have concerns about how the East Glasgow
Calor Centre was operated, particularly in relation to its pricing
policies. However the predominant issue
for him was that he was suffering from the decline in the butane market, and,
for whatever reason, he had never developed the propane market to fill the
gap. He considered that the territorial
restriction of the principal dealer agreement was a constraint on his ability
to develop his business. He had a
grievance over others being allowed to operate in his area, including an
individual called "The Gas Man". He had
discussions with representatives of Flogas, and was wrongly given to understand
that his agreement with Calor automatically ended, or became "null and void",
after five years. He therefore
considered that by August 2004 he was a free agent and could with impunity strike
up a new relationship with Flogas. In
his letter of termination, he explained why he was ending the longstanding
relationship with Calor. However I am
not satisfied that Calor did anything untoward which breached their part of the
agreement, or which justified unilateral termination by Mr Jamieson. No doubt Calor did things with which
Mr Jamieson disagreed, or which did not suit all his business interests,
but it has not been shown that any specific acts of Calor, either individually
or cumulatively, justified or excused the first defenders' failure to comply
with their contractual obligations. This
is consistent with the tone of Mr Jamieson's letter terminating the
relationship with Calor, which was more one of sorrow than anger.
The Article 81 Defence
[21] I have concluded that
the defenders did not follow the terms of the principal dealer agreements. It was terminated without any notice, and the
post-termination handling restrictions were breached. However, the defenders' case is that the
exclusivity arrangement for a minimum of five years, and the handling
restrictions, taken either individually or cumulatively, render the principal
dealer agreement void under Article 81(1) of the Treaty. Article 81(1) provides that:
"All agreements
between undertakings ... which may affect trade between member states and which
have as their object or effect prevention, restriction or distortion of
competition within the common market, and in particular those which: (a) directly or indirectly fix ... any trading
conditions, shall be prohibited as incompatible with the common market."
In summary the defenders claim that
the Calor network of principal dealer agreements throughout Great Britain between
1999 and 2005 had the effect of preventing, restricting or distorting
competition in the cylinder LPG market having regard to (a) the substantial
share of the GB market enjoyed by the pursuers (approximately 50%); (b) that the market is mature and in decline; and (c) that a five year single branding
obligation and the handling restrictions post termination raised barriers to
entry to the market and foreclosed it to prospective new entrants. The defenders rely upon the expert evidence
of an economist led by them, namely Mr Neil Marshall. He gave unchallenged evidence that the
relevant market for the purposes of Article 81 is the market in Great
Britain for cylinder LPG. This proposition was not contradicted by the expert
for the pursuers, and is consistent with the general picture which emerged from
the evidence of Mr Wooley and Mr Todd of Calor. From 1999 to 2004 Calor enjoyed a market
share of approximately 50%, though it is sufficient for Mr Marshall's
analysis that its market share was in this general region. It is also clear that over a lengthy period
the cylinder LPG market in Great Britain
has been in serious decline in respect of butane, and has been at best static
for propane gas. The market can properly
be characterised as mature. It is
against that background that the five year minimum single purchasing and
selling agreement, and the post termination handling restrictions, fall to be
assessed.
[22] In Brasserie de Haecht v
Wilkin [1967] E.C.R. 407 the Court of
Justice confirmed that in order to judge whether a particular contract contravened
the then Article 85(1) of the EEC Treaty (the predecessor to the current
Article 81(1)) it is necessary to take into account the economic context of
the whole of the market. In the
circumstances of that case, this involved having regard to the simultaneous
existence of a large number of contracts, namely contracts imposed by a small
number of Belgian breweries upon a large number of liquor licensees. The agreements required the licensees to
obtain supplies for a certain period from a given supplier to the exclusion of all
others. Furthermore the court made it
clear that, whatsoever the object or motivation, the focus should be on the
effect of the agreements on competition in the relevant market, including where
they might combine to have a cumulative effect.
In its judgment the court said:
"... an agreement
cannot be examined in isolation ... from the factual or legal circumstances
causing it to prevent, restrict or distort competition."
In Stergios Delimitis v Henninger
Braűag [1991] ECR I 935 the court again considered beer supply
agreements. It was necessary
"to analyse the
effects of a beer supply agreement, taken together with other contracts of the
same type, on the opportunities of national competitors or those from other member
states, to gain access to the market for beer consumption or to increase their
market share and, accordingly, the effects on a range of products offered to
customers." (para.15)
The court noted that
"it is generally
more difficult to penetrate a saturated market in which customers are loyal to
a small number of large producers than a market in full expansion in which a
large number of small producers are operating without any strong brand names."
(para.22)
If it is apparent that the
cumulative effect of agreements similar to that under specific consideration
renders it difficult for new national and foreign competitors to gain access to
the market, it is then necessary to assess the extent to which the contracts
entered into by the supplier in question contribute to the cumulative effect. Responsibility is attributed to those
suppliers which make an appreciable contribution to barriers to entry to the
market. The market share of the relevant
supplier is relevant, as is the duration of the agreement. Thus a supplier with a small market share may
nonetheless appreciably contribute to the cumulative adverse effect if his
outlets are tied to him for a lengthy period.
Similarly, shorter agreements may be equally responsible if they relate
to a supplier with a substantial share of the market (para.26). The decision in Stergios teaches that the first issue is whether
"having regard
to the economic and legal context of the agreement at the issue, it is
difficult for competitors who could enter the market or increase their market
share to gain access to the national market for the distribution of beer in
premises for the sale and consumption of drinks. The fact that, in that market, the agreement
in issue is one of a number of similar agreements having a cumulative effect on
competition constitutes only one factor amongst others in assessing whether
access to that market is indeed difficult.
The second condition is that the agreement in question must make a
significant contribution to the sealing off effect brought about by the
totality of those agreements in their economic and legal context. The extent of the contribution made by the
individual agreement depends on the position of the contracting parties in the
relevant market and on the duration of the agreement." (para.27)
At this stage I also note that at
paragraph 40 in the judgment one finds:
"However, the
fact that a beer supply agreement does not satisfy the conditions for block
exemption, does not necessarily mean that the whole of the contract is void
under Article 85(2) of the Treaty.
