[New search]
[Context]
[View without highlighting]
[Printable RTF version]
[Help]
Esso Solus & Related Agreements [1992] IECA 4 (25th June, 1992)
Competition
Authority Decision of 25 June 1992 relating to a proceeding under Section 4 of
the Competition Act, 1991.
Notification
Nos. CA/11/91E, CA/12/91E, CA/13/91E, and CA/14/91E. Esso Solus and Related
Agreements.
Decision
No. 4
Introduction
1. Notification
was made with a request for a licence under
Section 4 of the
Competition Act
1991 by Esso Ireland Limited on 19 December 1991 in respect of the standard
Esso solus agreement with independent dealers, and its dealer loan equipment
and dealer loan agreements, and its deed of charge/mortgage.
2. Notice
of intention to take a favourable decision was published in 'The Irish Times'
on 29 May 1992. There were no submissions from interested parties.
The
Facts
(a) The
Subject of the Decision
3. This
decision concerns the standard Esso solus agreement, which provides for the
exclusive purchase by an independent dealer of Esso motor fuels for resale, for
a maximum period of ten years, and the following related agreements:
- the
dealer loan equipment agreement, which relates to the provision of service
station equipment on loan to the dealer;
- the
dealer loan agreement, which is used when an interest-bearing loan is made
available to the dealer for redevelopment of the outlet; and
- the
deed of charge/mortgage, which is used to provide security for the loan to the
dealer.
Each
notified agreement is a standard agreement which Esso employs with the dealers
in its independent dealer network throughout the State. While each independent
dealer is a party to the solus agreement, not all dealers are party to the
other three agreements.
(b) The
Parties Involved
4. Esso
Ireland Limited is one of the major suppliers of motor fuels and oils in the
State. It is a wholly-owned subsidiary of the Exxon Corporation of the USA.
Esso is primarily involved in the marketing of petroleum products, which
includes the supply and distribution of motor fuels to the motoring public
through a chain of retail outlets. Esso imports its products, usually from an
Esso refinery in the UK, through various Irish ports where it has storage
facilities. From there, retail outlets are supplied by road tanker. The Esso
retail network consists of a number of company owned outlets, mostly operated
by Artane Service Station Limited, and several hundred dealer owned outlets
which operate under the Esso brand.
5. Most
of the Esso branded dealers purchase motor fuels from the company under
exclusive supply agreements. The remaining dealers are not contracted to Esso,
and purchase their motor fuels without being tied by formal supply agreements.
The Esso dealer network accounts for more than half of the Esso branded sales
volume. Esso dealer stations are located in almost every county in the State,
and they have a wide range of annual sales (throughput). A higher proportion
of company owned than dealer owned stations is located in the major centres of
population. Esso exclusive (solus) dealers are independent resellers of motor
fuels, and this operation may be combined with car repairs, car sales or a shop
selling, among other items, grocery products.
(c) The
Product
6. The
product with which the notified agreements are concerned consists of motor
fuels, that is petrol and diesel for use in mechanically-propelled road vehicles.
(d) The
Market
7. While
some motor fuels are sold direct by Esso to commercial users, and a large
proportion is sold through Esso company owned outlets, this Decision relates
only to sales of motor fuels though dealer owned outlets. Besides Esso, there
are ten other suppliers to the dealer market in the State:
B.P.
Ireland Ltd.
Irish
Shell Ltd.
Burmah
Castrol Ireland
McMullan
Bros. Ltd.
Campus
Morris
of Fiddown
Conoco
Ireland Ltd.
Tedcastle
Oil Products Ltd.
Estuary Texaco
(Ireland) Ltd.
8. According
to the Report of Enquiry into the Supply and Distribution of Motor Fuels by the
Fair Trade Commission in 1989 (PL. 7951), total sales of petrol through
retailers in 1988 were 1,090 million litres, while total retail sales of
autodiesel were 187 million litres. In 1988, there were 3,227 retail petrol
outlets, of which 447 were company owned, or 13.9%. The proportion of total
petrol sales through company owned outlets was, however, 41.6%. 36.3% of
dealer outlets sold less than 20,000 gallons of petrol per year (90,920 litres)
and only 4.6% sold more than 200,000 gallons (909,200 litres). The respective
figures for company stations were 4.1% and 57.2%. Company outlets had a higher
average annual throughput than solus dealers, who had a higher average
throughput than non-solus dealers. The average throughput of all outlets in
Ireland was only about one-quarter of the EC average.
9. Each
oil company sells motor fuels through independent dealers, both solus and
non-solus, and almost all also own company stations.
10. Since
dealer stations are located throughout the State, the appropriate geographic
market in this case is the State.
11. Up
to 30 September 1991, the motor fuels sector was subject to strict price
control and to the provisions of the Restrictive Practices (Motor Spirit and
Motor Vehicle Lubricating Oil) Order, 1981. Both the Order and price control
were removed on the coming into force of the
Competition Act on 1 October 1991.
