English Welsh & Scottish Railway Ltd v E. On UK Plc & Anor

The claimant (“EWS”) is an operator of bulk rail freight services. Its businesses were previously part of the freight sector of British Rail before privatisation. The defendant (“E.ON”) is in the business of electricity generation.

On 14 March 1997 EWS and E.ON (then called Powergen plc) entered into a Coal Carriage Agreement (“the CCA”) which was stated to be effective from 1 April 1996. Under the CCA E.ON is obliged to use EWS to carry all “Reference Coal” (clause 4.2). “Reference Coal” is defined as all coal which E.ON requires to be moved to one of a number of specified Power Stations from one of a number of specified “Supply Points”, subject to certain exclusions (clause 4.3). Three of these exclusions are in the nature of discretions exercisable by E.ON. The first allows E.ON to use another haulier for carriage from new supply points if the procedure in clause 6.1 does not result in bringing such supply within the CCA. The second is an “English” clause that entitles E.ON to use another coal haulier if EWS does not match that haulier’s quote (clause 4.3 (d)). The third allows E.ON to use other hauliers for up to 8% of its remaining coal (clause 4.3 (f)). Additional Power Stations and Supply Points can be added to those already specified if a notification procedure is complied with and the parties reach agreement, thereby extending the reach of clause 4.2 (clauses 5.4 and 6.1).

Clauses 4.2, 4.3, 5.4 and 6.1 are referred to hereafter as “the exclusionary terms”.

For its part, EWS agrees to carry the Reference Coal (clause 3.1) and by clause 3.2 to maintain the ability to carry in each week 250,000 tonnes of coal (“the Maximum Weekly Tonnage”), which can be altered by E.ON on one month’s notice (clause 6.3). For each tonne actually delivered by EWS under the CCA, E.ON is obliged to pay EWS a specified charge depending on the destination Power Station and the collection Supply Point (clause 7.1), subject to a “Minimum Invoice Amount” (clauses 7.2, 7.3), which amount is subject to variation upwards and downwards according to a formula based in part on the RPI and in part on the IPP. (Footnote: ¹)

The agreement is terminable on 24 months’ notice effective after 31 March 2003. In the first year of such a notice the amount of Reference Coal that E.ON must use EWS to carry is reduced by 25% and in the second year there is a further reduction of 25%.

In February 2001 two railway haulage companies, Enron Coal Services Limited and Freightliner Limited (“FL”) submitted complaints to the Director General of Fair Trading alleging that EWS had abused its dominant position in the market for the supply of coal to UK industrial users by foreclosing that market to competitors. The complaints were transferred to the then Office of the Rail Regulator which subsequently became the Office of Rail Regulation (“the ORR”) who has a concurrent investigatory jurisdiction. In August 2002 a further complaint alleging anti-competitive conduct by EWS was made to the ORR by Freightliner Heavy Haul (“FHH”), a company spun out of FL. The ORR’s decision on these complaints was issued on 17 November 2006 (“the Decision”). In particular, the ORR found that in abuse of its dominant position EWS had foreclosed the Great Britain coal haulage by rail market through entering into and maintaining: (i) the exclusionary terms of the CCA; (ii) an elective discount scheme contained in a coal carriage contract with RWE npower (“RWE”); (iii) a minimum payment provision in a coal carriage contract with AES Drax; and (iv) extendable exclusionary clauses in a coal carriage contract with Corus. Accordingly, EWS was in breach of Article 82 EC and, with effect from 1 March 2000, the Chapter II prohibition contained in section 18 of the Competition Act 1998 (“the Act”).

In paragraphs D4 and D5 of the Decision the ORR directed:

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.

D5 The terms in question are as follows:

(a)

E.ON -- Clauses 4.2, 4.3, 5.4 and 6.1 of the contract originally made between Powergen plc (now E.ON) and EWS dated 14 March 1997

(b)

[the elective discount structure in the RWE contract]

(c)

[Clause 7.3.2 in the AES Drax contract]

(c)

(sic) [three clauses in the Corus contract]

The ORR also fined EWS £4.1 million.

