a CATCHWORDS Trade Practices - contract, arrangement or understanding in restraint of trade or commerce - prior written agreement terminated upon advent of Trade Practices Act - sole distributorship - alleged refusal by other party to arrange~ ment to deal with third party. Trade Practices - position substantially to control a market - taking advantage of position - conscious predatory behaviour - subjective purpose or motive. Trade Practices Act 1974, ss.45 and 46, TRADE PRACTICES COMMISSION v C.S.B.P. & FARMERS LIMITED W.A. No. G27 of 1978 CORAM: FISHER J. PERTH 26 March 1980, IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY ) No. G27 of 1978 ) ) GENERAL DIVISION BETWEEN: TRADE PRACTICES COMMISSION Plaintiff - and ~ C.S.B.P. & FARMERS LIMITED Defendant ORDER JUDGE MAKING ORDER: Fisher J. DATE OF ORDER: 26 March 1980 WHERE MADE: Perth THE COURT ORDERS THAT: 1. 2. The plaintiff's claims herein be dismissed. The plaintiff pay the defendant's costs to be taxed. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY No. G27 of 1978 ee ew GENERAL DIVISION BETWEEN: TRADE PRACTICES COMMISSION Plaintiff - and - C.S.B.P. & FARMERS LIMITED Defendant CORAM: Fisher J. 26 March 1980 REASONS FOR JUDGMENT In this matter the Trade Practices Commission ("the Commission") by Writ of Summons dated 15 December 1978 brought proceedings against the defendant C.S.B.P. & Farmers Limited ("C.S.B.P.") alleging contravention of certain sections of the Trade Practices - Act 1974 ("the Act"). The Commission seeks to recover penalties under s.77 of the Act in respect of alleged contraventions by C.S.B.P. of ss.45(2)(a) and 46 of the Act as those sections stood prior to their amendment in 1977. The Commission limited its evidence to the facts as pleaded and did not suggest that they established any contravention other than those alleged. The statement of claim is a convenient introduction to a review of the proceedings and I set it out in The facts plcaded in the statement of claim to support the allegation of contravention of s.46 of the Act can be shortly stated as follows. It was pleaded, and admitted, that C.S.B.P. had at all material times carried on the business, inter alia, of the supply in the State of Western Australia of artificial fertilizers containing nitrogen. Having alleged as abovementioned that C.S.B.P. was in a position substantially to control the market in Western Australia for the supply of that fertilizer, the statement of claim went on to plead that in September and October 1975 R.T.C. made arrangements to import a quantity of urea from Italy to Western Australia for resale in that State. In the latter month R.T.C. decided to advertise that it proposed to sell that urea in the State and to accept orders at a price of $145.00 per tonne ex Fremantle for the urea. R.T.C. informed a number of persons of that decision and arranged for a campaign to advertise the sale of that urea at that price to commence on or about 17 October 1975. It was further pleaded, and admitted, that on or about 16 October 1975 C.5.B.P. announced a reduction in the selling price for urea sold by it through its distributors in Western Australia from $178.70 to $144.60 per tonne ex Kwinana and made this reduction on 17 October 1975. The statement of claim went on to allege that R.T.C., being unable to compete profitably with C.S.B.P. in the sale of urea by virtue of such reduction, cancelled its arrangements both to import urea from Italy and to advertise the sale of that urea, It was alleged that by reducing the selling price for its urea C.S.B.P. took advantage of its poer to control the market in Western Australia for urea, and thereby to prejudice R.T.C. in that market in the manner proscribed by s.46 of the Act. The statement of claim further pleaded, and C.S.B.P. admitter that C.F.L. had at all material times carried on the business, inter alia, of the wholesale supply (either directly or through its subsidiary Consolidated Fertilizer Sales Pty. Ltd) throughout Australia of urea manufactured by its subsidiary company Austral Pacific Fertilizers Limited ("Austral Pacific"). By particulars supplied at the request of C.S.B.P., the Commission indicated,in respect of its allegation of contraventior of s.46, that arrangements to import urea were made by R,T.C. with Dr. Guiseppe Ponzielli of Prodotti Chimici Interscambio S.A.§ of Milan in Italy in respect of the importation of 15,000 tonnes of urea. The price of that urea was U.S.$180 per tonne delivered from a European port to either one or two ports in Western Australia, and the delivery was to be in bags by ship chartered by the vendor and was expected to be completed by 25 December 1975 In respect of R.T.C!s arrangements to advertise the sale of urea, particulars were supplied of the persons informed of this decision, the persons with whom the arrangements to advertise were made, and the fact that this latter arrangement was made on or about 13 October 1975. The arrangements to import were cancelled by R.T.C., the Commission alleged, on or about 16 October 1975 following C.S.B.P's announcement of its reduction in price. The particulars supplied by the Commission in respect of its allegations in relation to S.45(2) disclosed little further information except that the Commission had no direct knowledge whether the arrangement was made in writing or orally or partly in writing and partly orally but that it believed it was made orally. The persons who were alleged to have made the arrange- ment or understanding were indicated as being Mr. H.C.C. Phillips ("Phillips") on behalf of C.S.B.P. and Mr. J.V. Wilkins ("Wilkins") on behalf of C.F.L. During 1975,the relevant sections of the Act were in the following form: "s.45 (1) (2) (3) (4) A contract in restraint of trade or commerce that was made before the commencement of this sub-section is unenforceable in so far as it confers rights or benefits or imposes duties or obligations on a corporation, A corporation shall not - (a) make a contract or arrangement, ar enter into an understanding, in restraint of trade or commerce; or (b) give effect to a contract, arrangement or under- standing to the extent that it is in restraint of trade or commerce, whether the contract or arrange- ment was made or the understanding was