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Court of Appeal of New Zealand |
Last Updated: 13 January 2019
IN THE COURT OF APPEAL OF NEW ZEALAND C.A.169/95
BETWEEN PORT NELSON LIMITED
Appellant
AND COMMERCE COMMISSION
Respondent
Coram: Gault J McKay J Blanchard J
Hearing: 16,17,18,19,22,23 and 24 April 1996
Counsel: D J White QC and W B Rainey for Appellant
B W F Brown and P H Rainsford for Respondent Judgment: 3 July 1996
JUDGMENT OF THE COURT DELIVERED BY GAULT J
This proceeding was brought by the Commerce Commission alleging breaches of ss 27 and 36 of the Commerce Act 1986 arising from steps taken by Port Nelson Ltd (PNL) at the time of, and soon after, the emergence at the end of 1990 of competition to its pilot services in the Port of Nelson. After a trial in the High Court which began on 10 October 1994 and ran, with some interruptions, until 20 December before McGechan J and Professor Lattimore (lay member - s 78 Commerce Act) judgments together running to 250 pages were delivered on 2 June 1995. They are reported at (1995) TCLR 406. PNL was found to have breached in certain respects both ss 27 and 36. Remedies in the form of declarations, injunctions and pecuniary penalties totalling $500,000 were ordered. The appeal is against all adverse findings.
There is a cross-appeal in respect of matters on which the Commerce Commission was unsuccessful.
It is convenient at the outset to set out the provisions of ss 27(1) and 36(1) as follows:
27(1)No person shall enter into a contract or arrangement, or arrive at an understanding, containing a provision that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.
...
36(1)No person who has a dominant position in a market shall use that position for the purpose of -
(a) Restricting the entry of any person into that or any other market; or
(b) Preventing or deterring any person from engaging in competitive conduct in that or in any other market; or
(c) Eliminating any person from that or any other market.
The judgment of McGechan J, with which Professor Lattimore expressed agreement, reviews the facts at great length. His account and certain of the findings he made are challenged in several respects and it will be necessary to deal with them. No fewer than 27 grounds of appeal were advanced. They have been carefully considered through seven days of oral arguments and subsequently with the assistance of lengthy written submissions. We say at the outset we have not been satisfied the Court below proceeded on any wrong basis or made material findings that were not reasonably open. Therefore it will not be necessary for this judgment to approach in length the principal judgment appealed against. For a full picture of the whole factual context that should be read with this judgment.
After its establishment in the course of widespread port reforms in New Zealand by the corporatisation of the control and operation of the ports around New Zealand, PNL has carried on business in the provision of port facilities and services at Nelson since October 1988 when it acquired the commercial undertakings of the Nelson Harbour Board.
PNL had its first encounter with the Commerce Act in connection with the services in stevedoring provided at the port by a partly owned company Tasman Bay Stevedores Ltd (TBSL) in competition with (now) Stevedoring Services (Nelson) Ltd (SSNL) a subsidiary of Union Shipping New Zealand Ltd which had long provided stevedoring services at the port. That matter was the subject of litigation reported as Union Shipping NZ Ltd v Port Nelson Ltd [1990] NZHC 61; [1990] 2 NZLR 662. The potential impact of ss 27 and 36 therefore would have been fresh in the minds of the officers of PNL at the time of the events with which we are concerned.
PNL provided tug services to shippers using two tugs it owned and pilot services secured under contract from Tasman Bay Maritime Pilots Ltd (TBMP). That company had been formed for the purpose by pilots previously employed in the port by the Harbour Board. Negotiations for a new contract for the supply by TBMP to PNL of pilot services to take effect from the expiry of their contract (as extended) on 7 November 1990 did not result in agreement. TBMP decided to strike out independently offering pilotage at Port Nelson direct to shippers. PNL elected to continue offering pilotage using the one pilot in its employ (who was also the Shipping Services Manager and Harbour Master) and arranging to employ others. For the first time there were competitive pilot services at Port Nelson.
PNL then took three steps. First, after obtaining authority from the Board of Directors and legal advice, the Managing Director, Mr Green, informed TBMP in writing on 19 December 1990 that:
The Port Company is not prepared to make its tugs and their masters and crew available for towing services where any vessel is being piloted by a self-employed pilot who is not either employed or contracted to the Port Company to supply pilot services.
This meant that to secure pilotage work for vessels other than those for which tugs were not needed (less than 80 metres in length) TBMP was obliged to secure the use of tugs. Access to low capacity tugs (primarily two of 3.5 and 9 tonne bollard pull respectively as against 36 and 19 tonne respectively for PNL’s tugs) was arranged and this enabled TBMP to compete at the smaller vessel end of the market.
Because of the possibility of shippers using competitive pilotage PNL was required to separate its own charges for pilotage from certain of its other services hitherto charged together. This arose at a time when PNL’s overall charging was under review with assistance from accountants (Deloittes) as was required following the Court decision in the stevedoring case. PNL formulated a schedule of charges for pilotage. Port customers were notified on 21 January 1991 that the new pilotage and shipping services charges were available on request. Those for pilotage were on a banded scale with a minimum of $100 for ships up to 2,500 GRT (gross registered tonnage) and increasing by steps to $800 (25,001 and above GRT). The review of charges continued. New charges were settled to become effective on 1 April 1991. There was no change then to the pilotage charges but there was introduced a discount notified as follows:
If all services required (i.e. tugs, pilotage, ships lines) are provided by PNL and the Company doing the Stevedoring uses PNL employees, a 5% reduction on all the Port Company’s charges will apply.
TBMP had complained to the Commerce Commission following the imposition by PNL of the tug tie (the refusal of tugs unless PNL pilotage services were used). The $100 minimum charge for PNL pilotage and the five per cent
discount therefore were introduced while the Commerce Commission investigation was under way.
Both SSNL and TBMP commenced proceedings against PNL in 1991 and sought interlocutory injunctions. SSNL alleged the five per cent discount breached ss 27 and 36. TBMP alleged breaches of the same sections by the tug tie, the $100 minimum pilotage charge and the discount. In a judgment delivered on 16 August 1991 (reported as Stevedoring Services (Nelson) Ltd v Port Nelson Ltd [1992] NZAR
Those proceedings were eventually discontinued by both plaintiffs, the dispute with SSNL having been resolved. However, following its investigation the Commerce Commission commenced this proceeding by which it may be seen to have taken up the allegations originally made by TBMP whose resources plainly could not bear litigation on the scale involved.
The Relevant Markets
Both ss 27 and 36 apply in respect of markets. By s 3(1A) of the Act reference to the term “market” is a reference to a market in New Zealand for goods or services as well as other goods or services that, as a matter of fact and commonsense, are substitutable for them.
Notwithstanding the references in the judgment in the interlocutory injunction proceedings to a market for tugs for relatively larger vessels and an upper pilotage market, the Commerce Commission pleaded the relevant markets as markets for:
The provision of pilotage services for vessels entering, moving within, and departing from the compulsory pilotage area at Port Nelson (“the pilotage services market”);
The provision of tug services for vessels entering, moving within, and departing from Port Nelson (“the tug services market”);
The provision of port services and facilities for vessels calling at Port Nelson (“the port services market”).
PNL denied the existence of these markets but did admit:
That it is in a dominant position (within the meaning of s 36 of the Commerce Act) in respect of the provision of harbour or port facilities at Port Nelson.
The case for PNL throughout has been that the relevant market for this proceeding is a vessel movement services market at Port Nelson.
As originally enacted the definition of market in the New Zealand Act was:
A market for goods and services within New Zealand that may be distinguished as a matter of fact and commercial commonsense.
In the first case in which this Court dealt with market definition under the 1986 Act, Tru Tone Ltd v Festival Records Retail Marketing Ltd [1988] NZCA 179; [1988] 2 NZLR 352,358, there was reference to the approach taken in decisions of the Commerce Commission which is traceable to Re Queensland Co-operative Milling Association Ltd, Defiance Holdings Ltd (1976) ATPR 40-102,17,247 where market bounds were said to be dictated by substitutability in response to price change. Noting the definition of
market in the New Zealand Act, this Court resisted the wholesale import of the Australian approach, stating (359):
In focusing in the definition in s 3(1) on distinguishability as a matter of fact and commercial common sense the legislation has carefully avoided giving prominence to any particular criterion. In particular, the test is not substitutability as such, although that will ordinarily be an important consideration; and, as is recognised in the passage cited, “market” is ordinarily regarded as a multi-dimensional concept with dimensions of product, functional level, space and time.