On 20 November 2006 EWS wrote to E.ON maintaining that the effect of the ORR’s directions (“the Directions”) was to render the entire CCA void. Enclosed with this letter was a supporting Opinion of Leading Counsel expressing the view that shorn of the exclusionary terms, the CCA would be so changed in its character as not to be the sort of contract that the parties on an objective view intended to enter.

E.ON took the view that the CCA would continue to bind EWS even if the exclusionary terms were removed. On 30 November 2006 the parties met in compliance with clause 35 of the CCA but were unable to agree a replacement contract. On 31 January 2007 EWS provided to E.ON a new draft contract under which EWS would continue to provide the same services as before but at an additional cost of £7 million. It is not in dispute that rates for the carriage of coal by rail now exceed the rates agreed in the CCA.

E.ON continues to be of the view that the CCA is not rendered wholly void as a consequence of the Directions with the result that EWS remains obliged to carry coal to E.ON’s Power Stations and at the contractual rate. In addition, E.ON has appealed against the Directions to the Competition Appeal Tribunal contending that they are excessively wide and/or too uncertain to be enforceable. The appeal is listed to be heard on 19 and 20 April 2007.

On 15 December 2006 EWS applied in Part 8 proceedings to the Commercial Court for a declaration that the effect of the Directions is to render the CCA void and unenforceable. It is this application which now falls to be determined.

E.ON applied to stay the Part 8 proceedings but this was refused by Judge Mackie QC on 5 February 2007. At another hearing on 20 February 2007 Judge Mackie QC declined to take up the CAT’s suggestion that E.ON’s appeal and EWS’s application be dealt with at a single hearing and ordered that EWS’s application be heard in the Commercial Court on 12 March 2007. For the purposes of these Part 8 proceedings, E.ON accepts the ORR’s findings and that the Decision is binding on it.

…

A direction under this section may, in particular, include provision -----

(a)

requiring the person concerned to modify the conduct in question;

or

(b)

requiring him to cease that conduct.

A direction under this section must be given in writing.

34 (1) If a person fails, without reasonable excuse, to comply with a direction under section 32 or 33, the OFT may apply to the court for an order---

(a)

requiring the defaulter to make good his default within a time specified in the order; or

(b)

if the direction related to anything to be done in the management or administration of an undertaking, requiring the undertaking or any of its officers to do it.

Mr Green QC for EWS submits that the meaning of the Directions is that if the parties cannot agree a modification of the exclusionary terms within 30 days so as to remove their exclusionary effect the parties must remove those terms from the CCA. In other words, the requirement of removal is a non-consensual default requirement in the absence of a consensual compliant modification. No modification of the terms has been agreed and therefore says Mr Green EWS and E.ON are obliged to remove the exclusionary terms from the CCA.

Mr Green further submits that given the ORR’s finding that EWS abused its dominant position in breach of Article 82 EC and the Chapter II prohibition each of the exclusionary terms is void, and this being so, whichever of the judicial formulations of the test of severability is applied, those terms cannot be severed from the CCA. The effect of the ORR’s findings and the Decision is therefore that the CCA is wholly void and unenforceable.

Mr Sharpe QC for E.ON contends that the Directions have as their objective the removal of the exclusionary effect of the exclusionary terms and not the terms themselves. He submits that the Directions require EWS and E.ON to act jointly (ie consensually) to amend the CCA either by a modification of the exclusionary terms so as to remove their exclusionary effect or by the removal of those terms altogether. If the parties fail to agree a modification of the terms or that the terms should be removed from the CCA the next step will be an application to the court by the ORR under s. 34 (1) of the Act to enforce the Directions and on such an application it will be for the court to decide whether the exclusionary terms should be modified or removed. In Mr Sharpe’s submission, at the s. 34 (1) stage the court would be bound to order that the exclusionary terms be modified because this would be the least intrusive way of bringing an end to EWS’s abuse of its dominant position. All that is required is that the English clause in clause 4.3 (d) be modified as follows:

“(d)

coal moved from a Supply Point to a Power Station in circumstances where [E.ON] has in good faith provided a notice to EWS specifying;