It is only those aspects of the agreement which are prohibited by
Article 85(1) that are void. The
agreement as a whole is void only if those parts of the agreement are not
severable from the agreement itself."
[23] The court returned to the subject of exclusive purchasing
agreements in Neste Markkinointi Oy v
Yotuuli Ky [2001] 4 C.M.L.R. 27, this
time in the context of motor fuel supply to service stations. The court reaffirmed the general approach set
out in the earlier cases. The issue was
whether a supplier's contracts could be subdivided to distinguish between those
which did and those which did not make an appreciable contribution to
foreclosure of the relevant market. (It
can be noted that in the cases terms such as "appreciable contribution" and
"significant effect" often appear to be used in a largely synonymous
manner). In Neste it was held that it was lawful to make this subdivision, and
that a short term agreement, which represented only a small minority of the
supplier's network, did not contribute significantly to the cumulative effect,
even where the bulk of the same supplier's network did have such an
effect. The interest of Neste for present purposes is the
importance given to the duration of the agreement under consideration. In his opinion Advocate General Fennelly
said:
"Clauses
governing the duration of agreements comprised in the network of exclusive
purchasing agreements are clearly material to their market effect, and shorter
periods are, by their nature, less restricted.
It is a question of degree." (para.A31)
In its judgment the court said at
paragraph 20:
"The duration of
an agreement is of cardinal importance in any assessment of the freedom of
action granted to the contracting party bound by an exclusive purchasing
obligation."
It continued that:
"Fixed term
contracts concluded for a number of years are more likely to restrict access to
the market than those which may be terminated upon short notice at any time."
(para.33)
In his written submissions
Mr Forrester prayed the Neste
case in aid of the pursuers' case on the basis that "a ten year exclusivity
agreement with a rolling one year notice period was held unobjectionable". However that is not how I interpret and
understand the court's decision. The
factual background was that the contract was concluded in 1986 for a ten year
period, after which it could be terminated on one year's notice. In June 1998 the service station company gave
one week's notice of termination. The
ten year fixed term having passed, as I read the court's judgment, it
considered and assessed the restrictive effect of the agreement only in the
context of an agreement terminable on one year's notice. This could be contrasted with the majority of
the supplier's contracts, which were fixed term contracts with a duration of
more than one year. There was no
suggestion that those contracts were unobjectionable, rather the reverse. It was because the court was willing to
subdivide the network agreements into those of a fixed term and those
terminable on one year's notice, that the latter were held to have an
insignificant effect on the cumulative restrictive effects on competition. It has not been argued that any similar
subdivision should take place in the present case.
[24] In his oral submissions Mr Forrester also relied on the
similarity of the agreements used in the relevant period by Calor and Flogas,
the two main players in the market, as demonstrating that the exclusivity
restraint used by Calor was normal and unexceptionable. However, as the above citation of authority
demonstrates, it is no defence to an anti-competitive effect that other
suppliers in the market operate in a similar fashion. On the contrary, if anything this will tend
to reinforce the foreclosure of the market to newcomers, and the question then
comes to be focused on whether the agreements in question make an appreciable
contribution to this outcome.
The Evidence on Article 81
[25] In respect of the
Article 81 issue, the evidence established the following background circumstances. There is limited scope for substitution from
cylinder LPG to bulk LPG or other fuels.
The relevant market is that for cylinder LPG. There are economic constraints on the
transport of cylinder LPG over large distances, however the network of distribution
points for cylinder LPG throughout Great Britain
means that it is appropriate to analyse Calor's principal dealer agreements in
the context of a GB wide market. At the
material time Calor's market share was in the region of 50%, which is sufficient
to allow the company to prevent, restrict or distort competition. (It also means that the agreements did not
attract the block exemption for vertical restraints available for those with
less than a 30% share). Calor operated a
network of principal dealer agreements across Great
Britain.
[26] Against that backdrop, Mr Neil Marshall addressed whether
the exclusive purchasing restriction for a minimum of five years duration and
the post-termination handling restrictions amounted to a barrier to entry to
new suppliers which foreclosed a significant share of Calor's principal dealer
network to competitors. He explained
that the agreement is what is known as a vertical agreement between an upstream
supplier and a downstream distributor.
Article 81 applies to vertical agreements that may affect trade
between member states and which prevent, restrict or distort competition. The negative effects of such restraints are:
(i) foreclosure of other
suppliers or other buyers by raising barriers to entry;
(ii) reduction of inter-brand
competition between the companies operating in a market;
(iii) reduction of inter-brand
competition between distributors of the same brand; and
(iv) the creation of obstacles
to market integration.
Mr Marshall addressed the
question of whether the single branding obligation for a minimum duration of
five years fell foul of the Article 81 prohibition. In guidelines on vertical restraints the
Commission advises that it is necessary to consider the nature of the
restriction, its duration, and the market power of the party imposing that
restriction. The Commission also states:
"It is not only
the market position of the supplier that is of importance, but also the extent
to and the duration for which he applies a non-compete obligation. The higher his tied market share, i.e. the
part of his market share sold under a single branding obligation, the more
significant foreclosure is likely to be.
Similarly, the longer the duration of the non-compete obligations, the
more significant foreclosure is likely to be.
Non-compete obligations shorter than one year entered into by
non-dominant companies are in general not considered to give rise to
appreciable anti-competitive effects or negative effects. Non-compete obligations between one and five
years entered into by non-dominant companies usually require a proper balancing
of pro and anti competitive effects, while non-compete obligations exceeding
five years are for most types of investments not considered necessary to
achieve claimed efficiencies or the efficiencies are not sufficient to outweigh
their foreclosure effect." - European Commission, (2000/C 291/01) "Guidelines
on Vertical Restraints" para.141.