It was following that decision that the statutory definition of market was amended to that now appearing in s 3(1A). This seems to reflect legislative intention to harmonise the approach to market definition with that adopted in Australia and incorporated into their statute in 1977 by s 4E of the Trade Practices Act. That approach was most recently articulated in the decision of the full Court of the Federal Court in Singapore Airlines Ltd v Taprobane Tours WA Pty Ltd (1992) ATPR 41- 159, and particularly in the comprehensive judgment of French J. Mr White cited to us the following passage from that judgment (40,169):
In competition law it [the concept of market] has a descriptive and a purposive role. It involves fact finding together with evaluative and purposive selection. In any given application it describes a range of economic activities defined by reference to particular economic functions (e.g. manufacturing, wholesale or retail sales), the class or classes of products, be they goods or services, which are the subject of those activities and the geographic area within which those activities occur. In its statutory setting the market designation imposes on the activities which it encompasses limits set by the law for the protection of competition. It involves a choice of the relevant range of activity by reference to economic and commercial realities and the policy of the statute. To the extent that it must serve statutory policy, the identification will be evaluative and purposive as well as descriptive.
So far as a purposive approach is advocated it was not contended that any different markets should be defined for the respective purposes of ss 27 and 36.
Generally a market will be identified by reference to the activities of those engaged in commerce, the structures underlying their activities and the perceived susceptibility to change in the medium term future. In other words what competitors are doing or might reasonably be expected to do indicates the market in which they are participants. The task is less easy when, as in this case, virtually the whole of the area of relevant commercial activity is in transition from statutory monopoly and has only recently been opened to competitive conduct. It does not follow that markets cannot be identified - it is just that the task is more difficult because of the absence of empirical indicators. In Queensland Wire Industries Pty Ltd v The Broken Hill Proprietary Co Ltd [1989] HCA 6; (1989) 167 CLR 177,195 Deane J said:
The identification of relevant markets and the definition of market structures and boundaries for the purposes of determining whether B.H.P.’s refusal to supply Y-bar to Q.W.I. contravened s 46(1) [corresponding to NZ s 36] involves value judgments about which there is some room for legitimate differences of opinion. The economy is not divided into an identifiable number of discrete markets into one or other of which all trading activities can be neatly fitted. One overall market may overlap other markets and contain more narrowly defined markets which may, in their turn, overlap, the one with one or more others. The outer limits (including geographic confines) of a particular market are likely to be blurred: their definition will commonly involve assessment of the relative weight to be given to competing considerations in relation to questions such as the extent of product substitutability and the significance of competition between traders at different stages of distribution. While actual competition must exist and be assessed in the context of a market, a market can exist if there be the potential for close competition even though none in fact exists. A market will continue to exist even though dealings in it be temporarily dormant or suspended. Indeed, for the purposes of the Act, a market may exist for particular existing goods at a particular level if there exists a demand for (and the potential for competition between traders in) such goods at that level, notwithstanding that there is no supplier of, nor trade in, those goods at a given time - because, for example, one party is unwilling to enter any transaction at the price or on the conditions set by the other.
In this case the location of Port Nelson, the absence of any rail link and the nature of trade through the port mean that it can be readily accepted that the
geographical scope of the relevant port facilities and services is confined. Port Nelson cannot be said to be in close competition with other ports in New Zealand. The primary dispute is whether the provision to shippers using the port at Nelson of tug services and pilot services constitutes a composite vessel movements market or separate markets. The issue is not really one of defining market limits by considering what services may be substituted for the particular service (no one suggests tug services and pilot services are substitutable inter se), but rather what is the particular service to which the first part of the definition in s 3(1A) applies? On this aspect the High Court was presented with conflicting opinion evidence from highly qualified economic experts experienced in competition law. There also was evidence of practices in overseas ports with which shippers would be acquainted and which would influence their expectations.
On the one side it was contended that tug and pilot services can be and are provided separately on occasions in Nelson and commonly in overseas ports; that complementarity of services does not dictate that they fall within the same market and that as port reform throughout New Zealand results in the emergence of competition there is no reason why tug services and pilot services should not be offered competitively and by separate suppliers. Indeed Dr Bollard who gave evidence as an independent expert (though subsequently he has been appointed Chairman of the Commerce Commission) expressed the view that the supply of tugs to larger vessels at Port Nelson, where competitive services with large tugs would be uneconomic for the limited number of vessel movements involved, could be seen as a separate market, perhaps even an essential facility. Dr Wilkinson expressed a somewhat similar opinion as, of course, had MeGechan J in the earlier judgment in the proceedings brought by SSNL and TBMP. However the Commerce Commission was content to rely on a single tug services market rather than separate markets within that.
On the other side it was contended that in a very high proportion of ship movements for which pilotage services are required so too are tug services; that historically the two services have been provided by the same supplier and this offers economic advantages; that they are to be regarded as integrated services and therefore that they comprise a single vessel movements market. It was said that TBMP in seeking to provide only pilot services was seeking to define a new market to protect a niche in the wider market in which it wanted protection.
After reviewing the competing evidence the High Court expressed preference for the evidence led by the Commission and held the pleaded markets proved. Having reviewed the evidence and the full reasons given in the judgment of McGechan J we have not been satisfied that that conclusion was wrong or rested on any misapprehension of the correct legal approach.
Acceptance of the two separate tug services and pilot services markets has considerable significance in the assessment of the conduct of PNL against the prohibitions in ss 27 and 36.
The Findings in the High Court
It was found in the High Court that PNL’s conduct in offering and allowing the five per cent discount in the terms specified, conditional upon use by shippers of PNL services for all their requirements, amounted to inducing and being party to contracts containing provisions that had the purpose and likely effect of substantially lessening competition in the pilotage market so as to contravene s 27. The feature of the discount which made it objectionable was that it attached not only to the contestable services provided by PNL such as pilotage but also to the incontestable services including port access, berthage, utilities, equipment, wharfage and storage. It was not a progressive discount; it was not available if any competitive service was
taken and so in its structure was designed to exclude competition in contestable services rather than encourage incremental purchases. We were taken to examples where the port user received a discount in excess of the total pilotage cost.
The High Court next found that offering and contracting at the $100 minimum pilotage charge amounted to PNL inducing and being party to contracts having the purpose and likely effect of substantially lessening competition in the pilot services market in contravention of s 27. It was held that however “cost” was defined the $100 minimum for movement of sub 2,500 GRT vessels was below cost and, when considered in conjunction with the tug tie the effect of which was to confine competitors in pilotage to the smaller vessel end of the market, (and also in conjunction from a later date with the discount) the alleged "predatory” pricing contravened.
The third finding adverse to PNL was that of breach of s 36. It was held that PNL was in a dominant position in the tug services market and because of the tug tie therefore also was dominant in the pilotage market and that in imposing and maintaining the tug tie PNL was using its dominant position for purposes proscribed by the section, that is, restricting the entry of TBMP into, preventing or deterring it from engaging in competitive conduct in, and eliminating it from, the pilotage market.
In the course of dealing with the challenges to these findings it will be necessary to advert to the grounds of cross-appeal presented on behalf of the Commission. This can be done briefly because Mr Brown accepted that if the judgment is upheld the additional acts of contravention the Commerce Commission asserts should have been found would make no significant difference to the overall outcome.
Points of Construction of s 27
Mr White argued a number of points of construction of s 27. The first is the meaning of “likely” and in particular the degree of probability it contemplates. We agree with the submission advanced by Mr White that bearing in mind the purpose of the provision the appropriate level is that above mere possibility but not so high as more likely than not and is best expressed as a real and substantial risk that the stated consequence will happen. That is the construction adopted in a different context in Colonial Mutual Life Assurance Society Ltd v Wilson Neill Ltd [1994] 2 NZLR 152,161 and one well known in the criminal law: R v Harney [1987] NZCA 86; [1987] 2 NZLR 576,581. After reviewing a number of authorities McGechan J adopted a construction at least as favourable to PNL as that contended for by Mr White as appears from this passage.
While the New Zealand statute is not technically penal, there is, with respect, wisdom in Franki J’s caution over setting standards too low. The area of likelihood at issue is a broad one lying somewhere between mere possibility and a chance in excess of 50%. It seems appropriate ... to adopt Deane J’s “real or not remote chance or possibility”; and as synonyms for that general sense, His Honour’s formulations “prone”, “with a propensity”, and “liable”. Alternatively, one might usefully borrow the New Zealand formulations from another context which carry a like message: “real risk”, “substantial risk”, or “something that might well happen” (italics added).