(i)

that another haulier has quoted to provide transport for such coal; and

(ii)

the Train Movement Charge that EWS would be required to offer within the terms of this Agreement to hold [E.ON] financially neutral to such alternative quote;

and EWS has declined to offer a Train Movement Charge which would improve E.ON’s financial position as compared to such alternative quote holds [E.ON] financial neutral for the period quoted by the other haulier;”

Mr Sharpe submits that such a modification would bring to an end EWS’s abuse of its dominant position because it is only where a dominant undertaking requires a customer to take “all or most” of its requirements exclusively from the dominant undertaking that this will be an abuse, see the decision of the ECJ in Hoffman-La-Roche v The Commission [1979] ECR 461. And if the court needed further comfort that the abusive exclusivity was being removed the 8% in clause 4.3 (f) could be increased to 20%. Commission Regulation 2790/99/EC – the Block Exemption for Vertical Agreements -defines a non-compete obligation as any direct or indirect obligation on the buyer to purchase from the supplier more than 80% of the buyer’s total purchases of the contract goods or services and excludes non-compete obligations from the scope of the Exemption, with the result that such obligations are, prima facie, likely to be in breach of Article 81 (1) EC. In Mr Sharpe’s submission this provides a strong indication of the level of exclusivity that is likely to be permissible for a dominant party before an abuse occurs.

It follows, contends Mr Sharpe, that EWS’s claim for a declaration must fail.

In the alternative, Mr Sharpe submits that the exclusionary terms are not void and therefore the law on severance has no application: the CCA shorn of the exclusionary provisions remains valid and enforceable, including in particular clause 3.1 and the price provisions. In support of this submission, Mr Sharpe points to the absence in Article 82 EC and the Chapter II prohibition of a provision for automatic invalidity such as is found in Article 81 EC and the Chapter I prohibition. There is no such provision in the former prohibitions because they are concerned with conduct, whereas the latter are concerned with agreements and decisions. Conduct, says Mr Sharpe, is incapable of being void. This is borne out by the Directions themselves. It is because the exclusionary terms were not automatically void that the ORR felt it necessary to direct that they be removed or modified.

Citing Chitty on Contracts, paras 16-143 to 145 and 16-153 and Stewart v Oriental Fire and Marine Insurance Co Ltd [1985] 1 QB 988 and Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1988] 1 QB 216, Mr Sharpe also submits that the illegality of the exclusionary provisions ought not to be a bar to E.ON enforcing the CCA. Article 82 EC and the Chapter II prohibition are silent as to the civil rights of innocent counterparties and accordingly the court should ask whether it was the intention that a non-offending party should be disabled from suing on an agreement containing abusive terms. Here there was no reason why E.ON should not be able to enforce the CCA; EWS should not be free to escape from a contract that was no longer “in the money”. Nor was there any room for the doctrine of frustration because the ORR’s findings and the Directions are the direct result of EWS’s own illegal misconduct, and a party cannot rely on self-induced frustration.

Article 15.3 of the Competition Regulation and paragraphs 4.1 and 4.1A of the Competition Law Practice Direction entitles a National Competition Authority (a “NCA”) to make written observations and to seek permission to make oral observations to a court hearing a claim relating to any of Articles 81 and 82 EC and the Chapter I and II prohibitions. Acting under this power, Mr Turner QC for the ORR served written observations and pursuant to leave granted by Aikens J also made oral submissions to the court.

Mr Turner agreed with Mr Green’s submission as to the meaning of the Directions. The parties were permitted to agree modifications to the exclusionary terms that removed the exclusionary effect thereof, but in the absence of such modifications the parties were to remove the offending provisions. Given the ORR’s finding that EWS had abused its dominant position through the agreement, maintenance and the extension of the exclusionary terms, removal of those terms is a natural default position and there is no question of the parties having to agree removal of the terms if they cannot agree a compliant modification.

Quite properly, Mr Turner made no submissions on the effect of the Directions on the continuing existence of the CCA. He did, however, make a number of observations on the question whether the exclusionary terms were void. Founding on: (i) Article 1.3 of Council Regulation No 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 Directions were not inconsistent with this analysis. Rather, they recognised that the exclusionary terms were illegal as being in breach of Article 82 and the Chapter II prohibition and were of an administrative nature ensuring that the CCA was brought expeditiously into line with public policy.