entered into before or after the commencement of this sub-sectio A contract, arrangement or understanding having the purpose or effect of fixing, controlling or maintaining the price for, or any discount, allowance or rebate in relation to, any goods or services supplied by the parti to the contract, arrangement or understanding, or by any of them, in competition with each other to persons not being parties to the contract, arrangement or understanding 1s not in restraint of trade or commerce for the purposes of this Act if the restraint has such a slight effect on competition between the parties to t contract, arrangement or understanding, andoncompetiti: : between those parties or any of them and other persons, as to be insignificant, A contract, arrangement or understanding that is not of the kind referred to in sub-section (3) is not in restraint of trade or commerce for the purposes of this Act unless the restraint has or is likely to have a significant effect on competition between the parties to the contract,arrangement or understanding or on- competition between those parties or any of them and other persons. (5) (6) (7) (8) s.46 (1) (2) (3) (4) This section does not apply to a contract, arrangement or understanding in so far as (a) the contract, arrangement or understanding is of a kind referred to in sub-section 47(2) or constitutes the practice of exclusive dealing as mentioned in sub-section 47(3) or (4); or A corporation that is in a position substantially to control a market for goods or services shall not take advantage of the power in relation to that market that it has by virtue of being in that position - (a) to eliminate or substantially to damage a competito in that market or in another market; (b) to prevent the entry of a person into that market or into another market; or (c) to deter or prevent a person from engaging in competitive behaviour in that market or in another market. For the purposes of this section, a reference to a corporation being in a position substantially to contro a market for goods or services includes a reference to a corporation which, by reason of its share of the mark or of its share of the market combined with availabilit« of technical knowledge, raw materials or capital, has the power to determine the prices, or control the production or distribution, of a substantial part of the goods or services in that market." Counsel for C.S.B.P. did not strenuously, if at all, relevance. dispute that his client was in a "position substantially to control a market for goods" but rather defended on the score that it had not taken "advantage of the power" to prejudice R.T.C. In these circumstances the 1977 amendment to s.46(1) has some The section now stands as follows: A corporation that is in a position substantially to control a market for goods or services shall not take advantage of the power in relation to that market that 1t has by virtue of being in that position for the purpose of - {a) eliminating ... (b) preventing ... {c) deterring ..." (my underlining) C.F.L., the company from whichC.S.B.P. acquired the bulk of its urea at the relevant times, and with whom the latter company is alleged to have made the arrangement, was formed as a holding company to consumate the merger of a number of existing fertilizer companies. One of the merging companies was Austral Pacific, a company with predominately American management and doubtless owner- ship. Austral Pacific was the first manufacturer of urea in Australi producing from Gibson Island, Queensland from about 1967. In the first instance it distributed urea in Western Australia from its own distribution facilities in that State. This operation was not a financial success, as urea was the only product sold by it in Western Australia and it comprised a very small portion of the total fertilizers used in that State. Ultimately it withdrew from the Western Australian market in about early 1970, passing its distribution facilities over to C.S.B.P. and appointing that company its sole distributor 1n that State. There was evidence to the effect that the appointment was in writing, but the document was not before me. Subsequent to its withdrawal from Western Australia, Austral Pacific merged with the other fertilizer companies. The new holding company C.F.L. executed a new agreement with C.S.B.P. in respect of the sale of urea in Western Australia. The document bears on its face reference to the fact that it is an agreement made on 1 October 1971 but the final page is dated 14 January 1972. This latter date would appear to be the date upon which at least C.F.L. by its then chief executive Wilkins executed the agreement, and his evidence confirmed this. Both Wilkins and Phillips, the general manager of C.S.B.P., gave evidence to the effect that this agreement ("the 1972 agreement") was 1n similar terms to the earlier agreement between Austral Pacific and C.S.B.P., the only significant alteration being the change of name of Austral Pacific to C.F.L. Crucial features of this agreement are as follows. C.F.L. appointed C.S.B.P. as its sole distributor in Western Australia south of the Tropic of Capricorn for urea and other fertilizers manufactured or sold by C.F.L. The agreement was terminable on two years' notice, but such notice could not be given prior to 30 June 1973. C.S.B.P. as sole distributor agreed to purchase all its requirements of urea from C.F.L., which company for its part covenanted that it would not be directly or indirectly engaged in the mahufacture or sale of fertilizers within the State of Western Australia south of the Tropic of Capricorn. There were a number of ancillary provisions concerning price, delivery, method of payment and consultation between the parties. However it was the uncontradicted evidence of Wilkins, Phillips and Batty, who was the chief executive of C.S.B.P. from 1952 to 1975,that the two companies did not strictly observe the terms of the agree- ment and that the relationship between them was little more than that of buyer and seller. From the outset Wilkins appeared to have had misgivings about the agreement, particularly in that in a time of short supply it might place his company under an obligation to C.S.B.P. and he expressed his concern 1n a number of letters