We are not satisfied that in applying the section to the particular conduct of PNL the Judge adopted any lower test.
The second point of construction is as to the meaning of “substantially”. In s 2(1A) “substantial” is defined as meaning real or of substance. The Judge referred to that. We find nothing inconsistent with it in his paraphrase “not insubstantial or nominal”.
Of greater substance is the argument advanced by Mr White that the Judge was wrong in his conclusion that there can be breach of s 27 where the purpose is that of only one party rather than the common purpose of both parties to the contract arrangement or understanding. Mr White submitted that there must be shown concerted action or collusion.
Arrangements and understandings - indeed even contracts - might be among many parties. It seems to follow from the argument advanced that the common purpose would have to be shared by all. If that were so the effectiveness of the provision would be considerably limited.
As a matter of construction the argument is flawed. First, it is the "provision" that must be shown to have the purpose. Secondly, the enquiry as to the purpose of the provision must be undertaken having regard to the deeming provision in s 2(5)(a) which reads:
A provision of a contract, arrangement or understanding, or a covenant shall be deemed to have had, or to have, a particular purpose if -
(i) The provision was or is included in the contract, arrangement or understanding, or the covenant was or is required to be given, for that purpose or purposes that included or include that purpose; and
(ii) That purpose was or is a substantial purpose:
That deems a provision to have the purpose if it was required to be included (by the person or persons so requiring) for that purpose. This indicates plainly that not all parties need be shown to share the purpose. In any event, in a case which is concerned with contracts and intended contracts it is unproductive to point to the purpose of only one party. Once the contract is concluded the parties must be taken to share the purposes of its provisions.
The conclusion that unilateral purpose may be sufficient already has been reached by this Court in Tui Foods Ltd v New Zealand Milk Corporation Ltd [1993] TCLR 406. That case involved s 29 but the material wording is the same in that section and we have not been satisfied that case is distinguishable. A similar construction has been adopted in Australia in ASX Operations Pty Ltd v Point Data Australia Pty Ltd (1990) 97 ALR 513 which McGechan J also relied upon. As Mr White pointed out, this Court’s decision has been criticised on the point and it is a consequence of the interpretation adopted that a party may contravene the section in ignorance. But that may occur also where a proscribed effect or likely effect is involved. The objective of the statutory provision must be borne in mind. The promotion of competition should not be inhibited by the artificiality of search for unanimous purposes.
Recently in News Ltd v Australian Rugby Football League Ltd [1996] FCA 1256; (1996) 135 ALR 33,99 some question was raised as to the application of this construction to a situation which could arise under s 4D of the Australian Trade Practices Act. That section is similar to (but differs from) the New Zealand s 29, but in any event the view expressed can have no bearing upon our s 27 and need not concern us in this case.
The conclusion reached by the Judge, that a proscribed purpose for which a provision was included by PNL alone falls within s 27, was correct.
As seems customary in cases under ss 27 and 36 we heard argument as to whether the proscribed purposes are to be ascertained subjectively or objectively. Mr White advocated an objective test for s 27. Much has been written on this distinction which generally is unimportant in practice. There will be very little difference in most cases between ascertaining subjective purpose by inference from what was said and done and ascribing objectively a purpose from evidence of what was said and done. In the present case, where the statutory purpose was found by the High Court in each
case, it was held expressly or impliedly to have been established both subjectively and objectively.
Simply by reference to the wording of the sections it is difficult to see how the purpose of a “provision” (s 27) can be ascertained (or negatived) subjectively. Yet the purpose for which a provision is included (s2(5)(a)) could be, as could the purposes for which a dominant position in a market is used (s 36).
Since it is unnecessary to express any concluded view in this case we are reluctant to add to the writing on the subject. It is sufficient with reference to s 27 to cite what was said by Cooke P in the Tui Foods case (there in relation to s 29):
I am disposed to think that, if a purpose is discernible on the face of a contract or arrangement having regard to the express terms considered in the light of any relevant surrounding circumstances, such a purpose will qualify under the statute. That might be described as an objective approach. But it is at least conceivable that there may also be cases where, although the purpose is not so apparent, it can be shown by evidence dehors a contract or arrangement that the intention of the party who sought the inclusion of the relevant provision was of a kind falling within the prohibition in s 29, and it may be that in such a case what may be called a subjective test is sufficient. It is unnecessary, however, for present purposes to express a definite view on that point because, on the face of this particular rebate arrangement and the evidence, it is manifestly well arguable in my view that there is no difference between an objective test and a subjective test: that both are satisfied.(409)
So far as concerns s 36, in the absence of further argument we incline to the conclusion McGechan J reached after reviewing the authorities that purpose may be established or negatived on either a subjective or an objective analysis.
One further point arises out of the legal submissions relating to s 27. The relevant enquiry is as to substantially lessening competition. That is not the same as substantially lessening the effectiveness of a particular competitor. Competition in a
market is a much broader concept. It is defined in s 3(1) as meaning “workable and effective competition”. That encompasses a market framework which participants may enter and in which they may engage in rivalrous behaviour with the expectation of deriving advantage from greater efficiency. There appears to have been consistent acceptance of the elements of competition explained in the Queensland Co-operative Milling Association case (17,246) and further quotation is unnecessary.
The distinction between lessening competition and lessening the effectiveness of a competitor arises in relation to the appeal against the finding that the 5 per cent discount had such purpose and the finding challenged by cross-appeal that though the discount had that likely effect it did not have that actual effect. It is to the five per cent discount that we now turn.
The Discount
PNL did not itself offer stevedoring services but it provided labour to its partly owned company TBSL which competed for stevedoring work at the port with SSNL. To qualify for the five per cent discount a shipper needed to take all the services it required at the port from PNL and use TBSL for any required stevedoring. The discount however was applied only to the direct charges of PNL and not to those of TBSL nor to the charge made by PNL to TBSL for labour supplied for stevedoring work.
It was the case for PNL that the only purpose in introducing the 5 per cent discount was to promote maximum utilisation of PNL labour and in particular to provide an incentive to shippers to use the stevedoring services of TBSL. The High Court found that while SSNL was the primary target of the discount it still was a real and substantial purpose of PNL when introducing and allowing the discount to
“eliminate TBMP from pilotage and tug markets and to deter other competitors”. McGechan J said:
Evidence from Mr Green and others that the discount occurred simply to permit better labour utilisation, without any aggressive intent toward TBMPL, defies probability and is rejected.
In the course of his reasoning the Judge employed language (such as “eliminate TBMP”) which Mr White said was more appropriate for s 36 analysis than for s 27 and indicated error by the Judge in focussing on the particular competitor rather than competition in the market. Given that in fact there were no others in or seeking to enter the pilotage market in Nelson the distinction makes no difference in this case. In any event the reference to deterring “other competitors" indicates the Judge was mindful of the point.
It was submitted that the finding that whether viewed objectively or subjectively it was a real and substantial purpose of PNL in offering the discount to substantially lessen competition in the pilotage market was erroneous and not reasonably open on the evidence.
First, there can be no dispute that the structure of the discount could make it difficult to compete with PNL in the pilotage market alone. Witnesses said as much. Mr Green, although he maintained the impact of the discount on TBMP was simply a consequence, not a purpose, acknowledged that “he could see it could cause them a problem”. Mr McNally, the accountant advising PNL, when he learned of it in the course of a meeting on 5 April 1991, made a note “how could a competitor match this situation”. Mrs Vautier, the economics expert called for PNL referred to the “fairly predictable” outcome and had stated in a report in 1991 when dealing with the tug tie:
Any impact of the tie on the ability of Tasman Bay Maritime Pilots (or other independent pilots) to provide a pilotage service in competition
with PNL, seems to be overwhelmed by the impact of the 5 per cent discount policy.
In addition the Judge found that to Mr Hufflett, a director of PNL and an experienced shipper, the impact on competition would have been obvious.
Having regard to the structure of the discount, the evidence just mentioned and that given on behalf of the Commerce Commission, the finding that the discount was likely to substantially lessen competition in the pilotage market not only was open but was inevitable. Mr White’s challenge to that finding did not lack ingenuity. He argued that because the High Court found that, as it turned out, the discount did not actually substantially lessen competition in the market it was erroneous to find that when it was introduced that effect was likely.
The reasoning in the judgment of McGechan J for the conclusion that although the effect of substantially lessening competition was likely it did not actually happen was constructed upon the steps taken by TBMP to compete and the “artificial constraints” operating upon PNL. He referred to the “freezing” effects of the on- going Commerce Commission investigation and the litigation as likely having deterred PNL from promoting and extracting the full potential effects from the discount after its introduction.