Mr Marshall observed that the
higher the market share the greater the scope for appreciable effects on
competition. A company with a high
market share has the potential to prevent, restrict or distort competition to
an appreciable extent. In
paragraph 140 of the guidelines the Commission explains that the market
position of the supplier is of main importance when assessing the possible
anti-competitive effects of non-compete obligations. Even leaving aside the effect of dealer
agreements, Mr Marshall considered that the barriers to entry in the
cylinder LPG market in Great Britain
are relatively high. In particular the
market is in decline, therefore newcomers require to win over customers from
existing suppliers, and on the basis of untargeted marketing. Further, quality of service is important,
especially regarding the speed of replacement of empty cylinders. Switching to an untested supplier is a risk
for consumers, who may well prefer to stay with their current proven
supplier. Newcomers face a brand leader
in Calor, whose name is synonymous with the product; which has an established network of centres,
dealers and stockists; and which enjoys
as many or more customers than the rest of the suppliers combined. Mr Marshall had been informed by Flogas
of its lack of success in launching new outlets. This was also spoken to by Mr Ablett. (I repel an objection to this evidence, which
was covered by the defenders' pleadings as to market foreclosure).
[27] Against that background, Mr Marshall explained that if
dealers are signed up to one supplier for a lengthy period, this restricts the
opportunity for others to enter the market or to expand their activities by
acquiring the supply contracts for existing dealers. During his evidence Mr Marshall agreed
that if 100 dealers were subject to five year agreements, each year on average only
20 of them would be available to switch to a new supplier, whereas if the
agreements lasted for only two years, each year some 50 of the dealerships
would be able to negotiate with an alternative supplier. He considered that the five year duration of
the single branding restriction in Calor's principal dealer agreements was a
significant restriction which presented a barrier to entry to the market and
reduced inter-brand competition.
Principal dealers are an important route to the market. They have skills in and experience of the
cylinder LPG trade in their locality.
The longer they are tied to one supplier the greater the restriction on
the opportunities available to competitors.
It reduces the ability of newcomers to set up the necessary network of
dealers/outlets and to enjoy economies of scale regarding a given cylinder
filling plant. These problems were
exacerbated by the declining market.
[28] Mr Marshall referred to and relied on a number of
precedents. In 2005 the Irish
Competition Authority issued a declarator which exempted exclusive distribution
arrangements for cylinder LPG from the competition rules, provided, among other
conditions, that the period of exclusivity did not exceed two years. Previously, exclusive distribution agreements
with a duration of five years had been implemented by LPG suppliers in Ireland. They were found to have created barriers to
entry into, and expansion of, the cylinder LPG market in Ireland by foreclosing
to competitors a larger share of the market than would have been the case with
two year agreements. The competition
authority was
"of the view
that the significant difference between the development of the cylinder LPG
market between 1994 and 1999, when two year exclusive dealer agreements were in
operation, and the subsequent period, a difference that is even more pronounced
given the revised 2003 market share figures ... highlights the manner in which
five year exclusive agreements act as a barrier to expansion for smaller
operators and new entrants. During the
period 1999-2003, both Calor and Flogas significantly expanded their market
shares, the former primarily because of the acquisition of Blugas. In sharp contrast, the smaller operators
failed to increase their market shares over the same period. The authority believes that this can be
primarily explained by the re-introduction of five year exclusive agreements by
Calor and Flogas which reduces by 60% the number of retail outlets available to
be signed up by competing suppliers in any given year. Such a situation, in an already declining
market, makes it very difficult for smaller operators to expand their market
share."
The 60% reduction is a reference to
the example given above of, on the one hand, 20 out of 100 dealers being
available for switching each year, as compared with 50 under a five year
exclusive arrangement; a reduction of
30, which is 60% of 50. To my mind this
not only encapsulates the defenders' case in relation to Article 81 so far
as the 5 year exclusive arrangement is concerned, it is also a compelling
demonstration of the claimed anti-competitive effect of the agreements in
question.
[29] Mr Marshall cited the OFT investigation, begun in 2002,
into Calor in Northern Ireland. Following this Calor agreed to alter the
length of its distribution agreements in Northern
Ireland from five to two years. At the time the OFT stated that it considered
that the length of the contracts may have had an anti-competitive effect by
creating a barrier to entry for new suppliers and by limiting the expansion of
existing small scale suppliers.
Subsequently Calor brought its policy in Great
Britain into line with that in Northern
Ireland.
Mr Marshall summarised his views as follows at paragraph 120
of his report:
"In the context
of Calor's market share, the economies of scale in setting up a distribution
network, and the need for new entrants to provide a high level of customer
service, I conclude that the principal dealer agreements prevent cylinder LPG
suppliers from accessing a major route to market, and therefore constitute a
barrier to entry, which leads to a restriction and distortion of
competition. I therefore conclude that
the duration and nature of restrictions in Calor's principal dealer agreements
constituted a vertical restraint, which had the effect of restricting
competition and which was therefore not compliant with Article 81."
Implicit in this was his assessment
that European competition law applied to the principal dealer agreements, an
issue which I address later in this opinion.
In cross-examination it was put to Mr Marshall that the increase of
the Flogas market share from 1% to 29% in 20 years, demonstrated that the
market was not foreclosed.
Mr Marshall did not agree, given that much of that growth had been
achieved through the acquisition of companies operating in the market. Thus Flogas growth did not demonstrate an
open market. He agreed that exclusivity
can have beneficial effects - however it is a matter of balancing the pro and
anti-competitive effects, which is where the duration issue becomes
relevant.
[30] Mr Marshall was cross-examined in detail on the issue of
block exemptions, but he rejected the inference that his view amounted to a
requirement that an agreement should fit into a block exemption category,
otherwise Article 81 would apply.
Rather he referred to block exemptions simply to exclude the possibility
that they might apply to Calor, given that its market share exceeded the 30% threshold
for such an exemption. I have no
difficulty in accepting Mr Marshall's position on this issue, which, as I
understood it, was that, since Calor were not entitled to a block exemption,
there was scope for a breach of Article 81; with this in turn depending upon the outcome
of a considered assessment of all the relevant circumstances. Much of Mr Forrester's submissions
focussed on what he described as the "fundamental issue of block exemptions". However, I did not at the time, and still do
not identify the perceived importance of the provisions on block exemptions to
the question before me, other than that it is clear that, because of the size
of its market share, Calor is not entitled to the security of an exemption.
