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Can a contract be void under Article 82?

This entry was added to http://www.reckon.co.uk/headlines-franckblog on 23 March 2007.

In a judgment handed down today in the High Court (Commercial Court), Mr Justice Field decided to grant the rail freight operator EWS a declaration that the effect of ORR's decision that EWS had abused a dominant position in breach of Article 82 and the Competition Act 1998 by imposing and maintaining exclusionary terms in long-term coal carriage contracts was that these contracts were void and unenforceable.

Background to the case

Although this is a case about exclusionary (English) clauses, ORR did not make a decision about the legality of the contract under Article 81. Furthermore, at the time of the facts, Section 2 of the Competition Act 1998 did not apply to the contract as a result of the vertical exclusion (since repealed).

So this is a slightly unusual case in which an exclusionary clause in a contract is being pursued under the prohibition on abuse of a dominant position.

ORR issued a decision in November 2006 which declared that EWS had abused a dominant position, and which also included the following direction (Part D, page 187):

D4. ORR therefore directs that, within 30 days, EWS and, as appropriate, the other parties to each of the contracts in question, remove or modify the terms identified below from the contracts currently in existence so as to remove their exclusionary effect and/or in the event that any new contracts are concluded to exclude from those contracts any terms capable of achieving the same or similar exclusionary effect to those identified as abusive.

Following this decision, EWS has been trying to get out of these contracts altogether. The commercial reason for this is simply that market prices for coal carriage have moved up since the contracts were entered into.

EWS' opponent in court, the power station operator E.ON (formerly Powergen), who has the benefit of a cheap long-term coal carriage contract with EWS, argued that ORR's decision that EWS had abused a dominant position could not have the effect of depriving E.ON — an innocent party — from the benefits of that contract.

ORR intervened in support of EWS' position.

Field J's judgment

Both parties agreed that the offending terms could not be severed from the contract. As the parties had not agreed any revised terms, if the offending terms were removed or void then the whole contract had to fail — meaning, in commercial terms, that E.ON would have to start paying current market rates rather than the lower price in the contract.

On the question of construction of the ORR decision, the judge decided that the direction given by ORR meant what it said, i.e. that the offending terms had to be removed: "absent compliant modifications in the time prescribed, the terms are to go, full stop". The legality of ORR's direction has been challenged by E.ON in the Competition Appeal Tribunal.

But the declaration that he proposes to grant to EWS (subject to submissions on precise wording) goes further than simply construing the ORR direction. The judge agreed with a submission from ORR (the competition authority) supporting the view taken by EWS (the firm guilty of abuse) that the effect of the ORR decision that implementing the offending terms was an abuse of a dominant position was to make the terms automatically void, in the same way that a contract that breaches Article 81 is automatically void. Given this, he concluded that:

30. For the reasons given above, EWS is entitled to a declaration the substance of which is that the effect of the ORR's Decision issued on 17 November 2006 and the Directions contained therein is that [the offending clauses] have from the inception of the contract been void and since those clauses cannot be severed the whole of the [contract] is void and unenforceable.

The judgment is interesting for both its procedural and substantive implications.

An interesting test of UK procedures

On the procedural side, this case is proving quite a test of the UK arrangements for litigating competition law cases.

Field J reports that the Commercial Court had "declined to take up the CAT's suggestion that E.ON's appeal and EWS' application be dealt with at a single hearing". Following his judgment, some questions are left hanging:

I don't know the answer to any of these questions, and won't comment on them or on the specifics of the E.ON/EWS case anyway.

But is the judgment right?

The subject of this article is the substantive question of law, which is whether the judge reached a correct view on whether and when contracts can be void under Article 82.

This is an unusual kind of question for me to ask: one of my few certainties in matters of regulation is that the process by which a High Court judge hears arguments from both sides of the debate and produces a reasoned judgment on a specific issue is the most reliable way of reaching decisions in regulatory and commercial disputes. I very rarely finish reading an English High Court judgment thinking "this cannot be right". Instead usually after reading the judgment, even if I had doubts at first about the result reached, I am at least convinced that there was a sound basis for taking the view that the judge took.

But this is one of those rare cases where I still suspect that the judge's view that

26 ... given: (i) the ORR's findings; (ii) Article 1.3 of Council Regulation 1/2003; and (iii) the direct effect of Article 82, the exclusionary terms were illegal as a matter of public law from the moment the [contract] was executed.

is not supported by the judgment, and implies a readiness to strike out contracts that implement abuses of a dominant position that just cannot be right. It might be right in this specific case, but even so it seems to me that the judgment fails to identify the facts of the case that made it right, and could therefore be a dangerous precedent (if I am right about it, that is).

And I suppose that judges cannot be infallible or we would not need a Court of Appeal.