It happened that TBMP, faced with the tug tie, found itself obliged to enter and seek to compete in the tug market at the port in order to be able to compete in the pilotage market. It did this with a degree of success by securing use, on what the Judge described as an ad hoc basis, of small tugs which could be used in conjunction with its pilot services. Because it was able to secure a significant share of the pilotage business in respect of other than the larger vessels the High Court concluded:
Certainly, it can be argued in the abstract that the 5% discount must have “substantially lessened” competition. However, looking at
revealed effect, I am not satisfied such actual effect has occurred to the severe degree pleaded.
The Commission has cross-appealed against this finding.
The focus is upon competition in the pilotage market. Section 3(3) provides:
For the purposes of this Act, the effect on competition in a market shall be determined by reference to all factors that affect competition in that market ...
Under s 3(2) “lessening” includes the hindering of competition and, as the Judge said, one can hinder by merely delaying or obstructing. It seems rather to have regard to the position of the competitor than to competition in the market to reason that there has been no hindering or obstruction of competition in the pilotage market because TBMP has been able to capture business when it has been able to do so only by entering the separate tug market.
The tug tie was a factor in the pilotage market and formed part of the general circumstances of that market when the discount was introduced. The discount, because of its structure, affected competition in the pilotage market. Also, because of its structure, it affected competition in the tug market. That a particular competitor has secured business in the pilotage market by subjecting itself to the impact of the discount also in the tug market seems an unconvincing reason for concluding that the impact no longer exists in the pilotage market. Nor should the temporary presence of artificial constraints bear upon the issue. Competition has emerged but subject to continued hindrance.
Of course in practical situations workable and effective competition in a market may develop even in the face of anti-competitive conduct and the point will be reached where that conduct no longer can be said substantially to lessen competition.
We are handicapped at the appellate level in making any assessment as to whether that point was reached at Port Nelson in the pilot services market and when. However, since, as Mr Brown accepted, it makes no practical difference to the outcome of this case we prefer not to disturb the decision reached in the High Court as to the actual effect of the discount. Nevertheless we are satisfied that the decision that the actual effect was not a substantial lessening of competition in the pilotage market is neither inconsistent with, nor undermines, the decision that that was a likely effect when it was introduced.
We revert to the finding that it was a purpose of the discount to substantially lessen competition in the pilotage market. When assessing whether the aggressive purpose directed at those in or contemplating entry to the pilotage market, which he found established, amounted to a substantial purpose (s 2(5)) McGechan J relied on three factors then in operation. They were:
First, there was a background of animosity toward TBMPL. Second, acute concern had developed as to the competitive threat posed by TBMPL. Third, there would have been a belief that a 5% discount imposed across all services including incontestable services would be severely detrimental to TBMPL.
Mr White submitted that the finding of animosity was not supported by the evidence. Of it, the Judge said that he did not make too much in itself as, in the end, other influences would have been more decisive, but it was a breeding ground. That reflects appropriate weighting. Competition, even fair competition, may be aggressive but we do not accept that the Judge was required to reject as irrelevant animosity towards the only competitor when assessing purpose. Nor do we accept the finding of animosity was without foundation.
The evening before the negotiations for a renewed contract for the provision to PNL by TBMP of pilots when the “robust” negotiations were at a tense stage, in a
telephone call from Captain Westbrooke of PNL the message was conveyed to the principals of TBMP that unless they agreed to the terms of the new contract “they would never pilot in the port again”. Earlier in the course of the negotiations there was a suggestion that TBMP could deal direct with shipping companies. The exchange according to McGechan J was as follows:
Mr Green, used to robust industrial negotiation, replied spontaneously. His words were close to “Whose wharves are you going to berth them at? I’ll run you out of business within a month”. Captain Tregidga [of TBMP] responded that a Court might have something to say about that (the litigation between PNL and USSL, judgment 10 months earlier, was notorious). Mr Green responded in words close to “So you want to see the cost of going to Court?”, implying TBMPL could never afford that option.
The Judge commented that while superficially sinister in reality these exchanges were no more than the cut and thrust of the negotiations and were understood at the time in that vein. They still provide some background to the finding of animosity.
Mr White referred to the evidence of Captain Myles which he said was overlooked. Captain Myles originally was involved with TBMP though he went off to Australia at an early stage. He said of Mr Green that he is a keen businessman but does not confuse personal relationships with business relationships. But, as we understand the judgment of McGechan J, his references were not so much to personal animosity as to the business relationship. This is confirmed by his finding that:
If the opportunity arose for PNL to injure TBMP, without undue risk, it would have been taken with alacrity.
It is confirmed also by the recorded comments in a report for and at PNL directors’ meetings after TBMP made its intentions known. There were statements to the effect that there was room only for the one operator of pilot services at the port and that “it is absolutely vital at this time that we prevail in this situation, otherwise we will have
paid redundancy in 1988 to [TBMP pilots formerly employed by the Harbour Board] to no avail”. Mr White complained that this last remark in Mr Green’s report to the meeting of 14 December 1990 was taken out of context by McGechan J but we are satisfied the significance he attached to it was open to him, just as it was open to him to reject the explanation for it given in evidence by Mr Green. Mrs Vautier made reference to “clear evidence of tension that built up in the relationship between ... TBMP and PNL”. The witnesses were seen and heard in the High Court over an extended period and the finding is not one that would be readily disturbed on appeal resting as it does in part on impressions formed on the basis of a range of contributing factors.
There must be the same rejection of the challenge to the finding of the perception by PNL of acute competitive danger represented by TBMP. There was much emphasis upon a fear of being held to ransom by an independent pilotage service and, although that could not be accepted as a sufficient justification for the tug tie, it is inconsistent with the argument on the present point.
Awareness of the competitive threat and determination to resist cannot be doubted. That was the admitted reason for the tug tie. The real issue is whether it was a substantial purpose of the discount to lessen the competitive threat. The finding that it was is one of fact. Although Mr White emphasised pointers in the evidence to the contrary and the absence of evidence of express affirmation, we consider the relevant matters were weighed and the conclusion is adequately supported by evidence available and the reasoning set out in McGechan J’s judgment.
Two further matters were raised in the challenge to the finding of the proscribed purpose of the discount. The first was the reference by McGechan J to pilotage, tugs and lines being “added in” to the discount after TBMP had indicated the intention to offer competing pilotage. We were taken to correspondence and evidence
indicating that a discount arrangement was under consideration by PNL as early as November 1990, so suggesting that TBMP was not a target. It is plain however that no document before 1991 made express reference to the discount as it was eventually structured including that, to qualify for it, the shipper must use PNL pilotage. We heard considerable argument as to the meaning to be ascribed to the documents. From the early material it appears the concept contemplated was a discount in respect of cargo handling, whereas by the time Mr Green made his formal recommendation to his board in a report dated 8 February 1991 he described it as “a system whereby a discount is offered, where all our services are employed, including pilotage stevedoring ships lines etc”. It is to be noted that the particular services he chose to specify were the contestable services.
The statements most helpful to PNL in attempting to show that the discount was contemplated before the TBMP competitive entry are in solicitors’ letters of 9 and 13 November 1990 referring to a discount for a “package of services”. The context still is the maximisation of labour usage and it cannot be said that these statements exclude the subsequent determination to structure the discount so as to require usage of PNL pilotage to qualify. The High Court finding is not undermined on this ground and the reference to pilotage being “added in” was not unjustified.
The other point advanced by Mr White was that because of the share of the stevedoring market held, and expected to be retained, by USSL there always was, and would be, a considerable volume of business which would not qualify for the PNL discount and so would be open to competitors without having to attempt to match the discount. This goes to substantiality both of purpose and of impact of the discount in the pilotage market. The definition of substantial is relevant. Even given the competition in the stevedoring market the effect of the discount would have been real and of substance in the pilotage market and, if that consequence was (as the Court
found) an objective, then the finding that the purpose requirement was met was appropriate.
The Minimum Pilotage Charge
To price a contestable service below cost can impact on competition for that service. The impact will be no different whatever the reason for the below cost pricing though, in the long term, such a practice cannot be sustained unless the loss is recovered from increased prices once competition is eliminated or unless the service is subsidised by other business for which there is no competition or perhaps by lower than market-cost equity. We agree with McGechan J that no assistance is gained by attempting to define the bounds of “predatory” pricing. It is preferable to concentrate on the terms of the statute.