which were tendered in evidence. In his letter of 14 August 1973 he told C.S.B.P. that the Western Australian market was not attractive to his company, which was considering exporting. By Letter of 14 March 1974 Wilkins said that the pressure on urea was increasing and suggested amending the 1972 agreement so that C.S.B.P. could promote sources of nitrogenous fertilizer other than urea. On 10 June 1974 Wilkins told C.S.B.P. that the price of urea was increasing and that his company could not agree to supply the same amount. Two months later by letter dated 15 August 1974 he said that his company was concerned about the impact of the Trade Practices Act upon the 1972 agreement, and that between their two companies a simple supply agreement would suffice. By letter dated 23 January 1975 Wilkins said to C.S.B.P. in respect of the 1972 agreement, described in the letter as "Sales Agreement dated 1st October 1971", that "In view of recent amendments to Trade Practices Legislation we mus advise that we can no longer continue to give effect to the above Agreement". It was not suggested by counsel for the Commission that this purported formal termination was a mere facade or sham,nor that the terms of the agreement remained thereafter on foot as an informa' understanding. He accepted the termination, and his contention was in accordance with his pleadings, namely that a new arrangement was entered ianto or made on or about 11 June 1975. At the time of the termination of the 1972 agreement C.S.B.P. was undergoing a novel experience. It was unable to purchase adequate supplies of urea for the coming selling season (April to August 1975) from C.F.L., and was compelled to buy from elsewhere. 10. Insofar as it purchased from overseas, prices were at a record high level and it was obliged to pay in the vicinity of $350.00 per tonne compared with C.F.L's current price of approximately $100.00 per tonne. R.T.C. was formed early in 1972 on the initiative of the Farmers Union of Western Australia (Incorporated). It was in the first instance primarily a research and investigation body for the benefit generally of farmers. Ultimately it was envisaged that it would undertake trading activities such as exploring overseas markets for Western Australianfarm products and supplying consumables at the best possible prices to farmers. Fertilizer was such a consumable. In October 1972 Mr. J.D. Anderson ("Anderson") became general manager of R.T.C. For several years his efforts were concentrated mainly on overseas markets, particularly in the Middle East. At the same time R.T.C. was slowly developing a merchandising division supplying various goods to farmers. Anderson gave evidence to the effect that by 1975 R.T.C. felt that it had progressed to the stage that it could involve itself in the distribution of fertilizer: to farmers. At that time C.S.B.P. was distributing its fertilizers through three stock companies, Elder Smith Goldsborough Mort Limited, Western Livestock Limited and Westralian Farmers Co-operative Limited. il. On 19 March 1975 R.T.C. applied to C.S.R.P. by telephone to be appointed a distributor of C.S.B.P's fertilizers in Western Australia. C.S.B.P. replied by letter dated 24 March 1975, refusing on the ground that through its existing distributors the farming community was adequately serviced. By letter dated 3 April 1975 Anderson requested reconsideration of the refusal, indicating that he could not agree that farmers' fertilizer requirements were serviced and financed in the most economical way. This further approach was rejected by C.S.B.P. by letter dated 11 April 1975. On 9 May 1975 C.S.B.P. forwarded to C.F.L. a draft of a suggested new agreement between the two companies, In this draft the appointment of C.S.B.P. as "sole" distributor was deleted, the agreement was restricted to the purchase by C.S.B.P. of urea, and C.S.B.P. was to be given the right, if C.F.L. could not supply all the urea that C.S.B.P. sought or if its price was not competitive, to purchase elsewhere. Moreover apart from these amendments and the deletion of the covenant in the earlier agreement to the effect that C F.L. would not engage in the manufacture or sale of urea in Western Australia, the draft was in somewhat similar terms to the 1972 agreement. Walikins replied by letter on behalf of C.F.L. to the effect that he was not happy with the draft and suggested the matter be left until the meeting of fertilizer companies in Melbourne the follow.ng month. Wilkins and Phillips attended this meeting which appears to have been held on 11 June 1975 and had a discussion together. It was during this discussion, the Commission alleged, that the arrangements or understandings as pleaded were made or entered into, 12. Each of them Wilkins and Phillips strenuously denied that any such arrangements or understandings were reached. After the meeting Phillips made the following diary entry, which, because it is the foundation of the Commission's case on this branch of the proceedings, I set out in full: "Buying and Selling Agreements - C.F.L. Urea Discussed future arrangements for urea supply with J.V. Wilkins of C.F.L. (in Melbourne). C.F.L. have no prospect of increasing urea production for the next year it seems and will require ail urea produced for Queensland and New South Wales (maybe also Victoria) requirements. So far as I know there is no scope to export urea but we would need to watch for any sign of this. In this situation C.F.L. do not want to restore an agreement with us but J.V.W. was ready to assure us that old arrangements were not disturbed by this. At this stage he is unable to offer any tonnage or price indications. The matter is to be kept under review between us next September and December but for the present it would seem we could allow for no more than a token (say 5,000 tonnes) from C.F.L. for the coming twelve months. ° C.F.L. offered to assist us in exploration or evaluation of imports if their experience could be of value to us. N.B: C.P.L. will not be taking any ammonium sulphate from W.M.C. as it does not compete in price with urea in Queensland," The only other reference to the content of the discussion between Phillips and Wilkins in Melbourne 1s to be found in Wilkins' letter to Phillips of 18 