TACHING PETROLEUM CO LTD v. MEYER ALUMINIUM LTD

HCA 1929/2017

[2018] HKCFI 1074

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1929 OF 2017

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J U D G M E N T

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The context

1.  This is the plaintiff’s application for summary judgment.  The plaintiff’s claim is for the price of goods sold and delivered. There is no dispute about the sale or delivery or quantity or quality of the goods (being diesel oil).  The sole defence raised is based on alleged price collusion in breach of the Competition Ordinance (Cap 619) (“Ordinance”) by the plaintiff with Shell Hong Kong Limited (“Shell”).

2.  The plaintiff is a Hong Kong company carrying on business in Hong Kong as an authorised dealer for Sinopec (a major fuel oil supplier) and a seller of various types of industrial fuel and diesel oil and other petroleum products.

3.  The defendant is also a local company, and has been carrying on business in Hong Kong in the manufacture and sale of aluminium products.  A key input for the defendant’s business is diesel fuel for its machines.  The defendant began purchasing fuel oil from the plaintiff in the late 1970s.  From 1999 onwards they had entered into written oil supply agreements.  There were successively a total of 4 supply agreements between them covering the period from 1999 to June 2015. In the initial years, the product sold and purchased was called Industrial Diesel Oil, but from 2010 onwards it had been called Industrial Euro V Diesel though according to the defendant it remained essentially the same product. 

4.  Each agreement specified an estimated quantity of diesel to be ordered by the defendant per month, which the plaintiff undertook to supply within a reasonable time.  If the plaintiff failed to supply, the defendant was entitled to purchase similar product from the market and claim the price difference from the plaintiff.  The plaintiff agreed to deliver diesel to the defendant’s premises within 24 hours of an order, and to maintain two underground storage tanks together with dispensing pumps and accessories in good condition throughout the duration of the agreement at no cost to the defendant.  The plaintiff also agreed to provide, free of charge, technical advice relating to the use of the diesel supplied.

5.  Under these agreements, the net price paid by the defendant had always been arrived at by taking a fixed discount (per litre) (“Fixed Discount”) specified in the agreement off the official list price (“List Price”) determined by the plaintiff.  A specific List Price was mentioned in the agreements but it was subject to change by the plaintiff from time to time, whereas the Fixed Discount was fixed for the duration of the contract.  In the last written agreement, dated 26 July 2012, it was stipulated that the price of the diesel supplied would be determined by deducting a Fixed Discount ($7.8 per litre) off the plaintiff’s List Price of Sinopec Ultra Low Sulphur Diesel, valid on the date of delivery. 

6.  After that agreement expired in June 2015, the parties did not enter into a further written agreement.  Instead, the plaintiff continued to supply Sinopec diesel to the defendant upon orders placed by telephone, and the defendant continued to pay for the diesel supplied in accordance with the plaintiff’s invoices issued on the terms of the last written agreement, until April 2017. 

7.  The present action concerns the diesel ordered by the defendant and supplied by the plaintiff between 1 April and 5 June 2017, the price of which totalled $4,435,150 as charged by 35 invoices at net prices ranging from HK$6.05 to HK$6.30 per litre and which have remained unpaid. 

8.  As I mentioned earlier, there is no dispute the diesel was sold and delivered and that the invoices were issued in accordance with the terms of the last written agreement between the parties.  The defence raised is based on an allegation that the plaintiff had been colluding with Shell, the defendant’s other supplier of diesel, to move their prices together.  In particular, the defendant alleges:

(1)  Shell was the other supplier of industrial diesel to the defendant apart from the plaintiff.  Shell’s pricing structure for the sale of diesel to the defendant was also based on a List Price less a Fixed Discount.  Over the years since 1999, whenever Shell revised its List Price, the plaintiff would invariably follow suit with a matching adjustment to its List Price within 1 to 2 working days.  There have been 120 such adjustments since 2011.

