Calor Gas Ltd v Express Fuels (Scotland) Ltd & Anor [2008] ScotCS CSOH

OUTER HOUSE, COURT OF SESSION

[2008] CSOH 13

OPINION OF LORD MALCOLM

in the cause

CALOR GAS LIMITED

Pursuers;

against

EXPRESS FUELS (SCOTLAND) LIMITED and D JAMIESON & SON LIMITED

Defenders:

________________

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 (12^th 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, 2^nd 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.

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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Calor Gas Ltd v Express Fuels (Scotland) Ltd & Anor [2008] ScotCS CSOH_13 (25 January 2008) URL: http://www.bailii.org/scot/cases/ScotCS/2008/CSOH_13.html Cite as: [2008] ScotCS CSOH_13, [2008] CSOH 13

Scottish Court of Session Decisions