June 1975 which again I set out in full: "Dear Clarrie, This will serve to confirm our discussion in Melbourne on your letter of the 9th May and the current urea position, 13. As agreed, we will put aside any formal agreement for the time being but maiantain constant liaison on the urea position. When we next meet on A.F.M.C. matters we will review the position again with particular reference to a possible shipment in the early part of 1976. Last week I had a visit from a representative of D.S.M. who had urea to offer and I suggested that he might make contact with you. We have found D.S.M. a supplier of high quality material although slightly higher priced than Japanese supplies." There was no further direct evidence to support the making of the alleged arrangement. The evidence of happenings subsequent to 18 June 1975 primarily had reference to the alleged contravention of s.46 although some of it, it was contended, being in the nature of circumstantial evidence supported the drawing of the inference that such an arrangement was made. On 8 September 1975 Anderson again wrote to C.S.B.P. seeking the appointment of R.T.C. as a distributor, which further approach was refused by letter of 15 September 1975. At or about this time Phillips went overseas, not returning to C.S.B.P. until about 15 October 1975. In September 1975 Anderson entered upon his negotiations directed towards acquiring for R.T.C. a supply of imported urea, At the time a subsidy of $36.00 per tonne was available to a producer or importer of urea under the Nitrogenous Fertilizers Act 1966, the benefit of which subsidy the producer or importer was obliged to pass on to the farmer. The subsidy was however under the provisions of that Act only available to an importer if the fertilizer was not available from an Australian producer at a comparable price: s.5(2)(b) as amended in 1972 of that Act. 14. The Customs Department administered this legislation. It is now necessary to relate shortly the communications in respect of this proposed importation which took place between R.T and C.F.F.,C.F.L. and C.S.B.P., and R.T.C. and Dr. Ponzielli. Insofar as counsel for the Commission relied upon specific aspects of these communications, such aspects will be referred to in detail when I consider his submissions in support of the Commission': claims. At this stage I merely set the communications out in chronological order, indicating briefly the substance of each. On 28 September 1975 R.T.C. enquired by telex of C.F.L. whether it could match an overseas offer of 30,000 tonnes of bagged urea at $167.00 per tonne free into store. On 29 September C.F.L. ' by telephone informed C.S.B.P. of the enquiry by R.T.C., and asked C.S.B.P. whether R.T.C. could finance the order. C.F.L. in replying to R.T.C. on 30 September did not answer R.T.C's enquiry but asked R.T.C. if it could handle the urea in bulk and whether R.T.c. had been in touch with the Customs Department. R.T.C. on the same day replied that it had no bagging facilities, 1ts overseas price included bagging and that it would consider an offer from C.F.L. of $120.00 - $125.00 which price took into account the subsidy which R.T.C. contemplated receiving. On 2 October 1975 C.F.L. by telex informed R.T.C. that the Western Australian market had aGequate stocks of urea, and that it would keep under careful review the tonnage necessary for the supply of that market. R.T.C. by telex on 3 October 1975 requested of C.F.L. an urgent reply as to whether it was prepared to supply. On the same day R.T.C. indicated to Dr. Ponziell1 by telex that it was close to obtazning government approval to import 15,000 tonnes of urea from his company i5. and would be seeking additional information on specified topics when Anderson telephoned. Later the same day R.T.C. received a telex from Dr. Ponzielli supblying the information. On 6 October 1975 C.F.L. telexed C.S.B.P. seeking an assurance, before it refused to supply R.T.C., that C.S.B.P. would supply R.T.C. in order that R.T.C. would be unable to claim discrimination. On 7 October C.S.B.P. replied to C.F.L. confirming availability of urea on standard terms. R.T.C. wrote again to C.S.B.P. on 8 October asking to be appointed a distributor, and on the same day wrote to the Custom's Department applying for the subsidy on an importation of 15,000 tonnes of urea at a price of U.S.$170, which was agreed as being the equivalent of approximately $A135.15. There were three other communications on that day, R.T.C. telexed Dr. Ponzielli for information on freight charges and shipping, Dr. Ponzielli replied supplying that information, and C.F.L. telexed R.T.C. refusing to suppy on the ground that it intended to maintain distribution through its established distrabutor C.S.B.P. On 18 October 1975 Dr. Pongielli advised R.T.C. by telex of an increase in quoted freight charges. Phillips returned from overseas on 12 October 1975. On 15 October 1975 he was offered by C.F.L. 8,000 tonnes of urea at $74.54 per tonne, for delivery in March1976. On the following day 16 October Dr. Ponzielli, by telex, gave to R.T.C. details required by Anderson of letter of credit arrangements, shipping tames etc. On that day C.S.B.P. published a new price list for 16. urea, reducing its price from $178.00 to $144.60 per tonne, and R.T.C. by telex to Dr. Ponzielli cancelled its arrangements to impor By letter dated 17 October to C.S.B.P., C.F.L. confirmed the supply of 7,500/8,500 tonnes about March 1976 at a price of $74.54 per tonne. These are the undisputed facts upon which the Commission based its contention that C.S.B.P. by reducing its price to the extent and at the time abovementioned, exercised its power to the prejudice of R.T.C. Further significant subsequent happenings which are not in dispute are that the following month R.T.C. made fresh arrangements to import urea, upon the basis of which arrange- ments it obtained cash deposits from farmers. Owing to shipping difficulties this urea did not come into the country and the deposits were refunded. However in the month of March 1976 R.T.C. did import and sell 4,250 tonnes of urea at $127.00 per tonne and C.S.B.P. did not take any steps to match this price. Before considering the contentions of counsel for the Commission in support