(e) The
notified agreements
(i) The
standard Esso solus agreement
12. The
standard solus agreement which Esso has with each of its independent solus
dealers is the basic agreement, and it provides for the exclusive supply of
Esso motor fuels for resale for a period not exceeding 10 years. It makes
provision for an interest-free loan and provides for a rebate on fuels
purchased. The loan is unsecured and the rebate earnings can be offset against
the loan, which is the usual procedure. The agreement contains the following
main provisions:
Clause
3(a) - The Dealer agrees with Esso 'To purchase all motor fuels required for
consumption or sale at the Service Station exclusively from Esso for a period
of ten years from the date hereof and not during the said period of ten years
to purchase, receive or sell or knowingly permit to be purchased received or
sold at the Service Station any motor fuels other than such as shall be
purchased from Esso.'
Clause
1(c) - 'Motor fuels shall mean all motor fuels including motor diesel fuel....'
Clause
1(d) - 'The Service Station shall for all the purposes of this Agreement mean
and include the said Service Station known as
and any other Service Station or premises owned, occupied or used by the Dealer
for the retail of motor fuels at the date of this Agreement or at any time
during the continuance thereof within an area comprised by a circle having a
radius of one mile from the said Service Station.'
Clause
2(a) - Esso agrees with the Dealer 'To sell to the Dealer at Esso's wholesale
schedule price to Dealers ruling on the date of delivery the Dealer's total
requirements of motor fuels for resale at the Service Station for a period of
ten years from the date hereof.'
Clause
2(b) - Esso agrees with the Dealer 'To pay to the Dealer a loan of.... to
assist the Dealer.... towards the cost of improvements at the Service Station
consisting of....'
Clause
2(c) - Esso agrees with the Dealer 'To pay to the Dealer a rebate on motor
fuels delivered by Esso.... calculated at the prevailing rebate rate....'
(which is 0.156p per gallon, or 0.034p per litre).
Clause
3(e) - The Dealer agrees with Esso 'To take deliveries of motor fuels in
quantities of not less than .... litres.'
Clause
3(f) - The Dealer agrees with Esso 'To operate the Service Station as far as
possible in accordance with the principles of the Esso Dealer Co-operation
Plan....'
Clause
3(j) - The Dealer agrees with Esso 'Not to sell or offer to sell the Service
Station or the business carried on there during the said period of ten years
without first giving Esso the opportunity to introduce a purchaser and to use
the Dealer's best endeavours to ensure that any purchaser, assignee or
transferee of the Service Station or the business will enter into an agreement
with Esso similar to this Agreement including this clause.'
Clause
4(b)(ii) - 'In the event of Esso withholding, reducing or suspending
deliveries.... the Dealer shall be free to purchase from other suppliers any
quantities which Esso after request by the dealer fails to deliver....'
13. In
respect of an option being exercised by the dealer upon the expiration of the
Agreement to postpone repayment in respect of an unpaid balance of a loan,
clause 7(e) states that 'The provision of this option herein shall not be
deemed or construed to impose any present undertaking or obligation on the
Dealer extending beyond the period of ten years from the date hereof and this
Agreement shall be construed accordingly.'
14. The
Esso Dealer Co-operation Plan, contained in the Schedule to the Agreement,
contains the following clauses:
'5. To
keep the Service Station open at all reasonable hours for the sale of Esso
Motor Fuels and Esso Motor Oils.
6.
To
participate in advertising and sales promotion plans and provide a mailing list
for circulation to customers and prospective customers.
7.
To
give preference to the sale of Esso Motor Oils and other products.'
(ii) The
Dealer Equipment Loan Agreement
15. The
dealer equipment loan agreement is subsidiary to and dependent upon the solus
agreement. Almost all dealers with a solus agreement are also party to the
equipment loan agreement. Title to the equipment remains with Esso, and the
loan is for a maximum period of 10 years. The agreement is used in tandem with
the solus agreement when a dealer first signs, and thereafter when new or
reconditioned equipment is being installed on site on a loan basis. Among the
terms of the agreement are:
Clause
1(i) - 'Subject to the provisions of this Agreement Esso will loan for a period
of .... years ('the loan period') commencing from the date of completion of
installation as specified in the Schedule hereto the item of equipment ('the
equipment') together with the cost of installation ('installation cost') as set
out in the Schedule. The equipment shall remain Esso's property.'
Clause
3 - 'Esso may during the loan period without prior notice determine the loan of
the equipment.... in the event of the Dealer ceasing for any reason whatsoever
to occupy the Service Station or ceasing to carry out there the business of
retailer of Esso Motor Fuels or failing to carry out any of the obligations
hereunder or under any Supply Agreement....'
Clause
4 - 'The Dealer agrees with Esso:
(i) To
keep the equipment in his possession and control at the Service Station and not
to remove it to any other premises and to permit Esso Ireland Ltd. from time to
time to inspect it and where the equipment includes or consists of storage or
dispensing equipment to use such storage and dispensing equipment exclusively
for the storage and supply of Esso Motor Fuels and to permit Esso Ireland Ltd.
(1) to
take samples of the contents and
(2) to
place a lock & seal on the tank during the continuance of this Agreement
and
the Dealer undertakes not to interfere with or remove such lock or seal.'
(iii) The
Dealer Loan Agreement
16. The
dealer loan agreement is used when an interest bearing loan is paid to the
dealer for redevelopment. The loan is secured by mortgage and is repayable
over a period not exceeding 15 years. The agreement is virtually identical to
the Esso solus agreement, with the clauses contained in (i) above, including
the 10 year exclusive purchasing clause. One additional provision is:
Clause
3(f) - The Dealer agrees with Esso 'To grant to Esso or its nominee as security
for the loan and interest a .... mortgage on the Service Station....'