(2)  Between 1999 and 2008, the List Price of Shell and the plaintiff were close to each other.  From 2008 onwards, the difference between them widened (so that, for example, as at January 2017, Shell’s List Price was under HK$14 per litre where the plaintiff’s was over HK$15 per litre).

(3)  Notwithstanding these changes in the List Price and the widening gap between their List Prices, the net price Shell and the plaintiff charged the defendant (ie List Price less the Fixed Discount) remained almost exactly the same throughout the period from 1999 to 2017.

(4)  The List Prices and Fixed Discounts offered by the plaintiff and Shell to the defendant were not publicly available information.  The Fixed Discounts, in particular, were negotiated by the defendant with the plaintiff and Shell separately.

(5)  As explained further below, the net prices the plaintiff and Shell charged the defendant, while similar to each other, were far in excess of what other suppliers were charging in the market and what the plaintiff was charging other purchasers.

9.  Furthermore, the defendant alleges that there had been massive over‑pricing by the plaintiff (and by Shell) in the sale of diesel to the defendant especially since 2008.  This argument involved the following steps:

(1)  The defendant took the import price of diesel from Singapore as the plaintiff’s variable cost.  The plaintiff’s import price was assumed to be the average monthly import price published by the Hong Kong Government.

(2)  The difference between this average monthly import price for January 1999 and the average actual price the plaintiff charged the defendant in that month is taken to be the average premium charged by the plaintiff for that month, which was calculated to be HK$0.28 per litre.

(3)  The defendant asserted that a fair premium thereafter would be the average premium in January 1999 adjusted for inflation by reference to the movements of the Composite Consumer Price Index.

(4)  Adding this inflation-adjusted premium to the average monthly import price would produce what the defendant called the “Fair Market Price” for each month.

(5)  The defendant found that the actual price the plaintiff invoiced it for “was much higher than the [Fair Market Price], especially since 2008”.  Accordingly, the defendant says that the plaintiff had been overcharging it since 1999.  It is said that the cumulative amount overcharged since 1999 exceeded HK$50 million, and that the amount overcharged since 14 December 2015 alone (the date when the Ordinance fully came into effect) was approximately HK$11 million.

10.  The defendant contends that such collusion between the plaintiff and Shell from 14 December 2015 onwards constituted a breach of the “first conduct rule” in s 6(1) of the Ordinance, which provides:

“(1) An undertaking must not—

(a) make or give effect to an agreement;

(b) engage in a concerted practice; or

(c) as a member of an association of undertakings, make or give effect to a decision of the association,

if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong.”

11.  As a consequence, the defendant contends that (i) the contracts pursuant to which the plaintiff supplied diesel oil to the defendant and now seeks to recover the price therefor were tainted by illegality and unenforceable; and (ii) the plaintiff is liable to the defendant for damages being the amount overcharged by the plaintiff as a result of the collusion estimated in the amount of HK$10,985,585, on which the defendant relies by way of set‑off to extinguish its liability to the plaintiff for the outstanding price.

12.  Accordingly, the defendant contends it should be given leave to defend, that its defence should be transferred to the Competition Tribunal (“Tribunal”), and that the proceedings should be stayed pending investigation by the Competition Commission (“Commission”).

The issues

13.  Based on the parties’ arguments it seems to me the following issues arise on this application, which I deal with in turn below:

(1)  Does the defence raising contravention of the first conduct rule have to be transferred to the Tribunal?

(2)  Has the defendant raised triable issues in the allegation that there was a contravention by the plaintiff of the first conduct rule?

(3)  If so, has the defendant raised triable issues that the price of diesel sued for was thereby rendered irrecoverable on the ground of illegality?

(4)  Has the defendant raised triable issues that it may rely on equitable set‑off of its claim for damages for loss and damage suffered as a result of the alleged contravention?

(5)  Should the proceedings be stayed by this court pending the Commission’s investigation?

Transfer of proceedings

14.  S 113(1)–(3) of the Ordinance provides:

“(1) Subject to subsection (2), the Court of First Instance must transfer to the Tribunal so much of the proceedings before the Court that are within the jurisdiction of the Tribunal.

