Competition Authority Decision of 25 June 1996 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/5/96 - Tedcastle/Primo

Decision No. 467

Introduction

1.	Notification was made by Tedcastle McCormick & Co Limited (Tedcastle) on 29 January 1996 of a distribution agreement with Primo Oil Limited 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.

The Facts

(a)  The subject of the notification

2.	The notification concerns an agreement dated 1 June 1995 under which Primo agrees to purchase its total requirements of gas oil, derv, kerosene and petrol exclusively from Tedcastle for a period of years.  Tedcastle has notified a number of other distribution agreements, and these are the subject of separate decisions, such as Decision Nos. 459 and 460 of 26 February 1996.

(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.  Primo is an Irish registered company which is engaged in the distribution of derv, gas oil and kerosene to commercial consumers and heating oil to households.  It also operates two company owned service stations retailing motor fuels under the Primo brand name.

(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 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 motor fuels.

(d)  The notified agreement

5.	The agreement between Tedcastle and Primo was made on 1 June 1995.  As notified, it continued in force for five years and for successive five year periods thereafter, unless terminated by either party giving no less than six months’ notice, 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 gas oil, derv, kerosene and petrol at net prices set out in clause 6 (clause 2).  The buyer agrees to deal only in Tedcastle petroleum products (clause 5).  Net prices are normally to be reviewed on a monthly basis, and net prices as of April 1995 are specified, as are volume rebates on petrol only (clause 6).  Tedcastle may sell the products to other persons, firms or companies (clause 7).  The buyer may not charge or part with possession of any of its facilities or property without Tedcastle’s consent (clause 8(b)).  If the buyer wishes to sell its business,  or part of it, to another person, it must offer it to Tedcastle at the same consideration as the other person is willing to give (clause 10(a)).

(e)  Submissions by Tedcastle

6.	In its submission, Tedcastle stated that:
`This Agreement is an exclusive purchasing Agreement.  The purpose of this Agreement is to enable the Supplier to plan the sales of his goods with greater precision and for a longer period and to ensure that the reseller's requirements will be met on a regular basis for the duration of the Agreement.  This will allow the parties to limit the risk to them of variations in market conditions and to lower distribution costs.  The Agreement will allow consumers a fair share of the resulting benefit since they will gain from the advantages of regular supply and will be able to obtain the contract goods more quickly and more easily.'

7.	In support of the request for a certificate, Tedcastle said that:
`This exclusive purchasing Agreement is one to which only two undertakings are party and whereby one party the reseller agrees with the other the supplier to purchase certain goods specified in the Agreement for resale only from the supplier.  Thereby this Agreement is exempted of Article 85(1) of the Treaty of Rome by virtue of Article 1 of Commission Regulation (EEC) No. 1984/83 pursuant to Article 85(3) of the Treaty.  

This Agreement in accordance with paragraph 11 of Commission Regulation (EEC) No. 1984/83 is concluded for a specified range of products and for not more than five years.'

8.	In support of the request for a licence, Tedcastle argued that:
`(a)	This Agreement allows both parties to approve distribution and to concentrate on sales activities.  By virtue of this agreement both parties need not maintain numerous business relations with a large number of dealers and are able by dealing with only one dealer to overcome more easily distribution difficulties in trade in general. This Agreement facilitates the promotion of sales of the product more intensive marketing and a continuity of sales, but at the same time a rationalisation of distribution.  This Agreement enables the supplier to plan the sale of his goods with good precision and for a longer period and will ensure that the reseller's requirements will be met on a regular basis for the duration of the Agreement.  This Agreement thus allows the party to limit the risk to them of variations in marketing conditions and to lower distribution costs.
(b)	As a rule exclusive purchasing Agreements of this nature allow consumers a fair share of the resulting benefit as they gain directly from the improvement in distribution as the economic and supply position of both parties is improved.  Such Agreements allow the parties to improve and maintain the quality of their goods and of their service to customers.

(c)	The terms imposed on the undertakings under this Agreement are indispensable as they are sine qua non terms of an exclusive purchasing Agreement.

(d)	Exclusive purchasing Agreements stimulate competition between the products of different manufacturers and are therefore taken to be of no threat to competition.'