17. About
one third of Esso solus dealers are party to the dealer loan agreement.
(iv) Deed
of Charge/Mortgage
18. The
deed of charge/mortgage is supplemental to the dealer loan agreement, and it is
used to provide security for the loan advanced to the Dealer. Among its
provisions are:
Clause
1(i) - 'In consideration of the sum of £.... paid by Esso to the
Dealer.... the Dealer hereby covenants with Esso that the Dealer will repay the
loan with interest as hereinafter provided to Esso on demand and in the
meantime.... to pay to Esso equal monthly payments of £.... each....'
Clause
6 - 'The Dealer hereby attorns and becomes tenant at will to Esso of the
Mortgaged Premises at a pepper corn rent during such times as the loan or any
part thereof shall remain owing on this security but nothing in this clause
contained shall prevent Esso from at any time entering on and taking possession
of the Mortgaged Premises and so determining the tenancy hereby created.'
Second
Schedule. Clause 2 - 'To occupy the Mortgaged Premises and personally to
conduct and keep the same open for business as a retailer of motor fuels.'
Clause
3 - 'To purchase exclusively from Esso all motor fuels which the Dealer shall
require for consumption or sale on the Mortgaged Premises or any other premises
owned, occupied or used by the Dealer within an area comprised by a circle with
a radius of one mile from the Mortgage Premises so long as Esso shall be ready
to supply the same for a period of ten years from the date of the Loan
Agreement and not during the said period to buy, receive or sell or knowingly
permit to be bought, received or sold on the Mortgaged Premises or any other
premises owned, occupied or used by the Dealer within an area comprised by a
circle with a radius of one mile from the Mortgaged Premises any motor fuels
other than such as shall be purchased from Esso.'
Third
Schedule. Clause 4 - 'The Dealer will not without the previous consent in
writing of Esso grant or agree to grant (whether in exercise or independently
of any Statutory Power) any lease or tenancy of the Mortgaged Premises.'
19. All
dealers with a loan agreement are also subject to the deed of charge/mortgage.
(f) EEC
Regulation 1984/83
20. EEC
Regulation No. 1984/83, of 22 June 1983, is a block exemption regulation which
applies Article 85(3) of the Treaty of Rome to categories of exclusive
purchasing agreements. It includes special provisions for service station
agreements, that is for solus agreements and for agreements relating to company
owned stations. The regulation entered into force on 1 July 1983 and it
expires on 31 December 1997.
[1]
21. The
regulation applies to agreements involving only two parties whereby one party,
the reseller, agrees with the other, the supplier, to purchase specified goods
only from the supplier, or from a connected undertaking or one entrusted by the
supplier with the sale of his goods.
22. In
the case of agreements for the supply of petroleum-based motor vehicle fuels,
or for these and other fuels, for resale in a specified service station,
special commercial or financial advantages may be accorded by the supplier to
the reseller. In such cases, the exclusive purchasing agreement may be for a
period not exceeding ten years, and the reseller may be obliged not to sell
fuels supplied by other undertakings. The reseller may also be obliged not to
use lubricating oil supplied by other firms in equipment financed or made
available by the supplier, but he may not be prevented from selling oil
supplied by other firms. These exclusive purchasing agreements may refer to no
other goods, nor to services (except in connection with the servicing of
equipment owned or financed by the supplier). Some general provisions of the
regulation also apply, such as permitting the reseller to be obliged to
purchase minimum quantities of goods, to sell the goods under trademarks and to
advertise. The benefits of exemption may be withdrawn by the Commission in a
particular case where it considers that the conditions of Article 85(3) are not
satisfied, where, for example, effective competition is lacking. There are
special transition provisions for existing service station agreements. Service
station agreements cannot be combined with general exclusive purchasing
agreements involving the same parties.
(g) Submissions
of the Parties and others
Esso
23. Esso
stated that the high proportion of sales through the dealer network emphasised
the importance of the independent sector in the distribution of retail motor
fuels. Thus Esso supported each dealer in maintaining and improving the
business by providing investment funding commensurate with the volume potential
of each station. The investment required to maintain or improve even a basic
service station facility was substantial, and there was a need to build in
safeguards to ensure that a reasonable return was achieved on the investment.
The arrangements were beneficial to consumers in that they provided for the
safe distribution of motor fuels to the motoring public, in a cost-effective
and efficient manner.
24. Esso
claimed that its investment policy was geared toward providing modern and
purpose-built facilities which offered the highest standards of consumer
service, by implementing a branded image at service stations. The considerable
investment also had to ensure adherence to the safety and environmental
legislation governing the industry. Each retail investment was considered a
joint venture with the dealer which should be capable of generating an adequate
financial return to both Esso and the dealer. The level of investment differed
in each case, depending on the individual circumstances of the dealer, the
physical aspects of the proposed development and the volume potential of the
location. The minimum cost of a basic facility, according to Esso, was
substantial, including tanks,pumps, pipework and tank gauges, civil works, a
canopy and service station equipment. A modern, fully equipped station, with a
car wash and a convenience store, would cost a considerable amount.