of its claims, I should make comment on the relevant law. The crucial questions for decision in this Matter can be reduced to two, namely whether the Commission has established to the required degree of satisfaction that Phillips and Wilkins made the arrangement alleged in the statement of claim in Melbourne on or about 11 June 1975, and whether C.S.B.P. took "advantage" of "its power substantially to control a market for goods" to the detriment of R.T.C. Both counsel accepted, in respect of the alleged s.45 contravention, my view as to the essential features in law of an arrangement or understanding in 17. Trade Practices Commission v Nicholas Enterprises Pty. Ltd. and Others (1979) 26 A.L.R. 609 at pp.627-629. In particular they accepted the necessity for a meeting of minds and for each party to have raised an expectation in the mind of the other. Counsel for C.S.B.P. referred to Briginshaw v Briginshaw (1938) 60 C.L.R. 336 at p.361 as establishing the requisite standard or degree of proof and this submission was not challenged by his opponent. On this aspect of the case it remains for me to consider the submissions of counsel, review the evidence and determine whether on the balance of probabilities and with regard to the gravity of the matters in issue I am satisfied that the arrangement or understanding has been proved, either positively or inferentially. In respect of s.46 there are some difficulties of construction. In circumstances where a corporation is admittedly in a position substantially to control the relevant market, it can not be that an adjustment of its price which only reflects, for example, a change in cost of materials is a contravention of the Act if the adjustment injures another. To overcome this situation each counsel conceded that the concept of taking advantage must entail an element of conscious predatory behaviour, though neither counsel discussed the precise meaning to attach to these words. Here where the behaviour of the defendant, which is challenged, is its reduction in price, I would see this as predatory behaviour if it be proved that the defendant charged an unreasonably low price with the intent to keep R.T.C. out of the urea industry in Western Australia. 18, It is now appropriate to consider the opposing submissions of counsel in respect of the two alleged contraventions. I will deal in the first instance with the claim arising under s.45(2) of the Act. In respect of the essential features, as a matter of law, of an arrangement or understanding, counsel for the Commission was prepared, as he said, "to rest on the authority of" Nicholas' case, supra. This necessitated him establishing either directly or inferentially that the requisite meeting of minds occurred on 11 June 1975, at the discussion between Wilkins and Phillips in Melbourne. The consequence of this meeting of minds, he contended, was that the parties made an arrangement which he characterised as a"sole distributorship arrangement". Counsel emphasised this particular aspect of the alleged arrangement, rather than the alleged agreement by C.F.L. not to engage in the manufacture or sale of urea in Western Australia. However neither the arrangement as pleaded nor the Commission's case before me suggested that C.S.B.P. accepted any obligations in favour of C.F.L. whether by way of consideration or otherwise for C.F.L's acceptance of the restraints. I do not see any justification for an assumption that if C.F.L. accepted any of the alleged restraints, C.S.B.P. for its part accepted some or all of the obligations imposed on it under the 1972 agreement or the 1975 draft. In particular there is no evidence of a willingness on the part of C.S.B.P. to bind itself to purchase all of its urea from C.F.L. Counsel for the Commission accepted that the earlier arrange- ments evidenced by the 1972 agreement were terminated by C.F.L. by the letter of 23 January 1975. He did not seek to contend that, 19. notwithstanding the formal termination, they continued as informal arrangements and that these arrangements were confirmed at the meeting on 11 June 1975, His case was that a new arrangement was reached on that date, but he conceded that there was no direct evidence in support of this submission apart from Phillips' diary note on 11 June 1975, set out above. This entry of memorandum, he submitted, was unequivocal evidence of the making of an arrange- ment and he contended that, notwithstanding the denials of Wilkins and Phillips, this evidence, supported by inferences which could be drawn from circumstantial evidence, should be preferred to the denials. Essentially the circumstantial evidence upon which he relied arose out of the conduct of C.F.L. and C.S.B.P. when R.T.C. sought to enter the urea market in Western Australia. The language used by C.F.L. in particular, he said, was such as would be used by a producer dealing with its sole distributor, and only capable of explanation on that score. In these circumstances he contended that I should, notwithstanding the evidence of Wilkins and Phillips to the contrary, be prepared to infer the existence of the relevant arrangement and that it was made on 11 June 1975. Counsel for C.S.B.P. for his part agreed that there was no argument as to the applicable law, accepting, the summary of the law in Nicholas' case. He drew my attention to the fact that both the pleadings and the submissions of the Commission were directed to establishing that a particular agreement was made on a particular day. It was not the case of the Commission that for many years past there was an arrangement which continued through out the relevant time. The defendant's submission was that no evidence of an arrangement having been made on that day was to be found in the evidence of Phillips and Wilkins and that a contrary 20. finding was justified on that evidence. It was essential to the proving of the Commission's case, he contended, that not only should Phillips and Wilkins be disbelieved but that there should be sufficient satisfactory circumstantial evidence, drawn from events subsequent to 11 June 1975, from which an inference could be drawn. It was his submission that there was no such evidence and that disbelief of Wilkins and Phillips did not by itself prove the contrary. In