Competition Authority Decision of 27 June 1996 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification Nos. CA/25 and 26/94 - Tedcastle/McCrystal 

Decision No. 470

Introduction

1.	Notification was made by Tedcastle McCormick & Co. Ltd (Tedcastle) on 14 and 27 September 1994 of two distribution agreements, with Aidan McCrystal and McCrystal Oils (Bellurgan) Ltd respectively, with a request for certificates under Section 4(4) of the Competition Act, 1991, or, in the event of a refusal by the Competition Authority to issue certificates, licences under Section 4(2) of the Competition Act.  Following the issue of a statement of objections, Tedcastle offered to amend the agreements in a manner which satisfied the concerns of the Authority.

The Facts

(a)	The subject of the notifications

2.	The notifications concern agreements dated 15 August 1994 under which Tedcastle:
(i)	appoints Aidan McCrystal to be a distributor of its petrol; and
(ii)	appoints McCrystal Oils to be a distributor of its gas oil, derv and kerosene;
in return for which the purchaser 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.  McCrystal Oils is an Irish company with its registered office in Dundalk, Co. Louth, and Aidan McCrystal is its controlling shareholder.

(c)  The products and the market

4.	The products involved in the agreements are fuel oils, that is diesel, gasoil, kerosene, and 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 diesel.

(d)	The notified agreements

5.	The agreements between Tedcastle and Aidan McCrystal and McCrystal Oils were made on 15 August 1994.  They are virtually identical.  As notified, they 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 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 price for 200 gallon lots, less specified rebates for premium and unleaded petrol in the first agreement and for gas oil, derv and kerosene in the second (clause 2).  The buyer agrees to deal only in Tedcastle petroleum products (clause 5).  The buyer is required to provide at its own cost the necessary storage tanks, vehicles and delivery and other equipment (clause 6 in the second agreement).  Tedcastle may sell to other persons, firms or companies (clause 6 in the first agreement and clause 7 in the second).  The buyer will keep records and produce them to Tedcastle when required (clause 7 in the first agreement and clause 8 in the second).  The buyer may not charge or part with possession of any of its facilities or property without Tedcastle's consent (clause 8(b) in the first agreement and clause 9(b) in the second).

(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.  The distributors are required to purchase all their supplies of product from Tedcastles unless Tedcastles are unable to supply them.  Tedcastles has provided credit facilities and a loan to McCrystal Oils.'

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.  Tedcastles has a minority shareholding in the CCO Limited of Dundalk which competes with the distributors.'

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 a depot, storage facilities and tankers.  He also needs working capital.  Most distributors would not possess the capital required to establish themselves in business were it not for the support provided by Tedcastles.

The distribution agreements produce an appreciable improvement in distribution in which consumers are allowed a fair share of the resulting benefits.  A high level of investment is required to provide adequate facilities and to meet safety standards and comply with the Dangerous Substances Act.  Distributors would have insufficient resources for the necessary investment without the substantial support provided by Tedcastles.  The exclusive purchasing obligation and the qualified prohibition on dealing in competing products imposed on the distributors encourage the distributors to devote all the resources at their disposal to the sale of the products while retaining their independence and freedom to run the business as they see fit.  The agreements lead to durable co-operation resulting in improved service to the consumer.  They facilitate 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 costs of distributing products to a limited number of distributors which purchase large quantities and have storage capacity are lower than the cost of delivering smaller volumes to a large number of outlets and competitive pressures ensure that any savings in costs are passed on to the consumers.  The restrictions placed on the distributors are the minimum necessary to secure a reasonable financial return for Tedcastles for its investment.  The agreements do not impose on Aidan McCrystal or McCrystal Oils (Bellurgan) Limited terms which are not indispensable to the attainment of this objection nor do they afford Tedcastles or the distributors the possibility of eliminating competition in respect of all or a substantial part of the products.

Tedcastles expertise in the importation of the products and Aidan McCrystals experience in the efficient distribution of the products greatly enhances the supply and distribution of the products with resulting benefits to competition and the consumer generally.'

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.  Such small distributors are regularly entering the market......

The agreements with McCrystal Oils (Bellurgan) Limited and Aidan McCrystal have increased competition for oil products in the market by enhancing and sustaining competition in the market......

The agreements do 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.....

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 agreements were of indefinite duration, since they were 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 agreements to provide that they would terminate automatically at the end of five years without notice from either party to the other and without any automatic rights of renewal.  Evidence was provided that the agreements were amended by letters from Tedcastle, countersigned by Aidan McCrystal, dated 2 February 1996.

(g)	EU precedents

11.	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 distributors freedom to set resale prices are not permitted.  Article 10 of the regulation relates to service station agreements, and is not relevant to the notified agreement.

Assessment

Applicability of Section 4(1)

12.	Section 4(1) of the Competition Act, 1991 prohibits and renders void all agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State. 

(a)	The undertakings

13.	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 Aidan McCrystal and McCrystal Oils are engaged in the distribution of those products for gain, and they are all therefore undertakings within the meaning of Section 3(1) of the Competition Act.  The agreements are agreements between undertakings.  They have effect within the State.

(b)     The agreement

14.	The essential feature of the distribution agreements 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 agreements were automatically renewed for subsequent five year periods, unless 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 agreements, as part of this market structure, restrict or distort competition, and so offend against Section 4(1) of the Competition Act.  

15.	The distributor may not charge or part with any of its facilities or property without Tedcastle's consent (clause 8(b) in the first agreement and clause 9(b) in the second).   While this places some constraint upon the distributor's freedom to sell his business, it does 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.  This requirement, in the Authority's opinion, does not offend against Section 4(1).  In the opinion of the Authority, none of the other clauses in the agreements 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 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.

18.	Such a 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 agreements with McCrystal had an initial duration of five years, and were automatically extended for further five year terms thereafter, unless lengthy notice was given.

21.	 In the opinion of the Authority, the notified agreements were of indefinite duration, and they were 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 agreements have now been limited to five years, with no period of notice, and this is regarded as indispensable by the Authority.

22.	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 agreements do not afford any possibility of eliminating competition in respect of a substantial part of the products in question.  

The Decision

23.	In the Authority's opinion, Tedcastle, Aidan McCrystal and McCrystal Oils  are undertakings and the notified agreements are agreements between undertakings.  The Authority considers that the agreements offend against Section 4(1) of the Competition Act, 1991.  The Authority considered that, because of the indefinite duration of the notified agreements, they did not fulfil the conditions of Section 4(2) of the Act.  The Authority considers, however, that the agreements, as amended by the letters of 2 February 1996 from Tedcastles, fulfil all the conditions of Section 4(2) of the Act.

24.  The Authority therefore grants licences under Section 4(2) in respect of the amended distribution agreements between Tedcastle and Aidan McCrystal and McCrystal Oils.  The licences shall apply from 27 June 1996. It appears appropriate that the period specified for the licences should be ten years, that is until 26 June 2006.  It is not considered necessary to attach any conditions to the grant of the licences.

The Licences

25.  The Authority therefore grants the following licences:

The Competition Authority grants licences to the distribution agreements of 15 August 1994 between Tedcastle McCormick & Co Ltd and Aidan McCrystal and McCrystal Oils (Bellurgan) Ltd, notified on 14 and 27 September 1994 respectively under Section 7 (notification nos. CA/25 and 26/94), as amended by the letters of 2 February 1996, 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 licences shall apply from 27 June 1996 to 26 June 2006.

For the Competition Authority

Patrick M Lyons
Chairman
27 June 1996