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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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BETWEEN
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TACHING PETROLEUM COMPANY, LIMITED |
Plaintiff |
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and
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MEYER ALUMINIUM LIMITED |
Defendant |
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Before: Hon G Lam J in Chambers
Date of Hearing: 16 March 2018
Date of Judgment: 17 May 2018
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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)...
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