(2) Subsection (1) does not apply to any proceedings that —

(a) are within the jurisdiction of the Tribunal under section 142(1)(g); and

(b) the Court of First Instance considers should not, in the interests of justice, be transferred to the Tribunal.

(3) Without limiting subsection (1) but subject to section 115(2), if, in any proceedings before the Court of First Instance, a contravention, or involvement in a contravention, of a conduct rule is alleged as a defence, the Court must, in respect of the allegation, transfer to the Tribunal so much of those proceedings that are within the jurisdiction of the Tribunal.”

15.  S 113(3) should be read with s 142(1), which sets out the subject matter jurisdiction of the Tribunal and, in particular, s 142(1)(d), which provides that the Tribunal has jurisdiction to hear and determine “allegations of contraventions, or involvements in contraventions, of the conduct rules raised as a defence”.  Mr Leung who appeared for the plaintiff did not dispute it and I have little difficulty in accepting that s 113(3) is prima facie engaged in this case.

16.  Although s 113(3), using the word “must”, might suggest a transfer to the Tribunal is mandatory, it may be that there is scope for suggesting that the Court of First Instance (“CFI”) can examine the quality of the defence so that if it can be summarily seen to be of no substance with the result that it can be struck out or summary judgment can be entered, then no defence remains that calls for a transfer.

17.  Even if a transfer is mandatory irrespective of the quality of the defence alleged, the same result may in my view be reached via the alternative route of s 114(3), which provides:

“If the Court of First Instance transfers any proceedings to the Tribunal under section 113(3), the Tribunal may transfer back to the Court so much of those proceedings that the Tribunal considers should, in the interests of justice, be transferred back to the Court.”

18.  This power to transfer back is exercisable in the interests of justice.  Without in any way seeking to define the circumstances in which it might arise, it seems to me it is open to the Tribunal to exercise this power where the defence raised is so lacking in substance that it would be liable to be struck out or would not survive an application made by the plaintiff for summary judgment.

19.  Moreover, I see no reason why this power could not, in an appropriate case, be exercised immediately following a transfer to the Tribunal under s 113(3).  It would be a very cumbersome procedure indeed if, in such a case, the hearing in the CFI has to be adjourned while the defence is transferred to the Tribunal, for the Tribunal to be constituted and to convene on a date to be fixed only to transfer the defence back to the CFI for it to be dealt with and for judgment to be entered.

20.  All judges of the CFI appointed under s 6 of the High Court Ordinance (Cap 4) are ex officio members of the Tribunal: s 135 of the Ordinance, ie excluding recorders, deputy judges, judges appointed under s 11A(3)(a) of the High Court Ordinance, and justices of appeal sitting as additional judges of the CFI.  In an appropriate case, where (as in this case) the judge of the CFI dealing with the case is also a member of the Tribunal, there seems to be nothing to prevent the same judge, after transferring (mandatorily) part of the proceedings to the Tribunal, from himself constituting the Tribunal (at any rate with the consent of the President of the Tribunal under s 145(1) of the Ordinance) and immediately exercising the discretion to transfer that part back to the CFI.

21.  For this reason, where a contravention, or involvement in a contravention, of a conduct rule is alleged as a defence in a case in the CFI, it would in my view be conducive to effective case management if any application to strike out such defence or for summary judgment or for transfer to the Tribunal is listed either before the President of the Tribunal (as a CFI judge) or in consultation with the President.

22.  In the present case, since, as will be seen below, I find there are triable issues raised, s 113(3) requires that the allegation of contravention of the first conduct rule be transferred to the Competition Tribunal.

Alleged contravention of first conduct rule

23.  There is no dispute between the parties that, for the purposes of an application for summary judgment, competition law defences are not in a special category with a different set of rules.  The usual principles apply.  Where a defendant shows that he has a fair case for defence or reasonable grounds for setting up a defence, or even a fair probability that he has a bona fide defence, he ought to have an opportunity to defend the action.  The question is not whether the defendant’s assertions are to be believed but whether they are believable — a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute; see UnicCompany v Centus Developments Limited [1988] HKC 643 and Ng Shou Chun v Hung Chun San [1994] 1 HKC 155, per Godfrey JA; Re Safe Rich Industries Ltd (unrep, CACV 81/1994, 3 November 1994), per Bokhary JA.