The Commerce Commission alleged and the High Court found that PNL did charge pilotage for (at least) below 2,500 GRT vessels at less than cost and that there were the purpose and likely effect of substantially lessening competition in the pilotage market so as to contravene s 27. It was not essential to the Commission’s case that in all bands of its scale for pilot services PNL’s charges did not cover its costs, though this was contended.
Charging for pilotage on a banded GRT scale was not in itself said to be objectionable although the costs of providing the service for vessels would not increase or decrease correspondingly in bands. Plainly the cost of providing pilotage for a vessel above 25,000 GRT (the fee for which was $800) would not be eight times the cost of piloting a vessel of less than 2,500 GRT. As McGechan J pointed out, charging on a GRT scale without maximum or minimum would result in under recovery at the lower end and over recovery at the upper end. That too is unobjectionable in itself if overall there is full recovery of costs. Further, the
application of a maximum and a minimum will avoid commercial absurdity at the extremes.
When it became necessary at the beginning of 1991 for PNL to formulate separate charges for pilotage Mr Green began with the overall cost to PNL of its pilot service as shown in the most recently available draft report from Deloittes. He made adjustments to this and then calculated that on the estimated level of shipping movements an average recovery of $0.0367 per GRT was required. From this he formulated his banded scale of charges. The figure of $0.0367 per GRT translates to a charge of $91.75 for a vessel of 2,500 GRT and $917.50 for a vessel of 25,000 GRT. However it is not helpful to equate the cost of pilotage for vessels of 2,500 GRT and below by reference to multiples of the average per GRT rate as this gives no true reflection of the actual cost of pilotage in this sector of the market to which, without larger capacity tugs, TBMP was substantially confined. That Mr Green’s figure of
$0.0367 per GRT would give the cost of $3.67 for piloting a 100 GRT vessel demonstrates this. So TBMP’s objection was not to the adoption of a minimum charge but to the level at which it was fixed. The selection of the level was said to be anti-competitive.
On the evidence given the High Court found that the adjustments made by Mr Green by way of reduction of the cost to PNL of the pilot service resulted in a figure below actual cost, whether fully allocated cost or opportunity cost. In particular, it was held that his exclusion of eighty per cent of PNL’s pilots’ wages and salaries (which he allocated to non-pilot cost centres) was not a genuine effort at cost accounting and gave an outcome which is an absurdity. There was criticism also of the failure to produce any calculation showing how the figures in the bands of the scale of charges were arrived at and, in particular, the fact there was no evidence whatever as to the source or rationale of the $100 minimum figure.
In his judgment McGechan J concluded that, viewed in 1991, the $100 minimum perhaps was not likely to substantially lessen competition in the market but he added:
However, in the context of a tug tie which drove TBMPL into the small vessel area; reinforced by a 5% discount with like tendency, that was a likelihood.
He went on to find, as he had in relation to the five per cent discount, that the likelihood receded after 1991 and that because of the “freezing effect” of the investigation and litigation the likely effect did not materialise, so that TBMP captured a substantial share of the smaller vessel pilotage. He held therefore that it was not established that the operation of the $100 minimum pilotage charge had the actual effect of substantially lessening competition, nor did the likelihood that it would do so remain after 1991. It was found that the $100 minimum had the proscribed purpose in conjunction with the companion measures of the tug tie and discount.
There was a great deal of evidence directed to the formulation of PNL’s pilotage charges and their relationship to the cost of providing the service. The work carried out for PNL by Deloittes was to endeavour to relate the levels of charges for individual services provided by PNL to the costs of providing those services. The figures available to Mr Green at the time he settled the new pilotage charges in mid January 1991 were those in the draft Deloitte report No 4. They assumed continuation of the earlier contract for pilotage with TBMP and on that aspect were out of date. At about the time the new banded scale of charges was being formulated PNL supplied to Deloittes suggested changes to estimates for pilotage costs, including removal of the contract figure and other reductions. As a result, Deloittes in their final report felt able to reduce the allocated cost of the pilotage service from $421,812 to $218,737, which led them to recommend a rate per GRT of $0.042.
Mr Green’s reductions as part of his exercise in formulating the new charges were greater still because he arrived at the per GRT rate of $0.0367 even after including figures for contribution to profit and interest. His calculation included only twenty per cent of the $193,400 cost of pilots’ wages and salaries. This was not accepted as realistic.
Notwithstanding all Mr White was able to take us to, we have not been persuaded McGechan J was wrong in stating that no record was available to show how the scale of pilotage charges was derived after the required average recovery of
$0.0367 was determined and, in particular, how the $100 minimum charge was arrived at. What is apparent is that the $100 charge for vessels under 2,500 GRT was very much less than the previous Harbour Board and PNL minimum charges (for pilotage, watch service and Harbour Master) of $200. More significantly, PNL was already engaged in a cost allocation exercise resulting from earlier Commerce Act litigation. That was why advice was being obtained from Deloittes. Yet Mr Green’s figure of $100 was set well below Deloittes’ final figure for the average fully allocated cost of pilotage alone (before providing a contribution to profit interest and tax) of between $220 for smaller vessels and $306 for larger vessels. The $100 minimum was set at the level of 2,500 GRT at a time when it was known that TBMP had commenced offering a competitive pilot service but was not known TBMP would have access to tugs (the tug tie having been imposed), so that the expectation would have been that few pilotage jobs would be available to TBMP involving ships for which the PNL minimum charge would not apply.
In this Court Mr White did not seek to challenge the finding that the $100 minimum was below the fully allocated cost to PNL of providing pilotage for vessels under 2,500 GRT. His case was that PNL was entitled to spread cost recovery across the whole of its pilotage work; that the minimum and maximum were commercially
appropriate and that, but for the adverse finding as to the allocation of pilots’ wages and salaries, any below cost charging was not such as should be regarded as other than competitive conduct open to PNL. These and related points advanced in the course of extensive argument on this aspect of the case must be dealt with.
It was submitted that the finding directed to the minimum charge resulted, in effect, in the under 2,500 GRT pilotage business being treated as a separate market when the Court had defined the relevant market as a single market for pilotage. This submission is hardly open to PNL having regard to the effect of the tug tie being to confine the only competitor in pilotage (and by inference any potential competitor in pilotage) to the smaller vessel end of the market. Taken more broadly, however, it cannot be the case that competition in a market is not substantially lessened unless competition across the whole of the market is lessened. It is correct that another competitor could enter the market with tugs and compete across the whole pilotage market, offsetting under-recovery on the smaller vessels by recovery on larger vessels. But that would require the market participant to enter what has been held to be a separate (tug) market. The need to do so, as previously stated, is obstructive to competition in the pilotage market. The United States cases relied upon (Janich Bros Inc v The American Distilling Co [1978] USCA9 235; 570 F 2d 848 (1977) and Bayou Bottling Inc v Dr Pepper Company [1984] USCA5 255; 725 F 2d 300 (1984)) are unhelpful. They indicate that in cases of alleged predatory pricing involving a product sold in a range of sizes it is necessary to look at the average variable cost of providing the whole range, not just one size. Neither case involved a tie limiting competition to one particular size.
It was submitted next that a purposive approach to s 27 as it relates to below cost pricing calls for a distinction to be drawn between price reductions that are part of vigorous competitive activity and true predatory (exclusionary) pricing. It was contended that an anti-competitive purpose requires an ability on the part of the trader to maintain the below cost charging until the competition is eliminated and then the
market power to increase charges in order to recoup the loss incurred. Without that ability and that market power, it was said, there can be no substantial lessening of competition and therefore no anti-competitive purpose. Like the full Court of the Federal Court in Australia (Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) ATPR 41-167, 40,307) we are reluctant automatically to read into the statutory wording concepts evolved in the differently based United States case law. It is not a contravention of s 27 to offer or sell goods or services at less than cost. The section requires proof of the substantial lessening of competition - not merely aggressive competitive conduct. The purpose or (likely) effect must be more than short term and must impact upon the competitive process in the particular market structure. The mere fact that a participant operates in the market at a loss, and even fails, will not necessarily lessen competition. But conduct that does lessen competition will contravene even in the absence of evidence of the ability ultimately to recoup the loss
- though that may generally be presumed from a decision to indulge in anti- competitive conduct. In the circumstances of this case, to look for an intention or ability by PNL to recoup from future pilotage in the under 2,500 GRT sector would be to overlook the potential for cross-subsidisation from non-contestable services. In other words, overall PNL’s profit may have been thought by its Board to be satisfactory despite any loss being incurred in the services affected by the $100 minimum for pilotage.