particular he disputed that "the arrange- ments" referred to by Phillips in his diary note referred to sole distribttorship arrangements. In the context of the diary note and in the light of the surrounding circumstances the words related, he contended, only to the arrangement that the parties would confer on the quantity of urea available from C.F.L. and the price payable for that urea as soon aS was possible in the September to December period. For my part I am not prepared to make a finding that C.S.B.P. made the arrangement with C.F.L. as alleged. Not only is there insufficient evidence, whether direct or circumstantial, available against C.S.B.P. to satisfy me that this is an appropriate finding, but the then urea climate and the nature of the restraint which it is alleged C.F.L. accepted make it inherently unlikely, in my view, that an arrangement to the alleged effect was made on the day in question. The linch-pin of the Commission's contentions is the sentence in Phillips diary note of 11 June 1975, namely "In this situation C.F.L. does not want to restore an agreement with us but J.V.W. was ready to assure us that old arrangements were not disturbed by this", 21. Support can only be obtained from this sentence if the words "old arrangements" are read as referring to the sole distributorship arrangement, and in particular the restriction which C.F.L. had thereunder accepted on its right to deal with anybody else in Western Australia. This is a possible reading, but in my view such ' a reference is unlikely and is certainly not a necessary reading ' of the words. It is equally, if not more, likely that the words refer to arrangements to "maintain constant liaison on the urea position" as it was put in Wilkins subsequent letter to Phillips of 18 June 1975. An example of such liaison is ontained in Wilkins' letter to Phillips of 23 April 1975. Moreover the whole emphasis of Phillips' diary note is on arrangements for future supply of urea, and his interest in availability of urea, tonnages, prices and possible importations. In my view a contention that "old arrangements" should be read as referring to earlier sole distributorship arrangements receives no support from the context of the diary note. There is insufficient support for reading the diz note in- the way the Commission contends and I am not prepared to construe it in that manner. I certainly do not see the particula sentence as unequivocal, as the Commission suggests. But a further difficulty arises for the Commission if its interpretation of the words "old arrangements" is accepted. Its case was that these arrangements "were made" on 11 June 1975. But the sentence recited that the old arrangements "were not disturbed" by the decision on that day not to enter into a written agreement. It did not say that arrangements akin to the old arrangements were made, revived or restored on that day. Thus whatever were the old arrangements, the sentence acknowledged ' that they were not entered into or made on that day. Such an 22. acknowledgment appoars to deny an essential feature of the Commission's case on this issue, The circumstantial evidence upon which the Commission relied was the language used by C.F.L. and the conduct of its officers at the time when R.T.C. sought to enter the Western Australian market. This language and conduct, counsel contended, was only capable of explanation on the basis that C.F.L. had a sole distributor in the latter State. There is no doubt that Wilkins was 1n some difficulties when he sought during cross-examination to explain the conduct of the officers of his company in September and October 1975. I did not find his explanation particularly satisfactory, and both the conduct and also the terminology of the officers were at least consistent with the existence of a sole distributorship arrangement. A possible, though not very satisfying explanation is that the officers still retained the attitude and phraseology referable to such arrangement even though as between the two companies it had been terminated. However it had existed for some four years or so and had only been terminated eight months earlier. Notwithstanding the termination, these officers appear to have treated C.S.B.P. as if it were in fact their company's sole distributor 'in Western Australia. If there was some evidence of the making of an arrangement in June 1975 (and thus reviving the arrangement terminated earlier that year) some of this circumstantial evidence, could be confirmatory of the existence of the alleged arrangement. Otherwise it does little more than raise suspicion. 23. T say "some of the evidence" because, in my opinion, I can not rely on the words used in the telexes which passed from C.F.L. to R.T.C. as evidence against C.S.B.P. on the question whether it was a party to an arrangement with C.F.L. To the extent that the words amounted to admissions by C.F.L. of the existence of an arrangement, the making of such admissions was no part of the arrangement. (Cross on Evidence 2nd Australian Edition at p.519). However, because even if they were all so admissible I would not be prepared to draw the inference that C.S.B.P. was a party to the arrangement as alleged, there is no advantage in my considering which portion of the communications I should exclude from the evidence against C.S.B.P. The Commission relied to a lesser extent upon the conduct of C.F.L. in its dealings with R.T.C. as circumstantial evidence from which I should draw the inference that C.F.L. had made an arrangement with CSB.P. However it is not necessarily only referable to and consistent with the exclusive distributorship arrangement which is pleaded. It could also have arisen out of an arrangement that in times of short supply of urea C.F.L. would provide C.S.B.P's requirements in the first instance. This 1s not the arrangement pleaded and not obviously an infringement of the Act. Similarly the inference is open to be drawn from this evidence that the arrangements evidenced by the 1972 agreement were, notwithstanding their apparent formal termination in January 1975, not in fact terminated but remained on foot. Such an inf erence denies rather than supports the likelihood of an arrangement being made in June 1975. 