[31] It was put to Mr Marshall that he had not compared Calor's
supply lines with those of its main competitor, Flogas, and that such would be
necessary, not least since a comparison would show that Calor's network was
more open to switching than that of Flogas.
Mr Marshall rejected the need for such a comparison. No doubt in a general sense this may seem
unfair, in that Flogas with its smaller market share enjoys a block exemption. Nonetheless I can understand that an adverse
conclusion as to the anti-competitive effects of Calor's arrangements, with its
superior market power and hence its greater ability to restrict the market, is
not dependent on any comparison with the adverse effects of the distribution
arrangements of smaller competitors. The
question whether, but for the exemption, Flogas would be in breach of
Article 81, is not of direct relevance to an assessment of Calor's
agreements. As Mr Marshall
said: "You cannot simply say - well they
are doing it", particularly when you are the largest supplier with a 50%
share.
[32] Calor did not lead expert evidence as to whether the
Article 81 prohibition did or did not apply to the 1999-2005 principal
dealer agreements. However it did lead
evidence from an economist specialising in competition analysis, namely
Mr Neil Pratt. His brief was expressly
limited to commenting on the reliability and robustness of Mr Marshall's
conclusions. He had not been asked to
carry out his own assessment of the competition aspects of the case. He considered that Mr Marshall's
conclusions were unreliable in that his description of the various routes to
market available to cylinder LPG supplies was inadequate, and that there was an
overall lack of substantiating evidence which would allow a proper assessment
of the various claims made in Mr Marshall's report. He put flesh on these bones as follows. It is not helpful to compare the bulk and
cylinder LPG markets. They are very
different markets so they may have different prospects for growth. Figure 2.1 of the Marshall Report entitled "Calor
Supply Chain" is incomplete as it omits ordinary dealers and Calor Centres. One would wish to know the amount of LPG
flowing through each route, and also address the supply chain for the cylinder
LPG market as a whole - i.e. dealers and retailers used by other suppliers; other routes to market; the number of outlets and their locations; and any relevant contractual provisions
between suppliers and dealers, etc.
Mr Marshall did not discuss other suppliers' distribution
arrangements. This goes to the question
of routes to market other than via Calor's principal dealers. Mr Marshall concentrated on the Calor
supply and distribution structures, but before he could conclude that this
foreclosed the market, he would require to have regard to the arrangements
adopted by Calor's competitors for the provision of cylinder LPG to end users. Even if Calor had a monopoly of one route, there
might be other routes open to a newcomer.
In other words, Mr Marshall could not talk to an anti-competitive
effect flowing from Calor's principal dealer agreements without also addressing
whether competitors were forced to use Calor dealers. If other routes were not subject to the same
restraints, and were available to new suppliers, then the significance of the
Calor arrangements would be reduced.
Mr Pratt had not studied such alternative routes. This was a gap in Mr Marshall's
reasoning. Similarly, if completely new
businesses could be set up to attract custom from existing dealers, then again
the Calor arrangements would be more acceptable. In cross-examination Mr Pratt accepted
that in a declining market competition becomes intense. He also explained that if a company has a
market share of less than 30%, distortion, etc of the market is unlikely. However, if the share is over 30%, then there
is potential for such adverse effects.
[33] In his evidence Mr Marshall observed that 50% was a very
significant market share, especially in a mature market. Any new supplier would require a high density
of custom in and around a filling plant.
Calor's principal dealers handled a large volume of gas, and were tied
to Calor for at least five years. For
an exclusive arrangement that duration was usually only allowed for small
players in a particular market, and, in any event, was generally the limit for
balancing the pro and anti-competitive effects of such single branding
obligations. If demand was growing,
there would be greater scope for new entrants, and correspondingly less concern
over such restraints. Calor enjoyed a
strong brand awareness. New entrants
would be faced with risky investments, irrecoverable or "sunk" costs, the need
to win over custom from existing suppliers, and also to garner a sufficient
concentration of customers in a relatively small area. Even without Calor's principal dealer
agreements - these are significant barriers to entry. The Flogas experience demonstrated the
difficulty of starting up completely new businesses, which in turn highlighted
the barriers to entry to the cylinder LPG market as a whole. Given the large investment involved, and the
need for a large volume of throughput close to a filling plant, winning supply
contracts with major existing dealers is a clear potential route to entry to
the market. So long as the new dealer
does not lose a significant proportion of his existing customers, this gives
the new upstream supplier important access to a business with the necessary
skills and knowledge of the local market.
It also promotes competition in the market. To rely on picking up small volume dealers
would be very risky. Marketing an
unknown brand involves a large investment.
[34] Further, according to Mr Marshall it was not just a matter
of the length of the exclusive bargain.
The post-termination handling arrangements deter dealers from switching
to a new supplier. No dealer would want
to turn customers away. The larger your
customer base, the more you have to gain from such post-termination handling
restrictions. Clause 10.4.7 was an
additional factor which had a cumulative anti-competitive effect along with the
five year single branding obligation. In
any event, clause 10.4.7 could stand alone in support of
Mr Marshall's overall conclusion.
In Mr Marshall's view, to look at the arrangements of smaller
suppliers would not add anything of significance to the above
considerations.
Conclusions on Article 81(1)
[35] It was submitted that
Mr Marshall should be regarded as an advocate for Calor's cause, and that
his evidence amounted to assertions without any properly researched basis. I demur to both suggestions. I noted the considered and thoughtful way in
which Mr Marshall gave his evidence.
I am entirely satisfied that he acted throughout as an independent
expert offering his opinions to assist the court. His credentials to give expert evidence on
this subject are impressive. On the
material issues, I accept all of Mr Marshall's evidence and his
conclusions. I do not find his
conclusions surprising or startling. They
coincide with what I would have suspected in any event, given the market share
of Calor and the nature and extent of the restrictions in the principal dealer
agreements. The above discussion
demonstrates the importance of the twin factors of market power and the
duration of the single-branding obligation.