24.  I agree, however, that in this context there is a need for careful scrutiny of competition law defences.  In Intel Corp v Via Technologies Inc [2003] FSR 12, [2002] EWHC 1159 (Ch), at §90, where the claimant sued the defendant for patent infringement and applied for summary judgment, and the defendant alleged the claimant’s refusal to license the defendant on the terms that it sought was an abuse of a dominant position under UK and EU competition laws, Lawrence Collins J stated, in a passaged approved on appeal in [2002] EWCA Civ 1905, [2003] FSR 33, at §32:

“the ease with which a defence based on Article 81 or 82[1] may be generated on the basis of vague or imprecise allegations makes it necessary to scrutinise them with some care in order to avoid defences with no merit at all going to a lengthy trial with expert economic evidence”.

25.  With these principles in mind I turn to the defendant’s allegations in the present case.  As Mr Leung submitted on behalf of the plaintiff, the defendant has produced no direct evidence of collusion between the plaintiff and Shell.  All that it relies upon is circumstantial evidence, particularly parallelism in price movements which, Mr Leung submitted, fell short of constituting “a firm, precise and consistent body of evidence of prior concertation”: Re Wood Pulp Cartel: A. Ahlstrom Osakeyhtio v E. C. Commission [1993] 4 CMLR 407, at §70. I accept that parallel conduct cannot by itself be equated with concerted practice, but it may, depending on the circumstances, be evidence of such practice.  Recognising that it is commonplace for collusion to take place clandestinely, the law does not insist on direct evidence.  As the European Court of Justice stated in Case C‑407/08P Knauf Gips KG v European Commission, at §49:

“In most cases, the existence of an anti‑competitive practice or agreement must be inferred from a number of coincidences and indicia which, taken together, may, in the absence of another plausible explanation, constitute evidence of an infringement of the competition rules”.

26.  With reference to parallel conduct, in Imperial Chemical Industries Ltd v E. C. Commission [1972] ECR 619, the European Court of Justice stated (at §66):

“Although parallel behaviour may not by itself be identified with a concerted practice, it may however amount to strong evidence of such a practice if it leads to conditions of competition which do not correspond to the normal conditions of the market, having regard to the nature of the products, the size and number of the undertakings, and the volume of the said market.”

27.  Similarly, in the case relied upon by Mr Leung, Re Wood Pulp Cartel, supra, at §71, the European Court of Justice also stated:

“parallel conduct cannot be regarded as furnishing proof of concertation unless concertation constitutes the only plausible explanation for such conduct”.

28.  Based on the materials produced by the defendant, there seems to have been a general parallel trend between the net price charged to the defendant by the plaintiff and by Shell respectively.  The precise extent of parallelism, both as regards closeness of the prices and simultaneity of movements, remains to be examined and analysed in detail but this is not an exercise required for present purposes because Mr Leung accepted there were price similarities as alleged, and indeed stated they were “not merely a coincidence”, but contended that they were “a normal feature of the diesel market in Hong Kong”.

29.  The problem with that contention is that the plaintiff has chosen not to file any factual evidence from itself in response or to give any explanation of the matters relied upon by the defendant.  All that the plaintiff did in its reply affirmation was, in essence, to exhibit two public reports, namely, a consultants’ report commissioned by the Economic Development and Labour Bureau on behalf of the Competition Policy Advisory Group of the Hong Kong Government on the Auto‑fuel Retail Market (published in 2005) and the report of the Competition Commission on Hong Kong’s Auto‑fuel Market (published in 2017).  The plaintiff’s affirmation quoted extensively from these reports, citing their conclusions that no evidence had been found to support the allegation of collusion among oil companies in the Hong Kong auto‑fuel market.