24. Another factor to which, in my opinion, it is proper to pay regard is what I see as the inherent unlikelihood of C.F.L. voluntarily accepting such a restriction on its freedom of action at that particular time. Likewise I can not see any reason why at that time Phillips would seek to negotiate, and in particular seek with any possibility of success to negotiate, such a concession from C.F.L. I have already set out in detail the climate in the urea market at the time, with C.F.L. having only limited supplies and giving preference to the eastern States and with C.S.B.P., with the experience of purchases from overseas markets at high prices, seeking to obtain assurances concerning supplies for the ensuing year, It was necessary for counsel for the Commission to ask me not to accept the evidence of Phillips and Wilkins, and in particular the denial of each of them that an arrangement was made at the meeting on 11 June 1975. I have already indicated the fact that I am not satisfied with the explanation that Wilkins gave concerning his company's conduct when R.T.C. attempted to enter the Western Australian market. However subject to this qualification I accept Phillips and Wilkins, who were both subjected to searching cross-examination, as witnesses of truth. It follows that I accept the evidence of each of them when they insist that they did not make any arrangement or understanding as alleged on 11 June 1975. In the absence of any direct evidence of the making of the alleged arrangement on that date, I am not prepared, in the circumstances, to infer such an arrangement from the circumstantial evidence, 25. I turn to the Commission's submissions in respect of an alleged contravention of s.46. They were directed to establishing the three essential elements of the section, namely that C.S.B.P. was at the relevant time in a position substantially to control the market for goods, that C.S.B.P. took advantage of that power in relation to that market that it had by virtue of being in that position, and that it took advantage of that power to eliminate R.T. as a competitor, to prevent its entry into the market, or to deter or prevent competitive conduct on the part of R.T.C. Counsel for the Commission presented a strong argument on the first element of substantial control, pointing to C.S.B.P's virtual monopoly of the market in Western Australia for nitrogenous fertilizers, the fact that it fixed its prices, with supervision only and not under control of Customs, its extensive distribution network and its favoured position in respect of bulk-handling facilities and wharfage rates. On the second essential feature, namely that C.S.B.P. took advantage of this power, counsel was prepared to concede that a subjective element such as purpose or motive must be established. He conceded that it is not sufficient merely to look at the effect of the exercise of the power, but that consideration must be given to what the exercise of the power was directed at. He adopted the test of the authors of Donaid and Heydon Trade Practices Law vol. 1 at p.229, namely "what may be required is proof that the conduct producing the consequence was motivated or inspired by a wish for the occurrence of the consequences". The conduct of C.S.B.P. in reducing its prices for urea to the extent and at the time that it did, had the consequence, it was submitted, that the entry of R.T.C. 26. anto the market at the time was prevented and it was climinatcd as a competitor. Consideration of the two factors, of time and quantum of reduction, he said, was in the circumstances proof that C.S.B.P. was motivated or inspired by the wish to harm R.T.C. The more important of the two features in his submission was the timing of the price reduction. This timing was such, he said, that it could only have been directed & R.T.C. Throughout the year C.S.B.P. had been aware that its selling price was unduly high, but it had done nothing. It then became aware of the proposed entry of R.T.C. into the market, and as a matter of urgency and at an earlier than usual point of time it took the step of reducing its price for the coming season. Moreover the new price was arrived at in circumstances where C.S.B.P. was aware of R.T.C's price and at a price which undercut R.T.C. Counsel was also critical of the manner in which the new price was calculate producing figures to establish that the normal margin had been reduced considerably. Finally, the Commission contended that the effect of C.S.B.P's price reduction was to harm R.T.C. in at least one of the ways referred to in s.46(1)(a)(b) and(c) of the Act. Counsel for C.S.B.P. did not contend that the Commission had not established the first element of substantial control, though he did not go as far as to concede this point. He acknowledged the difficulty in determining the correct meaning to be attached to the phrase "take advantage of the power" and contended that there were two necessary matters for proof, First it was necessary 27. to establish that there was an actual elimination of or substantial damage to a competitor in the market and, secondly, there must be some consciousness of this effect. He contended that the Act did not strike at monopolies as such, but at the way in which they exercised their power. He was prepared, when considering the circumstances surrounding his client's reduction in price, to concede that it was fixed earlier than usual. However his submissic was that there was no evidence that in the relevant sense C.S.B.P. was taking advantage of its power in reducing its price. Rather it acted in accordance with its established practice 6f reviewing and fixing its prices at that time of year for the coming season and on the basis of available supplies for that season. It had kept its price constantly under review during the year and made the adjustment in accordance with its normal formula when it received the necessary information as to quantities and prices from C.F.L. There could be no suggestion, it was submitted, that it went deliberately, or at all, under its costs or that it made an under- cutting of R.T.C. its starting point. My conclusion on the opposing submissions is that whilst the Commission has established that C.S.B.P. was at the relevant time in a position substantially to control at least