The argument that PNL should be seen as merely setting the fee at a level to meet the new competition in pilotage is undermined to some extent by the finding (made with some scepticism about Mr Green’s evidence) that PNL did not know at the time the $100 minimum charge was set that the TBMP minimum charge was
$130. In any event it is artificial to consider the minimum charge separately from the other steps taken by PNL. It is not just the combined effect of the tie and the minimum price but the combined, perhaps synergistic, effect of the tie, the discount and the minimum charge.
Mr White mounted an argument based on the expert evidence of Professor Williams that the appropriate cost to be recovered by the pilotage charge was the opportunity or avoidable cost, which would be the focus of any management decision whether or not to offer the service. Professor Williams did not attempt to quantify the relevant cost nor to identify the common costs (i.e. common to a range of services offered by PNL) which on this basis are to be excluded. Because it was found in the High Court on the available evidence that the opportunity cost of providing the service exceeded the $100 minimum charge it was unnecessary for a determination to be made as to the appropriate “cost”.
The evidence of the formulation of the PNL pilotage charges makes clear that opportunity or avoidable cost played no part. The starting point for Mr Green was the fully allocated cost assessed by Deloittes. In the circumstances of this case to fix pilotage charges according to PNL’s opportunity cost of providing a pilot service for vessels under 2,500 GRT, or for a vessel movement in that category, while maintaining incontestable services (including for practical purposes pilotage of larger vessels) upon which all common costs then would fall would be inconsistent with the very purpose of competition law. The evidence that more directly related to the factual situation which was given by Mr McNally of Deloittes, by Dr Wilkinson and by Mr Taylor of Ernst and Young fully demonstrates that an approach to costing more closely related to actual cost per vessel is appropriate. Contravention still depends upon requirements other than below cost charging.
Perhaps the most strongly contested finding in this part of the case is that relating to the allocation of pilot salaries and wages. In his report to his directors on 17 January 1991, just at the time the new pilotage charges were under consideration, Mr Green estimated that the cost of pilots to PNL exceeded $200,000. In the same report he expressed the opinion that Captain Westbrooke would be underemployed if
he acted as a part-time pilot (with two other full-time pilots) and had only the work of allocating berths, organising ship movements with attendant tugs, pilots, launch and lines parties and acting as Harbour Master to the Regional Council. Yet he justified his allocation of only twenty per cent of pilot salaries to the cost of pilotage on the ground that the pilots were required also to share the work of Shipping Services Manager and Harbour Master. The allocation was made by taking the proportion of the pilots’ hours on the water but, as Mr Taylor pointed out in his evidence, the time available to full time pilots to perform other duties having regard to their terms of employment and rosters amounted to only twenty-four per cent of the total rostered time.
The evidence was carefully reviewed in the judgment of McGechan J and the finding that an appropriate allocation would have been in the vicinity of fifty per cent of Captain Westbrooke’s salary and eighty per cent of the remuneration of other pilots was open. The consequence of accepting the apportionment of time asserted by Mr Green and Captain Westbrooke would have been to allocate the cost of all the on-call time of pilots to incontestable services. The finding that the $100 minimum charge was significantly below true cost was justified.
Below cost pricing will not frequently give rise to competition law concerns. The reduction of prices generally will reflect competition at work: Brooke Group Limited v Brown & Williamson Tobacco Corporation [1993] USSC 105; 125 L Ed 2d 168 (1993). But because of the effect of the tug tie and the discount (the larger the vessel the greater the available discount) upon the existing competitor and potential entrants in the pilotage market - effectively confining them to the smaller vessel end of the market - the below cost charge by PNL for pilotage must be seen as exclusionary and the conclusion of the High Court that it was likely to substantially lessen competition cannot be said to be wrong.
The conclusion that this effect was a substantial purpose rested primarily on the same considerations as the corresponding finding in respect of the discount. For the same reasons we are satisfied it was a finding that was supported by the evidence and should not be disturbed. There could be argument as to whether the entry by TBMP into the separate tug market justified limiting the finding of likely effect on competition in the pilotage market to 1991 only, but there is no cross-appeal on that point.
The Tug Tie
Certainly in this Court it was not contested that the refusal to supply tugs unless PNL pilots were employed was designed to counter the impending competition in pilotage by TBMP. It was said however that this was to protect PNL from potential liability and was merely competitive conduct not involving any breach of s 36. The High Court held otherwise. It was held that PNL used its dominant position in the tug and pilotage markets for the purpose of deterring TBMP from engaging in competition in pilotage and, as matters developed, eliminating TBMP from the pilotage market.
This part of the case was approached with reference to the three elements of s 36 identified by the Privy Council in Telecom Corporation of New Zealand Ltd v Clear Communications Ltd [1995] 1 NZLR 385,402:
In order to show a breach of s 36, three elements have to be present:
(i) A person who has a dominant position in a market;
(ii) who has used that dominant position;
(iii) for the purpose of the matters referred to in paras (a),(b) and
(c) of subs (1).
McGechan J applied the meaning of dominant position which was considered by five Judges of this Court in Telecom Corporation of New Zealand Ltd v Commerce Commission [1992] 3 NZLR 429. That is the applicable authority. It dealt with the interpretation of s 3(8) which reads:
For the purposes of [sections 36 and 36A] of this Act, a dominant position in a market is one in which a person as a supplier or an acquirer of goods or services either alone or together with any interconnected body corporate is in a position to exercise a dominant influence over the production, acquisition, supply, or price of goods or services in that market and for the purposes of determining whether a person is in a position to exercise a dominant influence over the production, acquisition, supply, or price of goods or services in a market regard shall be had to -
(a) The share of the market, the technical knowledge, the access to materials or capital of that person or that person together with any interconnected body corporate:
(b) The extent to which that person is constrained by the conduct of competitors or potential competitors in that market:
(c) The extent to which that person is constrained by the conduct of suppliers or acquirers of goods or services in that market.
Although adopting language differing to some extent, the Judges in the Telecom v Commerce Commission case held that the word dominant is to have its normal meaning of “prevailing”, “commanding”, “governing” or the like. The statute requires a position in a market in which that degree of influence can be exercised over the production, acquisition, supply or price of goods or services in that market. That is to be determined by reference to the stated matters and, because they are not exhaustive, such other relevant matters as may be found in the particular case. It is a broad factual assessment in the nature of a jury question.
Mr White criticised two aspects of McGechan J’s treatment of this aspect. In the course of summarising it, the Judge said:
... [“dominance”] involves more than “high” market power; more than mere ability to behave “largely” independently of competitors; and more than power to effect “appreciable” changes in terms of trading. It involves a high degree of market control.
How high? Clearly, not absolute control. There need not be monopoly. There need not be ability to act totally without regard to competitors, suppliers, or customers. Expression of the required degree of control in terms of mastery - e.g. as “commanding”, “ruling” or “governing” - is perhaps to that extent misaligned, and needs to be read down ...
It was said that there was no warrant for reading down the expressions “commanding”, “ruling” and “governing” and that this led to the application of too low a standard for dominant position.
The decision in Telecom v Commerce Commission has been criticised as setting too high a level of market power so as to limit the value of the section as an effective regulator of abusive anti-competitive conduct. In this respect it must be noted that the Commerce Act was amended in 1994 without any change being made to s 3(8) or s 36; compare the change to the corresponding Australian s 46 of the Trade Practices Act in 1986 from “in a position substantially to control a market” to “a substantial degree of power in a market”. Further, the decision of this Court did not, in our view, shift the concept of dominant position away from that from which it had been derived - Article 86 of the Treaty of Rome. The judgment of Richardson J, which on the meaning of dominance was agreed with by the majority of the other members of the Court, compares (443) the non-exhaustive factors to be regarded under s 3(8) in determining the existence of a dominant position with the attributes of an undertaking in a dominant position formulated in the decision of the Commission of the European Community in Re Continental Can Co Inc 1972 CMLR D11,D27. There is to be borne in mind the distinction between the concept (dominant position in
a market) and the test for its existence (market share, vertical and horizontal constraints - which economists assess as elements of market power).
The Telecom case really decided no more than that “dominant” means dominant; that in testing for dominant position s 3(8) prescribes certain non- exhaustive matters to be considered; that potential competition may impose constraints and that the evidence of economists (so long as it is empirically based) will be helpful. A reading of the judgments as a whole discloses that although there was concern that the use of synonyms and the economists’ expression “high market power” risks substituting a lower standard than the term dominant requires, all members of the Court were focussing on a market reality capable of practical assessment having regard to the market structure and the actual and potential process of workable and effective competition. There is no indication in the judgments that a dominant position is one of absolute control or monopoly. The very tests in s 3(8)(a),
(b) and (c) contemplate less than that.