30.  In his submissions, Mr Leung also merely referred to the two reports in submitting that simultaneous price movements are an almost universal feature of competitive homogeneous product markets.  On that basis it was submitted that parallel pricing between the plaintiff and Shell is not necessarily indicative of collusion between them and is therefore insufficient to raise any triable issue.

31.  With respect, this approach seems to me to be misconceived.  The two reports both dealt with the automobile fuel market while the subject matter of the present case is industrial diesel oil.  There is no suggestion or evidence that these products are the same or inter-substitutable. In Hong Kong, auto‑fuel is generally sold to consumers through full‑service petrol filling stations, while diesel was supplied to the defendant at its own premises by the plaintiff’s tanker trucks.  As Mr Leung accepted in oral argument, industrial diesel which is the subject matter of this action is a different product from auto‑fuel, and the two markets are different markets. 

32.  Significantly, on the defendant’s case, the List Price and the Fixed Discount were both not publicly available information.  The plaintiff has not filed any evidence to deny it.  Indeed, Mr Leung accepted that the Fixed Discount was the result of private negotiations between the plaintiff and the defendant.

33.  Furthermore, the defendant’s case is not that all suppliers of industrial diesel colluded in price across the board against all purchasers, but only that the plaintiff and Shell colluded against the defendant.  In essence, the defendant alleges that the plaintiff and Shell, the defendant’s only two suppliers, had got together and decided to increase their prices for diesel sold to the defendant over and above what other suppliers in Hong Kong were charging and over and above what the plaintiff and Shell were charging other purchasers. 

34.  Mr Leung said it is incredible that the defendant, a substantial company and a sizeable consumer of industrial diesel, could have allowed itself to be ripped off for so many years in the way it alleges.  There is some force in the point but there is evidence that on 7 June 2017, 2 days after the last purchase by the defendant from the plaintiff, the plaintiff quoted a price of HK$3.80 per litre of industrial diesel, compared to HK$6.25 invoiced to the defendant on 5 June 2017. Other suppliers including Chevron, Brenntag, ExxonMobil, Tak Cheong Loong and Yick Fung Hong were all quoting prices in the range of HK$3–4 per litre in around June to October 2017.  It is true that there is as yet no evidence of the pricing of other suppliers prior to June 2017, but there was no dramatic drop in the import price around June 2017 and the plaintiff has not suggested there was a substantial drop in retail price across the market at that time. The evidence on its face therefore gives some support for the defendant’s allegation which portrays a different situation from that found in the auto‑fuel market. 

35.  Mr Hui, who appeared for the defendant, did not shrink from the fact that the premise of the defendant’s case is that, for many years, the plaintiff and Shell had got away with charging the defendant a price far above the rest of the market because the defendant had simply failed to “shop around”, perhaps because it was too trusting, lazy or gullible.  Mr Leung castigated this assertion as incredible given the defendant’s experience and knowledge of the fuel oil market.  He also submitted that the alleged collusion would be ineffective because there would be many other suppliers willing and ready to sell at lower prices, thus undercutting and counteracting the alleged limited collusive union.  This had given me pause, but in the end, on the evidence before me, I do not think this makes the defence cross the line from being intuitively improbable to being unbelievable, though I consider there is sufficient doubt raised to warrant imposing a condition for leave to defend.

36.  Further, while I have serious misgivings about the so‑called Fair Market Price calculated by the defendant (see §9 above), there is, on the present evidence, nothing to contradict the allegation that the plaintiff’s and Shell’s prices charged to the defendant, whilst matching each other closely, substantially exceeded both what other suppliers were charging and the plaintiff’s own quote subsequently obtained.  Mr Leung was not able to point to anything to suggest that this might be a normal feature of an oligopolistic market or a competitive market for homogeneous products.