25. Esso
claimed that the initial investment for even the basic facility would place an
inordinate strain on the finances of the independent dealer. Independents
generally did not have the capital resources or access to such resources to
provide new facilities or develop existing facilities, and the available margin
from trading was inadequate to fund such investment. Over the last five years,
Esso had invested a large amount of money in the dealer network, and the
investment programme was continuing.
26. Esso
argued that, to safeguard its considerable investment in the dealer network,
the economically viable period for the exclusive purchase agreement was ten
years, because of the relatively low level of average throughput pertaining in
Ireland. It noted that, when the agreement expired, the dealer was free to
negotiate a new supply agreement with any wholesale supplier of his choosing.
Competition among wholesalers for untied dealers was very intense and a
significant amount of brand switching took place.
27. Esso
maintained that the arguments in favour of having ten-year supply agreements in
the retail motor fuel market had already been accepted by the EC, and had been
ratified under Regulation 1984/83. It pointed out that the Fair Trade
Commission did not consider that the maximum 10 year period operated against
the common good, but that any shorter period would substantially lessen the
incentive for wholesalers to invest in dealer outlets to the detriment of
dealers and consumers.
28. Esso
stated that the solus agreement provided financial assistance to independent
operators for the provision of modern, safe and efficient facilities for the
retail sale of motor fuels and in return an assured outlet for the wholesaler.
The investment included the provision of adequate storage capacity to take
deliveries in economic load sizes. This resulted in savings in the substantial
delivery costs. The commercial and financial advantages conferred by the
supplier made it significantly easier to establish, modernise, maintain and
operate a service station. The ban on dealing in competing products incited
the reseller to devote all his resources to the sale of the contract goods,
which allowed the parties to improve or maintain the quality of the contract
goods and of the services to the customer. The agreements allowed long term
planning of sales and consequently a cost-effective organisation of distribution.
29. Esso
claimed that consumers benefited from these improvements as they were assured
supplies of goods of satisfactory quality at fair prices and conditions while
being able to choose between the products of different suppliers. Consumers had
available a choice of modern, safe and efficient outlets for the purchase of
motor fuels at a price which reflected the reduced cost of distribution. The
only obligation imposed upon the retailer was to purchase motor fuels
exclusively from the wholesaler for a ten-year period. This was required in
order to justify the considerable investment involved. The obligation related
to a particular outlet only. Motor fuels supplied by other wholesalers were
available to the motoring public at other outlets in close proximity to the
assured outlet.
30. Esso
stated that the exact location of a service station was not easy to define and
the intention of including any other outlet within a one-mile radius was to
include all such facilities owned or used by the retailer in connection or
association with the main outlet. They considered a radius of one mile to be a
reasonable distance which did not impose an undue restraint on the retailer.
It was intended only as a safeguard against the catastrophic effect of a
retailer developing a competing virgin site in the very proximity of the
subject site. The minimum delivery quantity was incorporated into the
agreement to guarantee the efficiency of the delivery operation. The
Cooperation Plan was merely a guide to the proper and efficient operation of a
service station, and the obligation was not absolute and was not enforced. The
obligation in respect of opening was at all reasonable hours and no specific
hours were or had been specified. In locations where there was an opportunity,
Esso might recommend a retailer to extend his usual hours on a trial basis.
For some time, there had not been any joint advertising or sales promotions
and, in the past, any such promotions had been with the full agreement of the
retailer.
31. Esso
stated that they considered it normal business practice that, where equipment
was provided by a supplier, it could only be used for that supplier's goods.
The usual period of the Dealer Equipment Loan agreement was ten years. The few
dealers without such an agreement had such an agreement in the past which had
expired. While the equipment was written off over the ten year period of the
agreement, in reality it had a longer useful life. In addition to the basic
solus agreement which provided for the payment of rebate in advance by way of
interest free loan, further financial assistance could be requested by the
retailer in the form of an interest bearing loan. The usual period for such a
loan was 15 years, but it could be repaid at any time at the discretion of the
dealer. The clause in the Deed of Charge/Mortgage restricting letting by the
retailer without consent was stated by Esso to be a normal requirement of a
lender whose security could be depreciated by a letting at a rent less than the
market rent.
32. Esso
stated that solus dealers were free to set their own retail prices, and Esso
did not influence or enforce a retail price. In their communication advising
wholesale price changes,they informed dealers of the revised retail prices
which would apply at their company-operated sites. In fact, in the retailer
newsletter which advises of any change in wholesale prices, Esso include, for
information, the maximum recommended retail price for each grade of motor fuel,
effective some days ahead. Esso explained that this had been done in the past
in order to advise dealers of the maximum prices which could be charged under
the Maximum Prices Order. The practice was continued after the MPO had been
repealed for information purposes, and not to influence prices charged by
dealers, since, in its absence, all their dealers would telephone to enquire
about the prices which Esso would charge in their company stations. At the
request of the Authority, Esso agreed, by letter dated 13 May 1992, not in
future to inform solus retailers in advance of pump price changes at company
stations operated by Artane Service Station Limited.