the market for urea in that part of the State south of the Tropic of Capricorn, it has not satisfied me that C.S.B.P. took advantage of that power. Further if I had to rule, I would be inclined to the view that in the state of the law prior to the 1977 amendment of the section 1t was necessary for the Commission to establish that the actions of C.S.B.P. had the desired effect, in other words that it is not enough merely to consider the purpose of or motive for the 28. exercise of the power. As however I am against the Commission on its contention that C.S.B.P. took advantage of 1ts power, I do not have to consider whether it was necessary for the exercise of the power actually to affect the other person in one of the prescribed ways. Nor do I need to consider whether the requisite purpose or motive of C.S.B.P. was to eliminate or substantially damage in the manner prescribed by the section, and if so, whether the exercise of the power achieved this result. It is my opinion, based on the evidence, that although the announcement of the new price by C.S.B.P. may have been to an extent accelerated, there was nothing in the fixation of the new price at this time and at this figure which would justify a finding of predatory conduct. By predatory conduct I have in mind conduct other than in accordance with the established practices of the company engaged in for the purpose and with the concern of damaging R.T.C. I can agree with counsel for the Commission that C.S.B.P. can hardly support its new price on the basis that it is "fixed" by the Customs Department. I do not see that department as having any concern other than to ensure that the benefit of the bounty is enjoyed by the farmers. However this new price was supervised by the Customs Department with this end in mind, and the determination of a new price to take account of changes in anticipated costs was in accordance with the existing arrangements with that department. The Commission relied primarily on the timing of the new price, namely that it was fixed and notified at the time when arrangements had been made by R.1T.C. to import a substantial quantity of urea into Western Australia. If it be of any ultimate 29, significance I do not see R.T.C. as having made any firm arrange- ments at the date of announcement. It had certainly ascertained the availability of a supply of urea from Italy, and the terms and conditions thereof and probable date of delivery. However it did not contemplate making and could not make final or firm arrangements with Italy until such time as the support of farmers was obtained and cash deposits received from them. However I doubt that C.S.B.P. was aware of the exact state of negotiations or arrangements when it made its announcement. But, from the point of view of R.T.C. and its complaint as to timing, it was doubtless in less difficulty and suffered less inconvenience, if not loss, in consequence of receiving advice at this time than it would have if C.S.B.P. had reduced its price after firm arrange-= ments had been made with Italy and R.T.C. had received orders accompanied by cash from the farmers. From the point of view of C.S.B.P. it was under an obligation to review its price for the coming season and it was in the interests of farmers to be told of the new price as soon as possible. These farmers were at the time engaged in notifying the distributors of C.S.B.P. of their estimated requirements for the coming season. This was the time of year to adjust the price and to announce it to farmers and it was the time when such adjustments and announcements had been made in previous years. c.S.B.P. was aware,in consequence of its earlier calculations and of world conditions, of the need to adjust its price, but an essential element in the new price was the quantity it could expect from C.F.L. and the cost thereof, If the amount on' hand together with anticipated supplies from C.P.L. was insufficient it would have to import, and the cost of imports were crucial 39. to its new price. In my opinion, there was nothing exceptional in the fixing by C.S.B.P. of its price at this time. Its managing director had only recently arrived back from overseas and understandably to ascertain quantities and costs from C.F.L. was one of his first tasks. This was in accordance with the arrangements made by him with Wilkins at the June meeting in Melbourne, Having received this information it would be surprising if a new price was not calculated and announced as soon as possible. Particularly this would have been surprising in the light of C.S.B.P's knowledge that R.T.C. contemplated importing urea and selling it at a figure between $140.00 and $150.00 per tonne. Likewise in my opinion there was nothing out of the ordinary in the manner in which the new price was calculated. What was exceptional was that the stock on hand comprised a substantial amount of urea acquired at high prices from overseas. This made more complex the calculation of a proper cost for material on hand, However calculations for a new price had been made on a number of occasions during the preceding months of the current year, and the new calculation was made in similar manner and on much the same basis. The cost of material on hand was made on the basis of averaging the cost, and, in a general way, of treating the material on hand as that most recently received. It was the aim of the Commission to establish that C.S.B.P. manipulated its calculations to ensure it arrived at a price below the anticipated R.T.C. figure and in so doing it necessarily reduced its usual margin of $27.00 per tonne. In my opinion it has not succeeded. The calculations of C.S.B.P. disclosed a normal margin and a reasonable treatment of the cost of stock on hand. It follows that in my opinion the manner of calculation was not out of accord with established practice and there is no justification for the allegation that C.S.B.P. engaged in predatory conduct in calculating and announcing the new price. For these reasons neither the manner of arriving at the new price nor the amount thereof is any proof that C.S.B.P. was inspired by a desire to eliminate or damage R.T.C. as a competitor. The plaintiff's claims are dismissed with costs. oto tere reer - ee ~ - eae epee cere ee eee ene —'