All that is required is a sufficient contribution to restriction of
competition. It is not difficult to
understand that if a nationwide network of principal dealers is tied to the
brand leader for at least five years, this will restrict competition, especially
in a mature market. When the
post-termination handling restrictions are added, the defenders' case becomes
even more compelling, though I would have considered the vertical restraint as
sufficient in itself to amount to non-compliance with Article 81(1). As to Mr Pratt's main criticism of
Mr Marshall's report, I see no reason why the anti-competitive
consequences of the Calor arrangements should be dependent on a consideration
of the structures and contractual arrangements of other and smaller suppliers,
especially, given the very substantial market share enjoyed by Calor. The inference of Mr Pratt's comments was
that it might be that Calor's competitors could find a straightforward route to
market through other companies' dealers.
However, even if this could provide sufficient dilution of the
consequences of the Calor principal dealers agreement, it sits uneasily with
the pursuers' submission that the arrangements adopted by their main competitor
Flogas, with almost 30% of the market, were more restrictive than their own. Mr Pratt made various other criticisms
of the Marshall report, but he
either departed from them in cross-examination, or they are of relatively minor
importance. At one point he did say that
he may be a "typical pernickety economist", though I would not want to
associate myself with that no doubt "tongue in cheek" self-deprecatory remark.
Severability
[36] In the event that the
minimum five year vertical restraint was null and void, Mr Sandison
submitted that the post-termination restrictions in clause 10.4.7 could
nonetheless survive and remain enforceable.
He relied upon clause 14.1 of the principal dealer agreement which
provides that:
"Each of the
terms of the agreement shall be construed as independent of every other term of
the agreement, and if any term of the agreement is or becomes illegal, void or
invalid, that shall not affect the legality and validity of the other terms of
the agreement."
The submission was that
clause 10.4.7 should not be dragged down by any problem arising from other
terms in the agreement. If the five year
minimum exclusivity arrangement fell foul of European competition law, the post
termination handling restrictions should still be enforced. The pursuers' case rests only on the
post-termination handling restrictions. The
only real issue before the court is whether clause 10.4.7 is void under
Article 81. There was at least a suggestion
in the submission that even if clause 10.4.7 had an anti-competitive
effect, then unless that effect alone, considered quite separately from the
consequences of any other unacceptable parts of the agreement, was sufficient
to constitute a breach of Article 81, then clause 10.4.7 should stand
and be enforced. For the defenders
Mr Johnston submitted that the five year single branding obligation goes
to the heart of the contract. The other
obligations were conditional upon that obligation. They cannot be disentangled without
re-writing the contract.
[37] Insofar as Mr Sandison's submission depended upon
clause 10.4.7 having no adverse anti-competitive effect, I have rejected
that proposition. In my view both the
five year single branding obligation and clause 10.4.7 operate in a manner
which restricts competition. In the
context of quantifying damages, the pursuers themselves invited me to conclude
that if clause 10.4.7 was obeyed a dealer would lose 75% of his existing
customers. It is hard to imagine a
stronger disincentive to switching to another supplier. It probably also explains the widespread
disobedience of such agreements. In any
event I do not consider that it would be proper to view and assess the relevant
restraints separately, and then judge whether individually either or both would
result in non-compliance with Article 81.
Clause 14.1 does not require such an exercise, which in my view
would be highly artificial. When both
parts of the agreement have an anti-competitive effect, they cannot be severed
from each other. If one supposes an
agreement with two different types of obligation which both restrict
competition, and the cumulative effect is sufficient to attract the prohibition
in Article 81, that is enough for the conclusion that neither obligation
should be enforced. One does not require
to assess the impact of each separately, and enforce one or both of them,
depending upon the outcome of that exercise.
That could mean that, despite the overall effect of the agreement, both
restrictive obligations remained valid and enforceable, since neither, when
viewed in isolation, was sufficiently harmful to amount to non-compliance with
Article 81. That would be a very
surprising result. In my view, on the
above hypothesis, neither restraint is valid.
This remains true even if one clause on its own has a greater adverse
impact than the other, and is in itself sufficient to amount to non-compliance
with Article 81, whereas the same cannot be said of the other clause.
[38] In the present case Mr Marshall concentrated to a large
extent on the five year exclusivity provision.
However he did explain that the section of his report dealing with
clause 10.4.7 contained a stand alone argument. While I have explained that I do not consider
it necessary to assess the issue of non-compliance separately in respect of the
single-branding and the post-termination handling obligations, had I been
required to do so, I would have concluded that both, even when viewed in
isolation, result in a breach of Article 81(1). I have dealt with the single-branding issue
above. So far as clause 10.4.7 is
concerned I have mentioned the pursuers' evidence as to the serious impact on a
dealer's existing customer base should he switch suppliers and comply with the
prohibition on handling Calor cylinders.
The reality is that such restrictions are widely ignored. Mr Jamieson's evidence was a vivid
illustration of the strong commercial compulsion to retain business by
disobeying the prohibition, even if ordered not to do so by the court. The flip side of this is that if a dealer
considered that he would have to comply with such a prohibition, it is hard to
envisage him changing to another supplier.
This is all the more so when he has been tied to the same supplier for
at least five years, and when that supplier enjoys half the market in cylinder
LPG. In these circumstances if I was
required to assess clause 10.4.7 on its own, I would conclude that it
amounted to a significant restriction on competition and was in breach of
Article 81(1). (I need not consider
Article 81(3) since no case is pled thereunder). However, as mentioned above, I am of the view
that the proper approach is to view clause 10.4.7 as an integral and
non-severable part of the overall anti-competitive aspects of the agreement,
and thus it, along with the other relevant clauses, is void in terms of
Article 81(1).
Jurisdiction
[39] Before an agreement can
be considered under Article 81 it must be shown that it may affect trade
between Member States. This is a
jurisdictional test designed to sift out purely national issues, and identify
agreements in which the EU has a legitimate interest. The fact that an agreement relates only to
direct activities in one state, or even only to a region within in a state,
does not exclude the jurisdiction of the EU.