Much has been read into the passage of Richardson J’s judgment commenting on the earlier decision of the Commerce Commission in Proposal by Broadcast Communications Ltd (1990) 8 NZAR 443,448 which had said:
... the dominance test is not an absolute test based on an ability to act independently. Indeed no person, not even a monopolist, acts without regard to competitors, suppliers or customers. Rather, the concept of dominance is based on the degree of control a person has over the market involving his or her goods or service. Dominance exists when a person is in a position of economic strength such that it can behave to a large extent independently of that person’s competitors. A person in a dominant position will be able to effect an appreciable change in the price and or other aspects of supply of his goods and services and to maintain this change for an appreciable length of time without suffering a serious adverse impact on profitability.
Richardson J said of this:
There could be no criticism of the first three sentences. There is, however, a concern that “large” and “appreciable” used as synonyms for “dominant” set too low a standard. They are ambiguous expressions and as the High Court noted in criticising the Commission’s resort to “appreciable” that word can mean perceptible, discernible, noticeable; and it can also mean considerable, large or fairly large and, perhaps a different shade of meaning, material.
The ambiguity or elasticity of the terms “large” and “appreciable” is plain. Large, like “high” in the expression “high market power”, will mean what the user intends it to mean. We understand Richardson J not to be rejecting the language as wrong but to be criticising it as unhelpful because to some it could convey meanings inappropriate to reflect dominant position. It is not a rejection of the view that dominance reflects the ability to act to a large extent independently across every possible interpretation of “to a large extent”. Indeed in the next paragraph Richardson J said:
And s 3(8) requires that the influence which the person concerned is in a position to exercise is so high or great or large as to be characterised as “a dominant influence”.
The term “appreciably” is similar, though in the passage from the decision of the Commerce Commission quoted, it was used by reference not to the ability to effect changes in price but to the degree of change in price that might be effected. In particular circumstances the difference might be significant. A monopolist might adjust prices to a small degree yet still be using monopoly power to do so.
Having carefully considered the whole of that part of McGechan J’s judgment in which he instructed himself on the meaning of dominant position, we are satisfied that the standard he adopted was at least as high as that contemplated by this Court in Telecom v Commerce Commission.
The second criticism made by Mr White was that the Judge in formulating the test for dominant position failed to include reference to the time frame (see the judgment of Richardson J in Telecom v Commerce Commission (442)). This arises from the need to have regard to constraints of potential competitors (s 3(8)(b)). This was not overlooked. In his assessment of the factual position the Judge gave close attention to potential entrants to the relevant markets and did not discount any prospective entry as too remote in time save as to port facilities in respect of which a dominant position, indeed a practical monopoly, was admitted.
Accordingly, the Judge did not proceed on any wrong basis. It is necessary then to turn to his factual assessments.
As is plain from s 3(8) in which the legislature appears to have distilled the essential elements of market power, a dynamic analysis is required of the market, its structure, the concentration of participants, their behaviour and that expected of potential entrants, the nature of the activities encompassed and general circumstances of supply to, and by, the market. This is what was undertaken by the High Court. The judgment of McGechan J takes the tug and pilotage markets together and subsequent in time to the entry by TBMP into them. It first records in some detail the factors identified in support of the competing contentions of the parties. There follows an extensive review by reference to each of the specified matters in s 3(8) and an overview with express reference to the high degree of influence necessary to amount to a dominant position as set by the Telecom v Commerce Commission decision of this Court and also to the standard of proof having regard to the seriousness of the allegation. The conclusion is then stated:
I consider, on balance, such dominance is established. PNL has vastly superior market share in the commercially important GRT and revenue terms, and will at least retain it. The equal (or worse) share in numerical movements below 2500 GRT, where pilotage is conducted
at a loss, is relatively insignificant. PNL has all the technical knowledge, and access to materials and capital necessary to maintain and improve its position. PNL does not have a monopoly in tugs or pilots, but is not subject to significant competition or constraints in either. It could increase prices above 150m to a significant extent without risk of any new larger tug entering. It could increase prices to a significant extent in the sub 165m area, where competition is open, without incurring unacceptable overall loss of business or profit. There are considerable barriers to entry for a new tug, and therefore a new pilotage operator. PNL has considerable leeway as to charges and conditions before any real competitive prospect opens. PNL could, if minded, reduce prices, if necessary through acceptance of lower rates of return or cross subsidy, and force competitors down with it. PNL to date has perceived some constraint through consumer resistance to increased charges. In practice, PNL has chosen to move cautiously overall. However, realistically, with a largely captive cargo, and the relatively small proportion and absolute numbers involved in pilotage and tug charges, PNL with appropriate public relations management could have its way on pilotage and tug charges if it so chose. Viewed pragmatically, the circumstances on balance are such that PNL has the command of the tug and therefore pilotage market. It has effective control. The one competitor, within part of the market, is not a significant constraint overall. Nor are PNL’s captive customers, in relation to pilotage and tug charges. PNL is “dominant” within s 36 in the markets pleaded.
The finding of dominant position in the pilotage market was made by reference to the tug tie by which it was said the dominance in the tug market “levers into” the pilotage market. This may be seen rather to beg the question whether PNL has used its dominant position in the tug market to restrict competitive activity by TBMP in the pilotage market. It is that question on which we focus. The finding of a dominant position in the tug market therefore is the critical one.
Undoubtedly at the time the tug tie was imposed PNL was in a dominant position in the tug market in Port Nelson. With its two powerful tugs it had excess capacity for the existing and foreseeable demand and there was little or no realistic prospect of competitive entry into that geographically distinct market. It might be said that what TBMP was subsequently able to achieve when presented with the refusal by PNL to supply tugs should be accepted as the level of potential competition and so can
be (and was) taken into consideration. That involved the use of small tugs on an ad hoc basis arranged to enable TBMP to offer pilotage. It could not be regarded as reflecting a commercially evaluated competitive entry into the particular market - rather it was perceived as a short term expedient to meet what was believed to be a temporary and unlawful obstruction to the proposed pilotage business.
Even taking account of the tug business captured by TBMP in the smaller vessel sector, the High Court found that the dominant position of PNL remained. Mr White advanced extensive argument that the reasoning was flawed because it was based on findings not reasonably open and overlooked the commercial and economic realities of the case.
This judgment would approach the length of those under appeal should it include a separate review of each point of attack on the High Court assessment and the evidence relevant to it. The overall assessment made by McGechan J and Professor Lattimore was detailed and involved the exercise of judgment as to the weight to be accorded the various factors. It was open to them in their consideration of the market shares and the changes therein to attach greatest significance to the revenue to be earned from servicing the larger vessels. It was open to them to have regard to the nature and circumstances of TBMP’s business in the provision of tug services. The judgments made as to likely further competitive entry to the tug market were reasoned and open. The evaluation of constraints upon PNL in the operation and pricing of its tug services reflected views that reasonably could be reached.
Clearly there were matters indicating that PNL was not totally unconstrained but that is not a necessary requirement for dominant influence. In this respect the evidence of Mrs Vautier on which PNL placed considerable emphasis goes too far in this passage:
This raises the question as to why (in this case) PNL would need to act aggressively with a view to deterring entry in the tug services market (as the Commission defines it) - or in the large tug market as Dr Wilkinson prefers - if it were in a dominant position and protected by an undue entry barrier.
The very focus of s 36 is a person in a dominant position acting to deter or eliminate a competitor. The section contemplates a dominant position in which there still is a perceived need to act aggressively. A dominant position is not one that is so controlling that it is impenetrable.
In assessing the likely entry of potential competitors in tugs it was entirely open to the Court to take into account the evidence of the position of PNL in the port with control over the facilities, with local authority shareholders and having priced its tug services below the level recommended by Deloittes as appropriate to recover costs.
We have not been convinced that the finding of dominant position in the tug market was wrong.
The next issue is whether PNL used its dominant position in tugs for the purpose of deterring or eliminating the competitive activity of TBMP in the pilotage market. McGechan J concluded: “I am satisfied despite the welter of excuses put forward there were and are no other substantial purposes”.
There are two aspects as emphasised by the Privy Council in Telecom v Clear. There must be use of the dominant position and it must be for a proscribed purpose. As to the former the Privy Council, in a price cutting context, set the test as (403):
In Their Lordships’ view it cannot be said that a person in a dominant market position "uses" that position for the purposes of s 36 unless
[sic sc "if"] he acts in a way which a person not in a dominant position but otherwise in the same circumstances would have acted.
