Competition Authority Decision of 26 February 1996 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/24/94 - Tedcastle/Star Oil

Decision No. 459

Introduction

1.	Notification was made by Tedcastle McCormick & Co Ltd (Tedcastle) on 5 September 1994 of a distribution agreement with Star Oil Dublin East Ltd with a request for a certificate under Section 4(4) of the Competition Act, 1991, or, in the event of a refusal by the Competition Authority to issue a certificate, a licence under Section 4(2) of the Competition Act.  Following the issue of a statement of objections, Tedcastle offered to amend the agreement in a manner which satisfied the concerns of the Authority.

The Facts

(a)     The subject of the notification

2.	The notification concerns an agreement dated 29 April 1994 under which Tedcastle appoints Star Oil to be a distributor of its petroleum products, in return for which Star Oil agrees to purchase Tedcastle products exclusively for a period of years.  Tedcastle has notified a number of other distribution agreements, and these are the subject of separate decisions.

(b)     The parties involved  

3.	Tedcastle is a wholly owned subsidiary of Deepwell Investments Ltd, an Irish private limited company controlled by the Reihill family.  Tedcastle and its sister companies are engaged in the importation and distribution of oil products, in the State and in Northern Ireland, in the importation and sale of coal, commercial vehicles and heavy duty trucks and machinery, and in warehousing.  Star Oil is an Irish company with its registered office in Dublin.

(c)     The products and the market

4.	The products involved in the agreement are mainly fuel oils, that is diesel, gasoil and kerosene, although the distributor also deals in small amounts of petrol.  Tedcastle has a relatively small share of the main product markets.  The distributor supplies, inter alia, diesel fuel to commercial customers and central heating oil to domestic customers.  In common with other fuel oil suppliers, Tedcastle uses distributors to deliver to final customers and does not use its own staff, as in the past, although large customers may be supplied directly.  Tedcastle stated that it sold in the home heating market, the agricultural/commercial market and the motor propellant market.  It maintained that the first two relevant markets included coal, fuel oil, natural gas, LPG, turf and electricity.  The Authority considers that not all fuels are perfectly interchangeable and that, rather than a single home heating market, there is a distinct market for heating oil.  The relevant markets are those for heating oil and for motor diesel.

(d)     The notified agreements

5.	The agreement between Tedcastle and Star Oil was made on 29 April 1994 and came into effect on 3 August 1994.  As notified, it continued in force for five years, and for successive five year periods thereafter, unless terminated by either party giving to the other no less than six months' notice in writing in which event the agreement would terminate at the end of the five year period in which the notice was given (clause 1).  Tedcastle agrees to supply and the buyer agrees to purchase its total requirements of petroleum products, excluding lubricating oil, at Tedcastle's wholesale schedule prices for 900 litre lots, less specified rebates for gas oil, derv and kerosene (clause 2).  Star Oil agrees to deal only in Tedcastle petroleum products (clause 5).  Star Oil is required to provide at its own cost the necessary storage tanks, vehicles and delivery and other equipment (clause 6).  Tedcastle may sell to other persons, firms or companies (clause 7).  The buyer will keep records and produce them to Tedcastle when required (clause 8).  The buyer may not charge or part with possession of any of its facilities or property without Tedcastle's consent (clause 9(b)).  If the buyers wishes to sell its business, goodwill or assets to another person, it must offer these to Tedcastle at the same consideration as the other person is willing to give (clause 11(a)).

(e)     Submissions by Tedcastle

6.	In its submission, Tedcastle stated that:
`The Distributor purchases the product from Tedcastles at Tedcastles Wholesale Schedule Price.  This price is in effect determined by market forces.  The Distributor receives a rebate on this price.  In other words in exchange for agreeing to purchase only from Tedcastles the Distributor gets the product at slightly less than the prevailing wholesale market price and also gets a Guarantee of at least some of his requirements in the event of a fuel shortage.  The Distributor is required to purchase all his supplies of product from Tedcastles unless Tedcastles are unable to supply them.'

7.	Tedcastle said that distribution of the products took place at three principal levels of supply - importers, distributors and small distributors, and added that:
`These various levels of the distribution chain are not however completely distinct from one another and it is common practise for an importer (like Tedcastles) to supply directly to consumers.  Tedcastles sister company TOP sells directly to the public and is a competitor of Star Oil Dublin East Limited.' 