Society
of the Irish Motor Industry
33. The
Society of the Irish Motor Industry (SIMI), which has a number of Esso solus
dealers among its members, stated that there appeared to be a significant
amount of price competition, as was evidenced by the wide variation in prices
displayed at filling stations. With regard to autodiesel, SIMI understood that
from time to time dealers could avail themselves of very competitive prices
from wholesale suppliers other than their usual petrol company supplier, and
this arrangement was helpful from the point of view of enhancing competition.
SIMI understood that Esso suggested pump prices to their solus dealers, but
they were not aware of any insistence that solus dealers had to comply with
these suggested prices. SIMI considered that, depending on the proximity of a
company owned station to a dealer, the dealer might wish to protect his sales
volume by pricing competitively with the company owned station.
34. SIMI
stated that any agreement whereby retailers were required to source their
supplies from one supplier was, by definition, restrictive of competition.
However, apart from other considerations, solus agreements did provide the
stability to enable petrol retailers to develop and retain a reasonable sales
volume. Of itself, the solus agreement need not necessarily inhibit price
competition, as was clear from the present market place. SIMI supported, as a
matter of general principle, and without reference to any individual solus
agreement, the granting of a licence in respect of solus agreements.
35. While
the provision of loans for improvements or equipment might tend to prolong the
exclusive purchase requirement beyond ten years, SIMI considered that the
retailer was normally a free agent in this regard and had the option of
exploring more favourable arrangements for raising any additional capital
required. Without the availability of loans from petroleum companies, SIMI
considered that it was very unlikely that many petrol retailers would be
successful in raising the necessary capital for improvements and additional
equipment, having regard to the very low profit margins as traditionally
associated with the sale of petrol by retail. Since the repeal of the
Restrictive Practices Order, SIMI had not received any complaints about
unreasonable pressure on petrol retailers in relation to advertising and
promotion. SIMI were not in favour of advertising or promotional schemes which
involved the petrol retailer in additional costs which, inevitably, had to be
passed on to purchasers.
Assessment
(a) Applicability
of Section 4(1)
36.
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.
37. Esso
Ireland Limited and the independent Esso solus dealers are engaged in the sale
of motor fuels for gain, and they are therefore 'undertakings' within the
meaning of
Section 3(1) of the
Competition Act. The solus and related
agreements are agreements between undertakings. The relevant product market is
that of motor fuels for resale to the public. Since there are Esso solus
dealers in all but one county, the relevant geographical market is the State.
(i) The
solus agreement - exclusive purchasing requirement
38. The
primary feature of the basic solus agreement is that the solus dealer is
obliged to purchase his requirements of motor fuels exclusively from Esso for a
period not exceeding ten years (clause 3(a)). The solus dealer, therefore, is
not permitted to purchase any motor fuels from a supplier other than Esso
during the period of the agreement, and no supplier other than Esso may supply
the dealer during that period. This limits the commercial freedom of the
dealer to obtain supplies, and the freedom of others to supply him, and is a
restriction upon competition within the terms of
Section 4(1) of the
Competition Act.
39. While
the effect of a single agreement between Esso and an independent dealer might
be insignificant, each agreement must be considered in the economic context of
the retail market for motor fuels.
[2]
Esso alone has solus agreements with several hundred dealers, and it operates
through its own outlets, all of which can only purchase Esso motor fuels for a
lengthy period at least. Together, the network of Esso dealer and company
stations accounts for a not insignificant proportion of total retail sales of
motor fuels, and it comprises Esso stations with the largest throughputs. In
addition, all the other major suppliers operate a similar system of dealer
stations with ten-year solus agreements and large numbers of company stations.
The smaller suppliers also have solus dealers, with a few company outlets. The
net result is that a high proportion of all retail outlets, and almost all of
the largest ones, are either owned by a supplier or are operated on a ten-year
solus agreement. None of these can purchase motor fuels for a long period from
any other supplier.
40. This
tends to introduce a considerable degree of rigidity into the market, and makes
it difficult for a new entrant to enter the market on any significant scale,
since the most important potential customers are not available, at least in
some cases until their solus agreements have expired.
41. The
Authority considers, therefore, that the standard Esso solus agreement has the
object and the effect of preventing, restricting or distorting competition in
goods in the State, and therefore offends against
Section 4(1) of the
Competition Act, 1991. Since the three related agreements - concerning
equipment loan, loan and deed of charge/mortgage - also involve an exclusive
purchasing commitment for ten years, or are dependent on an agreement
containing such an obligation, they also come within the prohibition of
Section
4(1) of
the Act.
(ii) The
solus agreement - other requirements
42. The
obligation in the solus agreement upon Esso to supply the dealer with his total
requirements (clause 2(a)), is a corollary of the exclusive purchase obligation
on the dealer, and it comes within the prohibition of
Section 4(1). It is
qualified to the extent that the dealer is permitted to purchase supplies in
certain circumstances if Esso withholds, reduces or suspends deliveries (clause
4(b)(ii)). The extension of the exclusive purchasing requirement to include
the sale of motor fuels by the dealer at any premises within a one mile radius
of the designated service station (clause 1(d)), prevents the dealer from
selling competing motor fuels at any premises within that area. At the public
enquiry held by the Fair Trade Commission in 1989, it was widely held in
evidence that the location of a service station was very important in
attracting motorists, and that, because of the high price of petrol, it would
not be economic for a motorist to drive very far in order to buy petrol cheaper
in another service station, because any consequent saving would be offset by
the cost of fuel consumed. Competition would therefore appear to be a very
localised phenomenon. The obligation not to deal in competing motor fuels
within a one mile radius of the designated station is a restriction on
competition which is prohibited by
Section 4(1).