Mr Turner also challenged Mr Sharpe’s contention that the test whether an undertaking was abusing a dominant position through contractual exclusivity provisions depended on whether the counterparty was obliged to take “all or most” of its requirements from the undertaking at least in so far as the phrase “all or most” had been narrowly construed by Mr Sharpe. He stated that if E.ON were permitted to preserve the exclusivity identified in clauses 4.2 and 4.3 or to allow such exclusivity to extend to new flows by virtue of clauses 5.4 and 6.1, the ORR would continue to have serious competition concerns as such behaviour would be inconsistent with the “special responsibility” of a dominant undertaking not to allow its conduct to impair genuine undistorted competition in the market.

The Directions are somewhat infelicitously worded but in my judgement, construed against the background of the ORR’s findings in respect of the exclusionary terms and giving the word “remove” its ordinary and natural meaning, their meaning is clear. If the parties have not within 30 days agreed modifications to the exclusionary terms which remove their exclusionary effect, the parties must remove the terms from the CCA. There is no question of the parties being directed to agree to remove the terms: absent compliant modifications in the time prescribed, the terms are to go, full stop. With respect to Mr Sharpe, who presented his submissions most attractively, the idea that the ORR contemplated that the identified abuse would be dealt with by modifications determined by the court in section 34 enforcement proceedings is fanciful.

I agree with Mr Turner’s submission that 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 CCA was executed. And from 1^st March 2000, when Chapter II of the Act came into effect, the exclusionary terms were doubly illegal for being in breach of the Chapter II prohibition. The consequence is that from the time the CCA was executed the exclusionary terms have been void. The Directions to remove the terms are an administrative measure to ensure that the CCA is brought within the law.

Where terms are void at common law for being in restraint of trade or by reason of Article 81 EC and the Chapter I prohibition, the courts apply the doctrine of severance to determine if the offending terms can be severed from the contract leaving the residue to continue to operate as an enforceable contract; see eg Crehan v Courage Limited; Byrne v Inntreprenneur Beer Supply Co Ltd [1999] EuLR 834 at 896E-901A. In my judgement, exactly the same approach applies where a term or terms of a contract are void by reason of being in breach of Article 82 and the Chapter II prohibition. It is thus not a question of whether the contract is frustrated but whether the test for severance as formulated in the cases has been satisfied.

The Court of Appeal in Crehan v Courage rehearsed various formulations of the severance test propounded over the years without identifying which if any was to be preferred. These included: (i) whether the invalid restraint formed the whole or substantially the whole consideration for the promise; (ii) whether the contract would be so changed in its character as not to be the sort of contract that the parties intended to enter at all; (iii) whether what was unenforceable was part of the main purpose and substance, or whether the deletion altered entirely the scope and intention of the agreement or, on the contrary, left the rest of the agreement a reasonable arrangement between the parties; (iv) whether it would disappoint the main purposes of one of the main parties; and (v) whether the agreement was in substance an agreement for an invalid restraint.

Mr Sharpe conceded that if the doctrine of severance applied, the CCA without the exclusionary terms would be of a fundamentally different nature. In my judgement this concession was well made. Accordingly, subject to the true effect of clause 34 of the CCA, there can be no severance of the exclusionary terms and the whole contract is void and unenforceable. As to this latter point, the Court of Appeal in Richard Ground Ltd v (GB) Ltd [1997] EuLR 277 upheld the finding of the first instance judge that a clause in substantially similar words to clause 34 was ineffective to allow severance where the resulting contract would not be the sort of contract that the parties intended to enter at all. Unsurprisingly, Mr Sharpe accepted that in the light of this decision clause 34 did not allow for severance where the common law test was not satisfied.

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 clauses 4.2, 4.3, 5.4 and 6.1 of the CCA have from the inception of the contract been void and since those clauses cannot be severed the whole of the CCA is void and unenforceable.

I shall hear or receive submissions from the parties on the precise wording of the declaration that is to be ordered.