8.	Tedcastle maintained that:
`The Agreements are mutually beneficial for the parties.  They provide a secure and orderly market for Tedcastles and regular supplies for the Distributor and the consumer.  They increase the competition faced by other oil companies to the benefit of the consumers and thus allow for the creation of an efficient distribution chain.  In order to enter the market a distributor needs tankers and working capital.

The exclusive purchasing obligation and the qualified prohibition on dealing in competing products encourages the Distributor to devote all his resources to the sale of the products while retaining his independence and freedom to run the business as he thinks fit.  The Agreement leads to a durable cooperation resulting in improved service to the consumer.  It facilitates long term planning and consequently a cost effective organisation of importation and distribution by enabling Tedcastles to accurately plan its needs and to contract with its suppliers for the required tonnage to meet those needs.  The Agreement does not impose on the Distributor terms which are not indispensable to the obtainment of this objective nor do they afford Tedcastles the possibility of eliminating competition in respect of all or a substantial part of the products.'

9.	Tedcastle also stated that:

`The products are broadly commodity products and accordingly, competition is almost entirely on a price basis.  The consumers are well informed so any moves on the part of a distributor or Tedcastles to raise prices above the competitive level would lead inevitably to a loss of market share.  Consumers can readily transfer to other distributors and purchase the products at a lower price.  It is easy for a small distributor to gain access to the market.  All that is needed is a tanker which can be obtained for as little as  £4,000.00 and a telephone.....

The Agreement does not give Tedcastles the power to determine prices, control or restrict the production or distribution of the product or of similar products or to hinder effective competition in any way ......

Tedcastles has abandoned the pre-emption provision at Clause 11 in the Agreement and is not relying upon it.......

Article 10 of Regulation 1984/83 is relevant to this agreement.'

(f)  Subsequent developments

10.  The Authority issued a statement of objections on 30 November 1995, and expressed its concerns that the agreement was of indefinite duration, since it was automatically renewed unless lengthy notice of termination was given, and that the period of notice was lengthy.  Tedcastle responded on 5 January 1996 and stated that it would amend the agreement to provide that it would terminate automatically at the end of five years.  Tedcastle wrote to Star Oil on 2 February 1996, providing as follows:
`The Notice provision contained in Clause 1 is hereby amended so that the Agreement shall determine at the expiration of five years from the 3rd August 1994 without notice from either party to the other and without any automatic rights of renewal.  Nothing contained in this letter shall affect termination of the Agreement within the five year term under the provisions of Clause 13.'  This letter was countersigned by Star Oil. 

(g)     EU precedents

11.	The EU Commission considers that both exclusive distribution agreements and exclusive purchasing agreements may come within the scope of Article 85(1) of the Treaty of Rome, which prohibits anti-competitive agreements, but that both types of agreement generally satisfy the requirements of Article 85(3) for exemption. The Commission has therefore produced block exemption regulations for exclusive distribution agreements(1) and exclusive purchasing agreements(2).  These formed the basis of the Authority's category licences for exclusive distribution agreements(3) and for exclusive purchasing agreements for motor fuels(4).  The Authority had also previously issued licences for the Esso motor fuels solus and related agreements(5).

12.	Under Regulation 1983/83, the Commission granted a block exemption to exclusive distribution agreements whereby one party agrees to supply only to another party certain goods for resale within the whole or a defined area of the common market.  (The Regulation is described at length in the exclusive distribution category licence).  An essential feature of such agreements is that they allocate a specific territory to the exclusive distributor.  Certain obligations may be placed upon the exclusive distributor, it must not be allowed absolute territorial protection, and the agreement may be of indefinite length.  The Regulation does not permit any restriction upon the distributor's freedom to set his own resale prices.

13.	Regulation 1984/83 is similar to Regulation 1983/83, but it relates to exclusive purchasing, which does not allocate a territory to the exclusive purchaser.  (It is described in part in the Esso decision, and at length in the dealer LPG category licence(6)).  It permits the same obligations on the exclusive purchaser as on the exclusive distributor, but agreements must not be of indefinite duration nor for a period in excess of five years (though they can be renewed).  Restrictions upon the distributor's freedom to set resale prices are again not permitted.  Article 10 relates to service station agreements, and is not relevant to the notified agreement.