43. The
agreement to provide a loan (clause 2(b)), which is not applicable in all
agreements, is a reward to the dealer for accepting the exclusive agreement,
and is not caught by
Section 4(1). It is important that the existence of a
loan cannot be used to extend the life of the exclusive purchase agreement
beyond ten years (clause 7(e)). The payment of a rebate to the dealer (clause
2(c)), which is a small amount per litre and is not payable to non-solus
dealers or to company owned operators, is a further recompense for exclusivity,
and is not within the terms of
Section 4(1). The rebate is usually paid as a
lump sum in advance by way of a loan under clause 2(b), and amounts to the
estimated rebate over the ten years of the solus agreement. The minimum
delivery requirement (clause 3(e)), provided that it is not unreasonable, does
not itself restrict the dealer from obtaining supplies from another supplier,
since he is prevented from doing so by the exclusive purchasing requirement in
clause 3(a). It is not restrictive of competition and does not offend against
Section 4(1). The requirements in the Dealer Cooperation Plan to open at
reasonable hours (clause 5) and to participate in advertising and sales
promotion (clause 6), provided that the requirements in a particular case are
not unreasonable, do not restrict the dealer in deciding upon his own opening
hours nor do they restrict the dealer in engaging or not in his own forms of
advertising and promotion. They are not restrictive of competition and are not
prohibited by
Section 4(1). The obligation to give preference to Esso
lubricating oils and other products (clause 7), does not prevent the dealer
from selling competing products, and is not restrictive of competition and is
not caught by
Section 4(1). The requirements to give Esso the chance of
introducing a purchaser to the dealer and for the dealer to try to ensure that
any purchaser will continue to deal with Esso (clause 3(j)), do not restrict
the dealer's freedom to sell the station, and are not prohibited by
Section 4(1).
[3]
(iii) The
dealer equipment loan agreement
44. The
dealer equipment loan agreement comes within the scope of
Section 4(1) since it
is subsidiary to and dependent upon the solus agreement which is itself
prohibited by
Section 4(1). The equipment loan agreement does not have a
period of effectiveness beyond that of the solus agreement (clause 1(i)), and
cannot be used to extend the ten-year period of exclusivity by artificial
means, and the length of the loan is not a restriction on competition within
the meaning of
Section 4(1). The ability of Esso to determine the agreement in
the event of the dealer ceasing to operate the station or failing to carry out
his obligations (clause 3), is a normal consequence of the supply agreement and
of the fact that the equipment is the property of Esso, and does not restrict
competition in the sense of
Section 4(1). The requirements to allow Esso to
inspect the equipment, for the dealer to use the equipment exclusively for Esso
products, and for Esso to take samples and lock and seal the tanks (clause
4(1)), reflect the solus agreement and the ownership of the equipment by Esso,
and do not restrict competition and are not caught by
Section 4(1).
(iv) The
loan agreement
45. The
loan agreement, being virtually identical to the solus agreement, is prohibited
by
Section 4(1) for the same reasons as set out above, while many clauses are
not caught by
Section 4(1) as before. The obligation on the dealer to grant a
mortgage in return for the loan (clause 3(f)), which cannot be used to extend
the period of exclusivity, is a normal requirement for the granting of a loan,
and is not a restriction on competition within the meaning of
Section 4(1).
(v) The
deed of charge/mortgage
46. The
deed of charge/mortgage is related to the loan agreement, and it also contains
an exclusive purchase requirement (Second Schedule, clause 3), which brings it
within the scope of the prohibition in
Section 4(1). The requirements to repay
the loan (clause 1(i)), to become a tenant at will (clause 6), to keep the
premises open for the sale of petrol (Second Schedule, clause 2), and not,
without the consent of Esso, to grant any lease or tenancy (Third Schedule,
clause 4), are normal requirements of loan and mortgage agreements, and they do
not restrict competition and so they do not offend against
Section 4(1).
(b) Applicability
of Section 4(2)
47. 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 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.'
48. In
the opinion of the Authority, the solus and related agreements notified by Esso
fulfil the conditions provided for in
Section 4(2).
49. Solus
agreements in the motor fuels sector differ from other exclusive purchase
agreements in that the supplier confers on the reseller special commercial or
financial advantages by contributing to his financing, granting him a loan on
favourable terms, and providing him with equipment, while the reseller enters
into a long-term exclusive purchasing obligation which is accompanied by a ban
on dealing in competing products and the supplier agrees to supply the
reseller's total requirements of motor fuels.