37.  In the light of (i) the prima facie evidence of parallel pricing over a prolonged period between the plaintiff and Shell as against the defendant which substantially exceeded the prices charged by rest of the market, (ii) the (as yet) uncontradicted evidence that the List Price and Fixed Discount in the sales to the defendant were both confidential information, and (iii) the absence of any relevant evidence from the plaintiff to show that the defendant’s express or implied assertions of fact are beyond belief or to set out or explain what has happened, I have come to the view that the defendant’s case cannot summarily be dismissed as wholly without substance.  There are matters that warrant investigation in a trial.  Leave to defend should be given subject to a condition of payment into court.

Effect of contravention

38.  Mr Leung accepted that if the plaintiff and Shell did breach the first conduct rule as alleged, then the defendant arguably has an illegality defence.  It follows from the conclusion above (without any need for a decision) that there is a triable issue in relation to the illegality defence.  It is therefore unnecessary for me to discuss the arguments and authorities relied upon by Mr Hui in relation to illegality.

Set‑off

39.  Mr Hui further argued that if there was a contravention of the first conduct rule by the plaintiff, the defendant would be entitled to damages for the loss and damage it suffered as a result, which could be set off against the price claimed by the plaintiff.  In answer, Mr Leung submitted that the defendant can only claim damages by way of a follow‑on action under s 110 of the Ordinance if and when the CFI or the Tribunal has determined that the plaintiff contravened the first conduct rule and that, since no action or even investigation has been taken by the Competition Commission against the plaintiff, there is no basis for claiming any set‑off.

40.  The defence of set‑off is premised on a finding of contravention of the first conduct rule.  As such, in the circumstances of this case and for the purposes of the present application, it adds nothing to the illegality defence.  I have some doubt whether the defendant has a cause of action for damages under the Ordinance other than that enforceable by a follow‑on action conferred by s 110.  It is however unnecessary to deal with the defence of set‑off separately or with Mr Hui’s contention that s 94 permits a claim for damages to be raised by a private party, at any rate by way of set‑off. 

41.  I would only mention that it seems to me that a follow‑on action can be issued after a judicial finding of contravention has been made not only in the context of an enforcement action brought by the Commission, but also in the context of a defence in an action raising a contravention of a conduct rule.  This may be inferred from s 110(3)(b) which refers to a decision of the CFI under s 114(3), which in turn refers to s 113(3), which is concerned with a contravention of a conduct rule being raised as a defence.

Stay

42.  S 118(2) of the Ordinance empowers the CFI and the Tribunal to stay the proceedings before it pending the Commission’s investigation where the Court or the Tribunal has referred an alleged contravention or alleged involvement in a contravention of a conduct rule to the Commission for investigation.  Where a reference is made, the Commission has to consider whether to conduct an investigation: s 39(1)(c).

43.  The defendant has already made a complaint to the Commission in 2017.  There is no evidence on the views of the Commission or the steps that it is likely to take with regard to the complaint.  It is not known whether a formal investigation will be commenced. A reference to the Commission under s 118(1) is not to be lightly made.  Nor is it necessary in the circumstances of this case.  The evidence available before this court at this stage, whilst in my view sufficient to show triable issues, does not warrant a reference by this court to the Commission.  The power to stay under s 118(2) therefore does not arise.  Nor do I consider it appropriate under the general powers of the court to stay the action pending the Commission’s disposal of the defendant’s complaint.

Disposition

44.  For the reasons above, I would give leave for the defendant to defend the action on the condition of payment of HK$4.43 million into court within 28 days.  There will be an order nisi that the costs of and relating to the plaintiff’s summons filed on 28 September 2017 be in the cause. 

45.  Pursuant to s 113(3) of the Ordinance, the allegation of contravention of the first conduct rule will be transferred to the Competition Tribunal.  The provisions in Order 78A of the Rules of the High Court and Part 6 of the Competition Tribunal Rules (Cap 619D) will take effect accordingly, in conjunction with the general directions in §§109–114 of Practice Direction No 1 of the Tribunal.  I further direct that the remainder of the action is to be listed in the CFI for directions on the same day before the same judge who constitutes the Tribunal for the purpose of the directions hearing held pursuant to rule 99(1)(b) of the Competition Tribunal Rules.