Assessment

Applicability of Section 4(1)

14.	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. 

(a)     The undertakings

15.	Section 3(1) of the Competition Act defines an undertaking as "a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service".  Tedcastle is engaged in the supply and distribution of petroleum products for gain and the distributor is engaged in the distribution of those products for gain, and they are both therefore undertakings within the meaning of Section 3(1) of the Competition Act. The agreement is an agreement between undertakings. It has effect within the State.

(b)     The agreement

16.	The essential feature of the distribution agreement as notified was that the distributor was obliged to purchase his total requirements of petroleum products from Tedcastle, for an initial period of five years.  The agreement was automatically renewed for subsequent five year periods, unless it was specifically terminated,  by giving a lengthy period of notice, which could amount to five years or more.  The distributor, therefore, is not permitted to purchase any petroleum products from a supplier other than Tedcastle during the period of the agreement, and no supplier other than Tedcastle may supply the distributor during this period.  This limits the commercial freedom of the distributor to obtain supplies, and the freedom of other suppliers to meet his requirements.  While a single exclusive purchasing agreement between Tedcastle and one of its distributors might have only a negligible effect on competition, each agreement forms part of a network whereby all Tedcastle distributors are subject to exclusive purchasing requirements.  Other oil companies are known to have exclusive purchasing agreements with distributors, or they operate by way of long-term exclusive distribution agreements, under which distributors, who are appointed for specific territories, are required to purchase their supplies exclusively from a particular supplier.  Thus distributors generally are subject to long-term exclusive purchasing requirements, and the Tedcastle agreement, as part of this market structure, restricts or distorts competition, and so offends against Section 4(1) of the Competition Act.  

17.	The distributor is obliged not to dispose of its facilities or property without the consent of Tedcastle (clause 9(b)), and without offering these to Tedcastle at the same price as a proposed purchaser is willing to pay (clause 11(a)).  (Tedcastle has stated that it has abandoned the latter clause, but it is in the notified agreement).  While these place some constraint upon the distributor's freedom to sell his business, they do not prevent any person from entering the trade in petroleum products.  Unlike shops, where there is a local custom within the immediate area, oil distribution depots can be sited anywhere, and lack of access to a particular depot does not represent a barrier to entry by a competitor.  These requirements, in the Authority's opinion, do not offend against Section 4(1).  In the opinion of the Authority, none of the other clauses in the agreement offend against Section 4(1) of the Act.

Applicability of Section 4(2)

18.  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 or distribution 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  indispensableto 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.'
     
19.	The Authority considers that an exclusive purchasing agreement with a distributor produces an appreciable improvement in distribution in which consumers are allowed a fair share of the resulting benefit.  The supplier is able to concentrate his sales activities and he does not need to maintain numerous business relations with a large number of customers.  The agreement facilitates the promotion of sales of the product and leads to intensive marketing and to continuity of supplies while at the same time rationalising distribution.  It stimulates competition between the products of different suppliers.  The appointment of the distributor, who engages in sales promotion, customer services and carrying of stocks, is an effective way for the supplier to enter the market and to compete with other suppliers.  The exclusive purchasing obligation and the ban on dealing in competing products imposed on the distributor encourage the distributor to concentrate on the sale of Tedcastle products, while retaining his independence and freedom to run the business as he sees fit.  The agreement leads to durable cooperation between the supplier and the reseller, allowing them to improve or maintain services to customers and the sales efforts of the distributor.  The investment by the supplier ensures security of supply by providing assured outlets for its product, and the distributor is guaranteed regular supplies provided that it complies with the terms of the agreement.  This allows long‑term planning of sales and consequently a cost‑effective organisation of production and distribution.  It also allows the supplier to undertake the necessary investment in storage and shipping facilities.

20.	This distribution agreement also allows consumers a fair share of the resulting benefit as they gain directly from the improvement in distribution, and the economic and supply position is improved as they can obtain products more quickly and more easily.  Consumers are assured supplies of petroleum products, while being able to choose between different brands. The distribution system of Tedcastle, which operates alongside exclusive purchase or distribution systems of most other suppliers of these products, allows some degree of intra‑brand as well as inter‑brand competition, including price competition, since the Tedcastle agreements do not involve exclusive territories.