50. The
solus agreements produce an appreciable improvement in distribution in which
consumers are allowed a fair share of the resulting benefit. The commercial
and financial advantages conferred by the supplier on the retailer make it
significantly easier to establish, modernise, maintain and operate service
stations. A high level of investment is needed to provide adequate facilities
and to meet safety standards, and Esso has invested heavily in its company
owned stations. Independent dealers would have insufficient resources for the
necessary investment without substantial support from the supplier, otherwise
company stations would become dominant. They are able to provide a range of
services which they would otherwise be unable to offer. The exclusive
purchasing obligation and the ban on dealing in competing products imposed on
the reseller encourage the reseller to devote all the resources at his disposal
to the sale of motor fuels, while retaining his independence and freedom to run
the business as he sees fit. Solus agreements lead to durable cooperation
between the parties, allowing them to improve or maintain the quality of the
motor fuels and of the services to the customer and the sales efforts of the
reseller. The investment by the supplier ensures security of supply by
providing assured outlets for its product, and retailers are guaranteed regular
supplies. This allows long-term planning of sales and consequently a
cost-effective organisation of production and distribution. The costs of
distributing motor fuels to a limited number of exclusive outlets which
purchase in large quantities are lower than delivering smaller volumes to a
large number of outlets selling two or more brands at the one service station.
The pressure of competition between different brands of motor fuel obliges the
undertakings involved to determine the number and characteristics of service
stations in accordance with the wishes of consumers.
51. The
solus agreement includes a clause extending the exclusive purchasing
requirement to include the sale of motor fuels by the dealer at any premises
within a one-mile radius of the designated service station. The Authority
accepts that competition in the sale of motor fuels is a fairly localised
phenomenon. Motorists do not tend to travel any great distance to buy at a
cheaper price, since the cost of so doing would soon eliminate any savings
made. The dedication of the dealer to maximising sales of Esso motor fuels at
the designated outlet would be likely to be adversely affected if he were
permitted to sell another brand at a station owned or operated by himself
within one mile of the designated station. Without such a requirement, the
improvement in distribution would not be secured. The dealer is free, however,
to sell competing motor fuels outside the one mile radius.
52. Consumers
benefit from these improvements especially because they are ensured supplies of
motor fuel of satisfactory quality while being able to choose between different
brands of motor fuel. The solus system leads to more efficient distribution
and to better facilities and services at dealer stations, to the benefit of
consumers. They have a choice between stations offering differing degrees and
types of service. The system should ensure both intra-brand and inter-brand
competition, including price competition.
53. The
advantages produced by solus agreements cannot be achieved to the same extent
and with the same degree of certainty in any other way. The exclusive
purchasing obligation on the reseller and the non-competition clause imposed on
him are essential components of such agreements and are indispensable for the
attainment of these advantages. These obligations are confined to the purchase
of motor fuels for resale, and do not extend to other products. The limitation
of the period of the exclusive agreement to ten years is sufficient to produce
the advantages, while maintaining the reseller's commercial freedom to change
supplier and to ensure access to the retail level of distribution on the part
of other suppliers. Any shorter period would substantially lessen the
incentive for suppliers to invest in dealer outlets, to the detriment of
dealers and consumers. This is especially so in the State, where the average
throughput in petrol stations is only about one quarter of the EC average.
54. There
are large numbers of Esso solus, company and non-solus outlets, and there are
many other outlets of these types which sell motor fuels under other brand
names. There is a high degree of competition between outlets, both intra-brand
and inter-brand, and, with the removal of price control, there is scope for
price competition, in particular, since solus and non-solus dealers are free to
determine their own selling prices. While the long-term nature of the
exclusive supply contracts limits the possibilities for a new entrant to secure
outlets, all dealers are free to change their supplier at the expiry of the
contract, and this does occur, and agreements are expiring on a continuous
basis. In addition, a new supplier entrant would be likely to want the
security offered by long-term solus agreements before making the sizeable
investment necessary to enter the market in the first place. There is thus no
possibility of the undertakings being afforded the possibility of eliminating
competition for a substantial part of the products in question.
55. It
will be apparent that, in its assessment, the Authority has had regard to EC
Regulation No. 1984/83, which exempts certain exclusive purchasing agreements,
including service station agreements, from the prohibition of Article 85(1) of
the Treaty of Rome (see paras. 20 to 22).
(c) Recommended
Prices
56. During
the course of its investigation of the notified agreements, the Authority
became aware that, shortly before any change in the wholesale price of its
products, Esso circulated a newsletter to its solus retailers advising them of
the change in wholesale prices and of the maximum recommended retail price for
each grade of motor fuel. It was explained by Esso, and was accepted by the
Authority, that this had been done in the past in order to try to ensure that
its retailers did not exceed the maximum prices which could be charged under
the Maximum Prices Order, price control only being abolished on 30 September
1991. The subsequent continuance of this practice, according to Esso, was not
designed to influence prices charged by independent solus dealers nor was it
aimed at ensuring resale price maintenance.
57. This
practice was not part of the written terms of the agreements notified.
Nevertheless, the Authority considered that it formed part of the total
relationship between the supplier and its solus dealers, and that it should be
considered in this context. In most circumstances, provided that independent
resellers are free to set their own resale prices, and that they are aware of
this, the informing of resellers by suppliers of recommended, or recommended
maximum, resale prices does not, in the opinion of the Authority, amount to
resale price maintenance, and is not therefore caught by the prohibition in
Section 4(1). (This might not be the case, however, if a considerable degree
of price similarity were observed in the market).