At paragraph 93 of his report Mr Marshall made reference to
European Commission (2004/C 101/07), "Guidelines on the Effect on Trade Concept
contained in Articles 81 and 82 of the Treaty" ("the guidelines"). For Article 81 to be applicable, it is
not necessary to prove that trade is being influenced at the relevant
time. He quoted paragraph 23 of the
guidelines which states that:
"The notion 'may
affect' implies that it must be possible to foresee to a significant degree of
probability on the basis of a set of objective factors of law or fact that the
agreement or practice may have an influence, direct or indirect, actual or
potential, on the pattern of trade between Member States." (para.23)
[40] Mr Pratt criticised Mr Marshall's report on the basis
that he had not identified any foreign company that wanted to enter the UK
cylinder LPG market between 1999 and 2004, let alone one which was dissuaded
from doing so because of Calor's network of principal dealers. However I agree with Mr Johnston's
submission that such evidence is not a prerequisite to the applicability of
Article 81 to the agreements in question.
Mr Marshall explained that the concept of trade covers all cross-border
economic activity, including establishment.
Calor is owned by a Dutch group, and the parent company of Flogas is
based in the Republic of Ireland. This is indicative of an existing Community
dimension. It can be concluded that even
the activities of the existing foreign interests in the market may be
influenced by the way in which the GB market is structured, and in particular
by the Calor arrangements.
Mr Marshall continued by saying that it is sufficient that the
network of principal dealer agreements and the resultant foreclosure of the
market may have an effect on inter member state trade in a broad sense. It can be noted that in para.26 the
guidelines advise that "it is not required that the agreement or practice will
actually have or has had an effect on trade between member states. It is sufficient that the agreement or
practice is 'capable' of having such an effect" (para.26). LPG is an internationally traded commodity,
hence distortions to the structure of supply in the downstream market is likely
to effect the pattern of trade in the upstream markets. I accept Mr Marshall's evidence at
paragraph 99 of his report that there is potential for inter state entry
and trade in the supply and distribution of cylinder LPG in GB, and that this
potential is affected by the existence of a national network of agreements,
such as that between Calor and its principal dealers. With regard to the conclusions which I have
already reached on the adverse effects of the principal dealer agreements on
competition and entry to the market, and under reference to the relevant
criteria in the guidelines, I conclude that it was possible to foresee with a
sufficient degree of probability on the basis of objective factors that the agreements,
including that between the pursuers and the defenders, may have an appreciable
influence, direct or indirect, actual or potential, on the pattern of trade
between member states. Insofar as
Mr Pratt suggested and Mr Forrester submitted that such a conclusion
cannot or should not be made in the absence of direct evidence that a company
based in another member state was dissuaded from trading with or in GB because
of these agreements, I reject that approach.
While no doubt the defenders' case would have been bolstered by such
evidence, the matter can be tested by assuming consideration of the issue at
the commencement of the agreements, when ex
hypothesi no such evidence could be obtained. It should be remembered that the test is only
jurisdictional. It does not require any
judgment on actual impact. Rather it
only seeks to identify issues which are of legitimate concern to the interests
of the EU. What matters is the potential
for such an adverse effect, and no doubt it may often be that positive evidence
of the kind desiderated by the pursuers will be difficult or impossible to
obtain. If the pursuers' approach was
correct, in my opinion it would risk undue dilution of Article 81.
[41] I do not consider that I am falling into the trap identified by
Mr Forrester, under reference to various Commission and Court decisions,
of being seduced by a hypothetical or speculative potential effect. I accept that cross-border trade in cylinders
themselves is not likely to be significant, and that in practice cylinder LPG
supply businesses will be organised on a national basis. However that is not an end of the
matter. Jurisdiction can arise in
respect of undertakings that may wish to enter or to expand their existing
activities in other member states - see the guidelines paragraph 30. As with other aspects of the competition
issues, the large market share of Calor is relevant in this regard. Had Calor enjoyed a very small share of the
market, different considerations might well have arisen. For example reference can be made to Völk v Vervaecke [1969] E.C.R. 295.
[42] If a company in this country may be influenced in a decision
whether to enter the market or whether to expand its existing activities by the
terms and consequences of the Calor principal dealer agreements, it seems to me
reasonable to conclude that any potential or existing competitor based in
France or Germany may be similarly influenced by the same considerations, and
thus may be dissuaded from either setting up a business in this country to
compete against Calor and others, or to expand existing activities. I note that paragraph 77 of the
guidelines, after stating that it is sufficient that an appreciable change is
capable of being caused in the pattern of trade between member states, continues:
"... in many cases
involving a single member state the nature of the alleged infringement, and in
particular, its propensity to foreclose the national market, provides a good
indication of the capacity of the agreement or practice to affect trade between
member states."
As is well known, the underlying
policy issue is the prohibition of agreements or practices which might impede
the realisation of a single market between member states. The multi-national nature of the operators
involved in the market in this country is demonstrated by the parties involved
in this litigation. While I accept that
the onus is on the defenders, I note that the pursuers have led no substantive
evidence on this issue. As with other
aspects of the competition questions, they have contented themselves with a
critique of the reliability of the Marshall report, thus, unlike in some of the
cases relied upon by Mr Forrester, there is no positive evidence in favour
of the denial of jurisdiction such as might allow me to conclude that the
potential impact identified by Mr Marshall is in fact of very limited
extent. As mentioned above, I was
impressed by Mr Marshall, and in the absence of contradictory evidence, I
see no good reason to reject this chapter of his evidence. It might be said that in making these
comments I am inverting the onus, but I would demur. My above conclusions are based on the
evidence led by the defenders, which I accept, and which in my opinion
satisfies the test for jurisdiction. I
am simply noting the absence of evidence to the effect that there was no or very
little potential for inter state impact on trade flowing from the Calor
agreements.