(f)  Subsequent developments

9.  In a letter of 13 February 1996, the Authority 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.  In a subsequent letter of 29 March 1996, the Authority also expressed concern about clauses 8(b) and 10(a) of the agreement, which related to the disposal of Primo’s premises, insofar as the clauses related to Primo’s retail petrol stations.  Tedcastle stated that it would amend the agreement as follows:
‘Notice:
The notice provision contained in Clause 1 is hereby amended so that the agreement shall determine at the expiration of five years from the 1st June, 1995 without notice from either party to the other and without any automatic right of renewal.  Nothing contained in this letter shall affect termination of the Agreement within the five year term under the supervision of Clause 13.
Restrictions on disposals:
Clause 8(b) and Clause 10(a) are hereby amended to provide that if Primo Oil wishes to dispose of or charge any of the petrol stations which it owns, Tedcastles consent is not required to such a disposal or charge and nor is Primo Oil obliged to offer to sell the petrol station to Tedcastles under the provisions of Clause 10(a).

Clause 8(b) and Clause 10(a) shall be deemed not to apply to petrol stations owned by Primo although the remaining clauses of the agreement shall be of full force and effect.’

Evidence was provided that the agreement was amended by a letter from Tedcastle, dated 15 April 1996, and countersigned by Primo on 5 June 1996.

(g)  EU Precedents

10.	The EU Commission has produced block exemption regulations for exclusive distribution agreements and exclusive purchasing agreements (see Decision No. 459 of 26 February 1996).  The exclusive purchasing regulation permits certain restrictions on the exclusive purchaser, but such 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 not permitted.  Article 11 of the regulation relates to service station agreements, and is not relevant to the notified agreement.

Assessment

Applicability of Section 4(1)

11.	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

12.	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 Primo 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

13.	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. 

14.	The distributor is obliged not to dispose of its facilities or property without the consent of Tedcastle (clause 8(b)), and without offering these to Tedcastle at the same price as a proposed purchaser is willing to pay (clause 10(a)).   While these place some constraint upon the distributor's freedom to sell his business, they do not prevent any person from entering the oil distribution business.  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) insofar as they relate to the oil distribution business of Primo.

15.	Primo, however, owns two retail petrol stations, and clauses 8(b) and 10(a) of the notified agreement related to these properties also.  In the motor fuels category licence (Decision No. 25 of 1 July 1993, para 33), the Authority stated that such restrictions upon the freedom of the dealer to sell his premises, and upon the freedom of another person to buy the premises, constrained exit and entry to the trade in the retail sale of motor fuels, and they therefore affected competition in the trade.  Insofar as clauses 8(b) and 10(a) applied to Primo’s petrol stations, the Authority likewise considered that they offended against Section 4(1) of the Act.  Since the clauses have been amended so that they no longer relate to Primo’s petrol stations, the Authority considers that they now 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)

16.	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  indispensable to the attainment of those objectives;
(ii)	afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

17.	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 co-operation 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.

18.	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.

19.	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.

20.	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 Primo had an initial duration of five years, and was automatically extended for further five year terms thereafter, unless lengthy notice was given.

21.	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 Tedcastle agreement has been limited to five years, with no notice period, and this is regarded as indispensable by the Authority.

22.	As stated in para 70 of the motor fuels category licence, the Authority considered that the requirement that a supplier be given first option to purchase a petrol station produced no demonstrable benefits which could be shared with consumers, and it was not indispensable.  The implementation of such clauses could lead to a situation where a significant number of important dealer outlets would be acquired by suppliers, to the detriment of competition.  In the Authority’s opinion, clauses 8(b) and 10(a) of the notified agreement failed to fulfil the conditions of Section 4(2) of the Act.  As noted above, the clauses have been amended so that they no longer offend against Section 4(1).

23.	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

24.	In the Authority's opinion, Tedcastle and Primo Oil are undertakings and the notified agreement 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 agreement and the requirements to give first option to purchase Primo’s petrol stations to Tedcastle, 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 dated 15 April 1996 from Tedcastle to Primo, fulfils all the conditions of Section 4(2) of the Act.
 
25.  The Authority therefore grants a licence under Section 4(2) in respect of the amended distribution agreement between Tedcastle and Primo Oil Ltd.  The licence shall apply from 5 June 1996.  It appears appropriate that the period specified for the licence should be ten years, that is until 4 June 2006.  It is not considered necessary to attach any conditions to the grant of the licence.

The Licence

26.  The Authority therefore grants the following licence:
The Competition Authority grants a licence to the distribution agreement of 1 June 1995 between Tedcastle McCormick & Co Ltd and Primo Oil Ltd, notified on 29 January 1996 under Section 7 (notification no. CA/5/96), as amended by the letter of 15 April 1996 to Primo, 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 5 June 1996 to 4 June 2006.

For the Competition Authority

Patrick M Lyons
Chairman
25 June 1996.