21.	The exclusive purchasing obligation on the reseller and the non‑competition clause imposed on him are essential components of such an agreement and are indispensable for the attainment of these advantages.

22.	Exclusive purchasing obligations, however, need to be limited in duration.  The EU Commission has drawn a distinction between exclusive distribution agreements, where the distributor is allocated an exclusive territory (but without absolute territorial protection), and where exclusive purchasing is involved, and exclusive purchasing agreements, where no exclusive territory is allocated.  In the former case, the EU Regulation imposes no time limit for agreements, while the exclusive purchasing Regulation does not apply if the agreement is of indefinite duration or for a period in excess of five years, although agreements of up to ten years are permitted for certain motor fuel agreements, or even longer when the service station is owned by the supplier.  The Authority has taken a similar approach in its category licences for exclusive distribution agreements and for exclusive purchasing agreements for motor fuels.  The Tedcastle agreement with Star Oil had an initial duration of five years, and was automatically extended for further five year terms thereafter, unless lengthy notice was given.

23.	 In the opinion of the Authority, the notified agreement was of indefinite duration, and it was subject to a lengthy period of notice of termination.  It did not consider that these provisions were indispensable in securing the benefits outlined above, and so they failed to fulfil the conditions of Section 4(2) of the Act.  The Authority did not believe that Tedcastle could not effectively distribute its products by means of exclusive purchasing agreements whose duration did not exceed five years, with no automatic extension of the period of the agreement and no period of notice for termination.  The Authority was also conscious of the fact that the Tedcastle agreement did not satisfy the requirements of Regulation 1984/83, and that it might be void under Article 85(2) of the Treaty of Rome.  The Authority granted a licence to the Conoco distributor and related agreements(7) after Conoco amended the agreement to limit the exclusive purchase agreement to five years.  The Tedcastle agreement has been limited to five years, with no period of notice, and this is regarded as indispensable by the Authority.  

24.	There are in existence long‑term exclusive distribution agreements operated by other suppliers of petroleum products, which have been found to be acceptable under the category licence for such agreements.  In addition, Tedcastle distributors are not afforded territorial protection from each other.  In the circumstances the Authority considers that the agreement does not afford any possibility of eliminating competition in respect of a substantial part of the products in question.  
 
The Decision

25.	In the Authority's opinion, Tedcastle and Star Oil are undertakings and the notified agreement (CA/24/94) is an agreement between undertakings.  The Authority considers that the agreement offends against Section 4(1) of the Competition Act, 1991.  The Authority considered that, because of the indefinite duration of the notified agreement, it did not fulfil the conditions of Section 4(2) of the Act.  The Authority considers, however, that the agreement, as amended by the letter of 2 February 1996 to Star Oil, fulfils all the conditions of Section 4(2) of the Act.

26.  The Authority therefore grants a licence under Section 4(2) in respect of the amended distribution agreement between Tedcastle and Star Oil.  The licence shall apply from the date of the amendment, that is 2 February 1996.  It appears appropriate that the period specified for the licence should be ten years, that is until 1 February 2006.  It is not considered necessary to attach any conditions to the grant of the licence.

The Licence

27.  The Authority therefore grants the following licence:

The Competition Authority grants a licence to the distribution agreement of 29 April 1994 between Tedcastle McCormick & Co Ltd and Star Oil Dublin East Ltd, notified on 5 September 1994 under Section 7 (notification no. CA/24/94), as amended by the letter of 2 February 1996 to Star Oil, 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 2 February 1996 to 1 February 2006.

For the Competition Authority

Patrick M Lyons
Chairman
26 February 1996

Notes

1.	Regulation No. 1983/83, OJ L173, 30.6.83, p.1.
2.	Regulation No. 1984/83, OJ L173, 30.6.83, p.5.
3.	Decision No. 144 of 5 November 1993.
4.	Decision No. 25 of 1 July 1993.
5.	Decision No. 4 of 25 June 1992.
6.	Decision No. 364 of 28 October 1994.
7.	Decision No. 413 of 25 August 1995.