Final Remarks on Competition Issues
[43] Although I have not
rehearsed them in detail, in the above discussion I have sought to deal with
the main issues raised in the pursuers' submissions on this part of the
case. I now deal with a few remaining
miscellaneous points mentioned by Mr Forrester. He said that there had been plenty of
evidence of switching of allegiance by dealers.
My own view is that there was relatively little evidence of this, and
Mr Jamieson's decision did seem to come as something of a surprise, even a
shock to Calor. Mr Forrester also
observed that the vindication of property rights is not intrinsically
anti-competitive. No doubt this is true,
but repatriation by former dealers is an effective method of vindicating those
rights. He submitted that there is no
perceptibly anti-competitive effect when prohibiting former principal dealers
from handling cylinders after the termination of agreement. However this was directly contradicted by the
evidence of Mr Todd quoted above, and by the pursuers' own case on
damages. Mr Forrester also
submitted that if a competitor such as Flogas could increase its market share
by the acquisition of companies, the market cannot be said to be
foreclosed. However, in agreement with
Mr Marshall's response to this, market share can be increased by company
acquisition in a foreclosed market. As I
understand it, the need for Flogas to acquire companies in order to expand its
business is indicative of a market in which open competition is
restricted. Mr Forrester also sought
to persuade me that given the small area covered by the first defenders'
agreement, namely north-west Glasgow,
it could have no impact on cross-border trade.
However I consider that it would be artificial and wrong to focus only
on this one agreement, and ignore the network of such agreements across the
country, all as discussed by Mr Marshall.
Each agreement must be considered in the appropriate economic and
trading context. The Stergios Delimitis case quoted earlier
supports this approach. In my view it
would make little sense if it was necessary to assess individual dealership
agreements under Article 81(1) in isolation from the overall network. The final part of paragraph 87 of the
guidelines on the effect on trade concept confirms this approach.
[44] The result is that I uphold the defence based on the
prohibition contained in Article 81(1), and reject the pursuers' case
based on breach of contract by the first defenders.
Inducement of Breach of Contract
[45] The pursuers have a
second string to their bow against the first defenders. In the alternative they plead that the first
defenders are liable in damages to Calor in that they induced or procured
Calor's customers to break their contracts with the pursuers. This was the main ground of claim against the
second defenders, who had no direct contractual relationship with the
pursuers. It is said that both defenders
are liable on an accessory basis for damage caused by breaches of contract by
Calor's customers.
[46] The basis for this argument is that when purchasing a Calor
cylinder from the defenders, customers were obliged to sign an agreement,
termed a form 167 agreement, which, amongst other things, obliged them to
return the cylinder only to an authorised Calor dealer. It was submitted that by accepting Calor
cylinders in exchange for a Flogas cylinder, the defenders took active steps
which resulted in a breach of that obligation by the customer, and thereby
deprived Calor of the opportunity of maintaining the customer connection.
[47] In my view this ground of claim is unfounded, principally for
two reasons. The first reason is as
follows. The essence of the alleged
delict is deliberate and unjustifiable damage to another by procuring the
breach by a third party of his contract with that other person. Reference can be made to British Motor Trade Association v Gray 1951 SC 586, especially Lord Russell at 603. In Allen
v Flood [1898] AC 1, at 106-7
Lord Watson said:
"He who wilfully
induces another to do an unlawful act which, but for his persuasion, would or
might never have been committed, is rightly held responsible for the wrong
which he procured."
In the same case Lord Macnaughten
referred to "the person in the background who pulls the strings." As so often, the key question is whether the
defenders can properly be held to be responsible in law for the damage to the pursuers. The authorities demonstrate that a positive
answer demands an element of persuasion, threat, inducement or procurement by
the defender. Failing to stop a breach
is not enough. Similarly it is not
sufficient that breach is a foreseeable consequence of the defenders'
conduct. The House of Lords has recently
reaffirmed that a positive act of inducement or procurement is essential to the
wrong - see OBG Limited and Others v Allan and Others [2007] UKHL 21, for
example Lord Nicholls of Birkenhead at paragraph 189.
[48] In the circumstances of the present case, in my opinion this
essential element is missing. At most
the defenders provided an opportunity for Calor customers to fail to return the
cylinder to an authorised Calor dealer.
While the defenders did not do all possible to prevent the failure, the
evidence does not indicate that they took positive steps to induce or procure such
breaches of contract. They took
advantage of the decision of customers to leave cylinders with them, but they
did not take the active steps to encourage or obtain that result which are
necessary before they can be made accessories to the primary liability of the
customer. I agree with
Mr Johnston's submission that there is no evidence of the necessary
inducement by the defenders to customers to breach their contracts with Calor.
[49] The second reason for rejecting this head of claim relates to
the content of the customer's obligation to Calor. The pursuers seek damages for loss of the
customer connection. However, form 167
did not oblige a customer to buy a new cylinder from Calor, but only to return
the empty cylinder to a Calor dealer. No
doubt this had the potential for commercial advantage to Calor, in that it
would increase the prospects for a new purchase, but Calor had no contractual
right to that advantage. Since the
customer cannot be liable in damages for failure to purchase a new Calor
cylinder, neither can the defenders, even if they did procure the breach by the
customer. At most the pursuers are
liable on an accessory basis for the damage caused by the customer's breach,
which in turn can be measured only by the consequences for Calor of giving the
cylinder to the defenders, rather than to a Calor outlet. Since the defenders returned the cylinders to
Calor, those damages would be, at best, minimal. No doubt the real battleground between the
defenders and Calor was over the next purchase by the customer, but that falls
outside the scope of the 167 agreement.
[50] In these circumstances it is not necessary for me to express a
view on whether any inducement to breach could be justified on public interest
grounds, such as safety considerations, though I would doubt it, given the
proximity of Calor dealers to the defenders' premises. Similarly it is not necessary to deal with
the submission that the customer was not in breach by giving the cylinder to a
responsible person, such as a former dealer, for return to the owner. However in that regard I doubt that the
evidence showed that customers were aware that the defenders would return them
to Calor. In OBG Limited v Allen,
their Lordships discussed the civil wrong of causing loss by unlawful means,
but in the absence of any case by the pursuers on that basis, I make no comment
on the matter.