While it is not easy to see why use of a dominant position should not be determined simply as a question of fact without the need to postulate artificial scenarios, we are content in this case to adopt that approach, as did the High Court. For the purpose of applying that test the High Court assumed a firm not dominant in wharves (port facilities), tugs or pilotage but otherwise in the same circumstances as PNL and asked whether that firm would refuse to make its tugs available unless its pilots were engaged also. It would seem that it is the market in which the dominant position is held that is to be assumed contestable. In the High Court the allegations were broader than that now under consideration so that the assumption made was unexceptionable. For our purposes however it is sufficient to postulate PNL in its present proved position but not dominant in tugs; that is, to assume there were competitive tug services available to shippers in the port. In that situation a refusal to supply tugs would be pointless. PNL could refuse to supply tugs with a view to protecting its own pilotage services and thereby affect TBMP’s pilotage business only if there was no competing tug service available. When it did so in other circumstances it used its dominant position in the market to affect the pilotage market. Section 36 prohibits the use of a dominant position in a market for proscribed purposes affecting that or any other market.
In his judgment McGechan J went on to investigate the true purpose of the tug tie and whether there might be commercial reasons dictating imposition of such a tie even under competitive conditions and despite the risks of loss of both tug and pilot business. He concluded that there were not and in doing so he rejected the “welter of excuses” advanced by PNL.
The justifications for the tie were offered differently by PNL at different stages. Concern for potential legal liability was one. Accepting the High Court finding that the tie was not in fact motivated by such a concern about uninsured liability, we would in any event have given perhaps greater weight to the obvious lack of concern by PNL on the same point when its tugs were made available for vessels under the control of exempt masters (i.e. those not requiring a pilot). There could have been no credible anxiety about the competence of the TBMP pilots who had in earlier years been working in the port for PNL and its predecessor.
The true purpose in denying tugs to ships piloted by TBMP was the fear that TBMP would secure all the pilotage work at the port and so be in a position to hold PNL to ransom. That was admitted by counsel in this Court. The determination not to allow dependence on TBMP to develop was fuelled by Mr Green’s vexation at the fact that the TBMP pilots had been paid redundancy in 1988 when they changed from employees to independent suppliers to PNL of pilot services. Between 1988 and the end of 1990 PNL was content to contract out pilot services and saw no need to incorporate the pilots into its multi-skilled labour force. It was content to accept the risk of the failure of annual negotiations as to terms apparently without the same sense of exposure to legal liability for negligence by the contracted pilots.
The distinction Mr White sought to draw between the purpose of PNL in protecting its own pilotage business and the purpose of deterring or eliminating TBMP is fine indeed when the means adopted to achieve that purpose was to refuse to supply tugs where TBMP pilots were engaged. The short answer is that each plainly was a substantial purpose. There was ample evidence, as reviewed in the judgment of McGechan J, to support the finding as to PNL’s purpose.
The advice which PNL claimed reasonably to have relied upon as indicating absence of any purpose proscribed by s 36 rested upon the assumption that the
relevant market was the broader vessel movements market and in fact sounded caution should it be found that there were a separate pilotage market.
The decision that PNL used its dominant position in tugs against TBMP for proscribed purposes was open; indeed it was inevitable, probably even if the market had properly been defined as one of vessel movements.
The Commerce Commission challenged by way of cross appeal the determinations that PNL was not shown to have used its dominant position in the tug and pilotage markets in contravention of s 36 in offering and operating the $100 minimum pilotage charge nor to have used similarly its dominant position in the port facilities (wharves), tug services and pilotage markets in giving the five per cent discount. In view of the conclusions already reached it is accepted that it is unnecessary for practical purposes to consider these matters. Suffice it to say that we have not been persuaded that the findings of the High Court should be disturbed. Nevertheless it should be acknowledged that there is strength in the argument that a firm not in a dominant position in port facilities, tugs and pilotage would run considerable risk in structuring a discount so that it was not available until every required service was taken. Once one service is declined there is no incentive to take any. Similarly, where a pilotage market is contestable the risk of charging below cost in the smaller vessel sector without assurance of the ability to recover in the larger vessel sector would be real enough.
In the result the findings of the High Court are upheld.
Mr White was anxious to have us consider some additional submissions challenging findings which PNL considers unjustified in relation to Mr Green and in relation to the influence of local authority representatives on the PNL Board of Directors. To the extent to which these findings are not material to orders made and
appealed against they are not appealable: Lake v Lake [1955] 2 All ER 538, Meridian Global Funds Management Association Ltd v The Securities Commission (Unreported CA 4/92 judgment 14 September 1992).
Relief
The High Court granted declarations that the discount and minimum pilotage charge gave rise to contraventions of s 27 and that the tug tie breached s 36. No issue has been taken with the terms of the declarations.
Injunctions were granted restraining further allowance of the discount structured as it was and restraining continuation of the tug tie. There was no injunction in respect of the minimum pilotage charge because the real vice was seen in the potential impact when combined with the tug tie and the discount. The restraint of them was considered sufficient.
It was submitted that to restrain continuation of the discount and the tug tie respectively would result in an increase in charges and a reduction in competitive activity for tug services at the port. Such short term consequences, if they occur, provide no reason for not bringing an end to what have been found to be impediments to the development of workable and effective competition at Port Nelson.
Mr White criticised the High Court for (in effect) requiring PNL to provide tug services where TBMP pilots are engaged without giving a definite ruling as to whether PNL is entitled to charge more for tug services when its pilot services are not used. He referred to an apparent difference in view on the point between McGechan J (who left it open) and Professor Lattimore who expressed the view that PNL could not do so. It is not necessary in this judgment to rule on a matter which has not arisen and
which necessarily will depend on the circumstances. We comment only that PNL would be wise to proceed cautiously.
By way of pecuniary penalties PNL was ordered to pay $100,000 in respect of the breach of s 27 by allowing the discount, $100,000 for breach of s 27 with the minimum pilotage charge and $300,000 for operating the tug tie in contravention of s
Section 80(2) provides:
In determining an appropriate penalty under this section, the Court shall have regard to all relevant matters, including -
(a) The nature and extent of the act or omission:
(b) The nature and extent of any loss or damage suffered by any person as a result of the act or omission:
(c) The circumstances in which the act or omission took place:
(d) Whether or not the person has previously been found by the Court in proceedings under this Part of this Act to have engaged in any similar conduct.
The judgment of McGechan J records a careful consideration of the circumstances of the breaches by PNL and it cannot be said that the level of penalties arrived at was outside the discretion he was called upon to exercise. He carefully reviewed the nature of each contravention in its context of the whole port operation. He examined the impact on TBMP and the circumstances surrounding PNL’s conduct. He referred to the need for deterrence but subject to some allowance for the “test case” nature of the litigation and the background of the tentative views expressed in the interlocutory judgment. The seriousness of the breaches involving the discount and minimum charge was regarded as similar but less than that of the tug tie.
It was submitted that PNL was not given the opportunity to be heard on the level of pecuniary penalties. Full opportunity was given in this Court and we have given careful consideration to the matters put forward but they have not led us to the view that the penalties are excessive or inappropriate.
There is one aspect of the penalties that does call for comment. That is the imposition of the separate pecuniary penalty for breach of s 27 by the minimum pilotage charge. In declining the injunction in relation to that McGechan J said the real vice was because of its combination with the other steps taken by PNL and in respect of which separate pecuniary penalties have been imposed. In view of that we think that there is a risk that there could be perceived an element of double punishment and it might have been preferable for there to be a single penalty for the contravention of s 27. However the amount of that penalty would have been required to reflect both aspects of the contravention which involved separate conduct on the part of PNL and so have been fixed with a view to the total pecuniary penalties for the totality of the contravening conduct. McGechan J fixed the total penalty at $500,000 and that was open to him. Indeed it could not be regarded as severe in light of the maximum penalties provided for and the whole history of the events at Port Nelson. The careful arguments of Mr White have not convinced us that any lesser sum would be appropriate. Accordingly we are not disposed to interfere with the penalties and the appeal is dismissed.
The respondent is entitled to costs which we fix at $25,000 together with disbursements as approved by the Registrar.
Solicitors
Pitt and Moore, Nelson, for Appellant
Office Solicitor, Commerce Commission, Wellington, for Respondent
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URL: http://www.nzlii.org/nz/cases/NZCA/1996/230.html