58. Esso
tends to differ from other oil wholesalers in that its company-owned stations
are operated by the company itself, through Artane Service Station Limited, and
Esso sets the resale prices at these company stations. Such stations are in
competition with Esso solus stations in the vicinity. Esso is an operator on
the market like its solus dealer outlets. In BP Kemi/DDSF, the EC Commission
condemned an information exchange agreement between a supplier and his
distributor where the supplier himself competed in the distributor's territory.
[4]
In effect, Esso, by informing its solus dealers of a maximum recommended
price, was informing them of the price which would be charged in Esso company
operated stations. Its action amounted to informing solus dealers in advance
about the prices which would be charged by their competitors, competitors who
accounted for a large proportion of total retail sales of Esso products. The
Authority was concerned that this could have the effect of eliminating
uncertainty and of distorting intra-brand competition between Esso outlets. In
response to this concern, Esso, as pointed out in para 32, readily agreed not
in future to inform solus retailers in advance of pump price changes at company
stations operated by Artane Service Station Limited, that is at Esso
company-operated stations. The Authority believes that, in general, the
exchange of information by competitors would offend against
Section 4 (1) and
it does not believe that a licence under
Section 4 (2) could be justified for
such a practice.
The
Decision
59. Accordingly,
the Authority is of the opinion that all the conditions set out in
Section 4(2)
of the
Competition Act are fulfilled.
60. The
Authority therefore grants a licence under
Section 4(2) in respect of each of
the notified Esso agreements. Since each notification relates to a category of
standard agreements, each licence is granted in respect of that category of
notified Esso agreements.
61. The
licences shall apply from the date of this decision, that is 25 June 1992.
Given the ten-year duration of the notified agreements, it seems appropriate
that the period specified for the licences should be ten years also, that is
until 24 June 2002. It is not considered necessary to attach any conditions to
the licences.
62. A
copy of the licences is annexed to this decision.
For
the Competition Authority:
Patrick
M. Lyons
Chairman
25/06/1992.
Annex: The
licences
(a) The
standard Esso solus agreement
Article
1
The
provisions of
Section 4(1) of the
Competition Act, 1991 are declared
inapplicable to the category of standard Esso solus agreements notified to the
Competition Authority on 19 December 1991 (CA/14/91E), 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. This licence shall apply from 25
June 1992 to 24 June 2002.
Article
2
This
licence is addressed to:
Esso
Ireland Limited,
Stillorgan,
Co.
Dublin.
For
the Competition Authority:
Patrick
M. Lyons
Chairman
25/06/1992.
(b) The
Dealer Equipment Loan Agreement
Article
1
The
provisions of
Section 4(1) of the
Competition Act, 1991 are declared
inapplicable to the category of Esso dealer equipment loan agreements notified
to the Competition Authority on 19 December 1991 (CA/13/91E), 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. This licence shall apply from
25 June 1992 to 24 June 2002.
Article
2
This
licence is addressed to:
Esso
Ireland Limited,
Stillorgan,
Co.
Dublin.
For
the Competition Authority:
Patrick
M. Lyons
Chairman,
25/06/1992.
(c) The
Dealer Loan Agreement
Article
1
The
provisions of
Section 4(1) of the
Competition Act, 1991 are declared
inapplicable to the category of Esso dealer loan agreements notified to the
Competition Authority on 19 December 1991 (CA/12/91E), 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. This licence shall apply from 25
June 1992 to 24 June 2002.
Article
2
This
licence is addressed to:
Esso
Ireland Limited,
Stillorgan,
Co.
Dublin.
For
the Competition Authority:
Patrick
M. Lyons
Chairman
25/06/1992.
(d) Deed
of Charge/Mortgage
Article
1
The
provisions of
Section 4(1) of the
Competition Act, 1991 are declared
inapplicable to the category of Esso deed of charge/mortgage agreements
notified to the Competition Authority on 19 December 1991 (CA/11/91E), 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. This licence shall
apply from 25 June 1992 to 24 June 2002.
Article
2
This
licence is addressed to:
Esso
Ireland Limited,
Stillorgan,
Co. Dublin.
For
the Competition Authority:
Patrick
M. Lyons
Chairman
25/06/1992.
[ ] 1 OJ
No. L173, 30.6.83, p. 5
[ ]2 This
is the view of the Court of Justice in the Brasserie de Haecht No. 1 Case,
No.23/67, [1967] ECR 407.
[ ]3 The
Authority has considered the implications of the judgment of the High Court on
1 May 1991 in the case of Texaco (Ireland) Limited v Thomas Farrell and Esso
Ireland Ltd. Blaney J. held that a pre-emption clause in a solus agreement,
whereby the dealer had first to offer his premises for sale to Texaco, was in
restraint of trade and was void. He held that Texaco were adequately protected
by the clause which required the dealer to secure a purchaser's written
agreement with Texaco to be bound by the solus agreement. The Authority
considers that the Esso agreement does not give any similar pre-emption right
to Esso, and that it does not even oblige the dealer to secure the purchaser's
agreement to be bound by the solus agreement, only to try to secure such
agreement.
[ ]4 BP
Kemi/DDSF (OJ L286, 14.11.79, p. 32).
© 1992 Irish Competition Authority
BAILII:
Copyright Policy |
Disclaimers |
Privacy Policy |
Feedback |
Donate to BAILII
URL: http://www.bailii.org/ie/cases/IECompA/1992/4.html