Spuilzie
[51] The final string to the
pursuers' bow was spuilzie.
Mr Sandison submitted that, whatever else, both defenders were
guilty of deliberate unauthorised possession of the pursuers' cylinders. While the cylinders were returned to the
pursuers, the defenders' conduct caused damage to Calor through loss of the
customer to a rival company. Stair
describes spuilzie as
"the taking away
of moveables without consent of the owner or order of law ... Thus, things stolen or robbed, though they
might be criminally pursued (for) theft or robbery, yet they may be, (also)
civilly pursued (for) as spuilzie." - 1, 9, 16.
The Scottish Law Commission has
described spuilzie as "protean and of uncertain scope". Its very existence as a remedy available
today has been doubted. However, one
thing seems clear, namely that unlawful (sometimes called "vitious")
dispossession of the owner is required. Gow
describes spuilzie as "a remedy ... used for the protection of actual possession
and maintenance of the public peace", The
Law of Hire Purchase, 2nd ed. 232, a definition which harks back
to sheep stealing, etc.
[52] I have difficulty in fitting the circumstances of the present
case into that of spuilzie. The
defenders were given possession of a large number of the pursuers' cylinders for
the purpose of trading with customers buying cylinder LPG gas. They gave possession of the cylinders to
their customers. Those customers
returned them when empty, and then bought a cylinder of a rival supplier. The defenders took the empty cylinders and
returned them to Calor. Even if the
defenders' possession can properly be described as unauthorised, in my opinion
it falls far short of the kind of unlawful dispossession necessary for
spuilzie. The reality is that the battle
was over the next contract, namely would the customer purchase another Calor
cylinder or a Flogas cylinder. That has
nothing to do with spuilzie. The
cylinders taken by the defenders were returned to Calor, and they can continue
to use them in their business.
[53] In any event, spuilzie does not arise if possession is given
voluntarily by someone entitled to possess the goods, even if he is not the
owner. Mr Sandison relied on a
recent decision in the context of hire purchase, namely McKinnon v Avonside Homes
Limited 1993 S.C.C.R. 976, though in that case the issue in dispute focused
on damages. The author of the spuilzie
chapter in the Stair Encyclopaedia surmises that in modern
cases relating to hire purchase the importance of consent by a lawful possessor
has been overlooked because of an overly wide definition of spuilzie in some
modern texts to the effect that it applies to any act which denies the pursuer's
right to possession. Mr Sandison
cited the then Mr Alan Rodger's article "Spuilzie in the Modern World" 1970 S.L.T. (News) 35 in support of
his submission. However, he did not
persuade me that any ability of a hire purchase company to possess goods
through the hirer could be extended to the pursuers in the circumstances of the
present case. Further, the defenders can
point not only to the consent of the lawful possessor of the cylinder, but also
to their own intention to return the goods to Calor.
[54] In any event, spuilzie leads to damages based on the value of
the assets concerned and the profits which could be gained by the owner from
their use. Those remedies hardly apply
when the goods have been returned to the owners. The pursuers' reliance on consequential
commercial losses does not assist. The
remedies for spuilzie are defined by reference to the facts necessary for its
existence, namely loss of value and of the profits available from the use of
the goods. Whatever else spuilzie would
not lead to damages of the kind claimed by the pursuers in the present
case. The reality is that Calor are
seeking to protect their commercial interests, not the proprietary interested
protected by spuilzie.
Summary and Result
[55] In summary, I have held
that the first defenders were in breach of the principal dealers agreement with
Calor. In particular they failed to provide
the necessary notice for termination of the dealership, and they continued to
handle Calor cylinders in breach of clause 10.4.7. Calor did not breach their obligations to the
first defenders. Rather the unilateral
termination was caused by Mr Jamieson's belief, which had been engendered
by representatives of Flogas, that after five years of the arrangement with
Calor he was a free agent, allied to his unhappiness with the health of his
business. However, given Calor's very
substantial share of the cylinder LPG market, the relevant restrictions in the
agreement were not compliant with Article 81(1) of the EU Treaty in that,
both cumulatively and individually, they amounted to a significant restriction
on competition in what was, and still is, a mature market. Thus the primary ground of claim against the
first defenders fails.
[56] The pursuers also claim that both defenders caused them loss by
inducing Calor customers to breach a duty to return empty Calor cylinders to a
Calor outlet. Alternatively, they are
entitled to damages from both companies on the basis of spuilzie. I have rejected both of those claims. It follows that the defenders are entitled to
decree of absolvitor. If I am wrong I
would have accepted the pursuers' submissions on quantum, and pronounced decree against the first defenders in the
sum of £37,500, and against the second defenders in the sum of £30,000, both
with interest from 1 September
2005. However I would have
been reluctant to grant permanent interdict, given the lapse of time since the
change in dealership. In Kelso School Board v Hunter (1874) 2 R 228, Lord Deas
said that an interdict is of the nature of an extraordinary remedy "not to be
given except for urgent reasons, and even then not as a matter of right, but only
in the exercise of a sound judicial discretion". In my view this statement of the position is
not blunted by other judicial observations emphasising that the enforcement of
legal rights by permanent interdict is not subject to considerations such as the
balancing of respective harm and advantage; see for example Lord President Inglis in Bank of Scotland v Stewart (1891) 18 R. 957 at 971.
Such comments are addressing a different issue. Of course I do not condone the defenders'
failure to obey the interim interdict
orders. However, the issue generated
heat at the time because of the impact on the pursuers' business
connection. By now the defenders will
have built up their own trade as Flogas dealers, and, especially in the absence
of recent ongoing concern about their handling of Calor cylinders, I consider
it likely that I would have concluded that permanent interdict would now be
disproportionate and unnecessary. I
shall repel the pursuers' pleas-in-law (barring the first and fourth pleas,
which are no longer relevant); sustain
the fourth, fifth and sixth pleas for both defenders; assoilzie the defenders; and, in so far as not already dealt with,
grant them the expenses of the action.