The reasoning adopted by the judge

The only reasoning underpinning this conclusion is given at paragraph 23 of the judgment, endorsed by the judge at paragraph 26:

23 ... Founding on: (i) Article 1.3 of Council Regulation 1/2003 which reads "The abuse of a dominant position referred to in Article 82 of the Treaty shall be prohibited, no prior decision to that effect being required"; and (ii) the direct effect of Article 82 giving enforceable rights to third parties within the class protected by that Article, Mr Turner submitted that from the moment the exclusionary terms were entered into they were illegal and void as a matter of public law. The [ORR's] Directions were not inconsistent with this analysis. ...

That's not really a reasoning. Presumably more detail was given in the hearing, but the judge seems to have based his decision on the assertion quoted above rather than on that reasoning.

Let me try to fill the reasoning in.

First, who are the third parties protected by Article 82 whose enforceable rights require the exclusionary terms to be void?

It's not E.ON, who benefits from the continuation of the contract.

It's not EWS, as it is the perpetrator of abuse rather than a third party protected by Article 82.

So it must be EWS' competitors, the freight operators or handlers whom EWS' conduct had unduly excluded from coal carriage markets. These people are within the class protected by the prohibition on exclusionary abuse.

They did not appear at the hearing and were not in any sense enforcing their EC law rights in respect of the application decided by the judge today. Therefore the question is whether it was necessary "as a matter of public law" for the court to strike down the exclusionary terms in order to afford these third parties the protection to which they were entitled.

Presumably ordinary principles of proportionality apply so as to restrict the scope of these decisions "as a matter of public law" to what is strictly necessary, especially when a presumed innocent third party — in this case E.ON — suffers commercially from the "public law" decision.

So the argument boils down to whether the judge accepted too readily the submission by EWS and ORR that the offending clauses, and the whole contract if these clauses cannot be amended or severed, had to go in order to protect the right of EWS' competitors not to be unfairly excluded from the market.

There are two aspects to this, depending on the time at which the competitors are to be protected.

As regards future protection, the question is whether it is necessary to strike down the contract and expose E.ON to current market prices in order to protect fair access to the market for EWS' competitors, or whether it might be possible to put a stop to the abuse by imposing restraints on EWS's behaviour or preventing it from enforcing its benefits under the contract, which preserving E.ON's ability to enforce its contracted benefits (low prices) against EWS. This part of the argument will presumably be the subject of the April 2007 hearing at CAT into the legality of the ORR directions, so I'll shut up for now.

But even if ORR's directions are found to be lawful and legitimate, this would not be enough to justify Field J's judgment that the offending clauses "have from the inception of the contract been void".

So it is necessary to examine the protection of the past interests of EWS' competitors too.

It seems to me that it is too late for any actual protection of their ability to compete, and the remedy to which third party victims of past exclusionary abuses are entitled to under Article 82 must be in damages. And there seems to be no need to void the contract retrospectively and perhaps expose E.ON to a retrospective claim for market-based prices in order to allow any victims to claim whatever damages they might be entitled to from EWS.

Conclusion: I have tried, and I just cannot see how the judge reached his decision. The reasoning still looks deficient to me.

Consequences of the judge's approach

Another way of looking at the problem is to see what results the judge's approach would have in other kinds of cases. This is a good way of testing the validity of the logic (on the basis that a sound reasoning should not lead to an absurd result) and it also makes explicit my concerns about the possible effect of this judgment if it stands as a precedent.

Take a hypothetical case of a predatory abuse.

Let's imagine a town with an incumbent bus company, Bigbus. A new entrant, Littlebus, starts operating a commuter service. Its main product is an annual season ticket initially priced at £500.

In response to Littlebus' entry, Bigbus starts operating a new Cheapbus service that runs three minutes before the Littlebus and charges 25p per journey or £100 for an annual season. Cheapbus' direct operating costs come to 50p per passenger journey.

Let's further assume that the OFT decides that the case is one of their priorities, and puts some effort into investigating a complaint by Littlebus (this example does not have to be realistic).

After an investigation lasting a couple of weeks (this example does not have to be realistic), the OFT decides that 25p is less than 50p, and that Bigbus' conduct in charging 25p per journey, £100 for an annual season, and in scheduling its Cheapbus service immediately before Littlebus' amounted to predatory abuse.

Bigbus says "ok guv", raises its advertised prices to £1 per journey and £400 a year, and pays a fine. (Littlebus, in response to what is now fair competition, reduces its rate to £380.)

Then Bigbus writes to all its season ticket holders saying that their ticket is now void and would they please send it back for a full refund of the £100, and pay a retrospective £1 per journey for all past journeys undertaken under the now-void ticket or alternatively purchase a £400 season backdated to start at the same time as the now-void ticket.

I hope that it is obvious that the court would not enforce this request from Bigbus against a customer saying "I have paid £100 for a year's travel, I don't care about the OFT, I have done nothing wrong and I want my year's travel as agreed".

I await the next steps of the E.ON/EWS/ORR procedure with interest.

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Entry added by Franck Latrémolière on 23 March 2007.

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Last changed by Franck at 5:32 PM on Friday 6 June 2008.

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Reckon Open "Can a contract be void under Article 82? | viewpoint: Franck" 2008-06-06T17:32:02