Taching Petroleum Company Limited v Meyer Aluminium Limited (unreported, CTA 1/2018 & CTA 2/2018,  HKCT 2, 12.10.2021)
Taching Petroleum Company Limited v Meyer Aluminium Limited (unreported, HCA 1929/2017 & HCA 1069/2018,  HKCFI 3028, 12.10.2021)
This case saw the unprecedented use of contravention of competition law as a defence to contractual claims in civil proceedings. After more than three years of procedural battles, the matter finally proceeded to trial in the summer of 2021. The recent judgments by the Honourable Madam Justice Au-Yeung (Deputy President of the Competition Tribunal) shed light on this novel defence, as well as the law on establishing a contravention of the First Conduct Rule in the context of parallel behaviour.
The Plaintiffs in CTA 1/2018 and CTA 2/2018 are Taching Petroleum Company Limited (“Taching”) and Shell Hong Kong Limited (“Shell”) respectively. Shell is one of the 4 companies in Hong Kong with a licence to import industrial diesel into Hong Kong (the “Oil Majors”), while Taching is one of 80-100 sellers or retailers of industrial diesel in Hong Kong. Taching sources its industrial diesel solely from Sinopec, an Oil Major.
Taching and Shell each commenced a High Court Action (the “HC Actions”) against Meyer for the outstanding price of industrial diesel they had each delivered to Meyer. In defence, Meyer alleged that Taching and Shell breached the First Conduct Rule by colluding to fix prices or exchange price information (“Alleged Contravention”) and relied on the defences of illegality and/or set off.
Since Meyer’s defence raises an allegation of a contravention of the First Conduct Rule, the issue was transferred to the Competition Tribunal (the “Tribunal”) for determination in CTA 1/2018 and CTA 2/2018 (the “CT Actions”).
We previously reported on the Tribunal’s decision in these proceedings dated 22 February 2019, covering procedural issues raised in the early stages of the actions including the use of a confidentiality ring to facilitate a more focused and streamlined discovery process. See The Diesel Cases: Hiving Off a Competition Defence to the Competition Tribunal? Procedural Considerations at the Case Management Stage of 14 June 2019.
The HC Actions and CT Actions were tried together before the Deputy President. After trial, the Tribunal found no breach of the First Conduct Rule by Taching or Shell and rejected Meyer’s “competition law defence”.
The Alleged Contravention
Meyer claimed that the adjustments Taching and Shell had made to their List Price of industrial diesel sold to Meyer were strikingly similar. Meyer relied on 118 pairs of corresponding Price Adjustment Notices issued by Taching and Shell between January 2011 and June 2017 (the “Parallel Conduct”) to infer that it was the result of their anti-competitive collusion that could not be explained by mere coincidence.
Parallel conduct as a contravention of the First Conduct Rule
The Tribunal confirmed the principles in relation to parallel conduct as a contravention of the First Conduct Rule, citing the FCR Guideline §2.31, Case C-89/85 Alhstrom Osakeyhtio v Commission of the EU  ECR I-1307 (Wood Pulp II), and Case T-442/08, CISAC v European Commission, EU:T:2013:188.
Parallel conduct alone is not illegal and does not necessarily mean there is anti-competitive collusion. In general, there are 3 methods to prove that an agreement or concertation existed in the context of parallel conduct:
1. Where there is direct or indirect factual evidence (such as communications) pointing to explicit collusion other than parallel conduct, the Tribunal will first examine whether such evidence meet the requisite standard. If there is such evidence, alternative plausible explanations would not invalidate the finding of infringement (“1st Method”).
2. Where there is some direct or indirect evidence of explicit collusion but it is not enough to establish infringement to the requisite standard, this may be supplemented by circumstantial evidence, including economic evidence. However, the claimant must still provide sufficient evidence to render implausible the alternative explanations for the parallel conduct (“2nd Method”).
3. Where there is no direct or indirect evidence of any explicit collusion, parallel conduct alone cannot be regarded as proof of collusion unless that collusion constituted the only plausible explanation for such conduct (“3rd Method”).
Standard of proof in competition law proceedings remains the same
The standard of proof in proceedings involving a competition law defence transferred from the CFI to the Tribunal is the civil standard of balance of probabilities. The Tribunal reiterated that the standard would not be heightened because of the gravity of the allegations.
The civil standard of proof should not, however, be conflated with the necessary elements or the quality of evidence needed to establish collusion. The party bearing the burden of proving a serious allegation must discharge the burden with evidence of commensurate cogency.
This case is only concerned with the 3rd Method of proving an agreement or concertation, as set out above, because there was no direct or indirect evidence of any explicit collusion between Taching and Shell. Thus, it behoves Meyer to prove that collusion was the only plausible explanation for the parallel conduct or, in other words, the alternative explanations for the parallel conduct were implausible. Such a requirement does not elevate the standard of proof above the usual civil standard. Competition law imposes such a requirement because of the nature of parallel conduct, which may well be innocent and be the “very essence” of competition.
Commercially sensitive evidence in competition proceedings
Generally, trials in the Competition Tribunal should be heard in open court (Rule 28 of the Competition Tribunal Rules (Cap. 619D)), but the Tribunal considered and granted leave to hear part of the evidence in camera upon application by Shell.
The provision of evidence in camera would restrict the open administration of justice, therefore it must be justified by considering and balancing all pertinent interests, rights, and freedoms. It may be justified if:
1. It would frustrate the ultimate aim of doing justice between the parties, which is a most important if not decisive consideration in the balancing exercise;
2. It would jeopardize some right or interest of one or both of the parties outside of the case.
(See also Television Broadcasts Limited v Communications Authority & Anor  2 HKLRD 41)
As competition proceedings often involve confidential and commercially sensitive information, certain restrictions of open justice are not uncommon, like the redaction of documents. However, cogent evidence and details must be given to support and justify an application for such a restriction. The Tribunal adopted the approach in Unwired Planet International Ltd v Huawei Technologies Co Ltd  Bus LR 896;  EWHC 3083 (Pat)) where the following factors were looked at when justifying the restriction of open justice:
1. The nature of the information (e.g. technical trade secrets);
2. The effect of publication of the information, which is a critical factor (i.e. the effect on competition and competitiveness of the market);
3. The nature of the proceedings, as the balance of factors would differ (e.g. the need to encourage leniency application in a competition case);
4. The relationship between the information in issue, and the proceedings as a whole – whether the restriction will undermine the public’s understanding of the proceedings or the reasons for the judgment; and,
5. The relationship between the person seeking to restrain publication of the information and the proceedings themselves – whether that person is the party who puts in issue the confidential information in the first place or a third party.
The Tribunal directed that the evidence of Shell’s witnesses was to be heard partly in camera. The reasons were based on the highly sensitive information contained in Shell’s List Price and method in determining the price for industrial diesel, of which exposure to the public (specifically, its competitors and customers) would harm Shell’s business interest.
Collusion was not the only plausible explanation for the similar List Price Adjustments
In the absence of explicit concertation, Meyer had to provide sufficient evidence to show that Taching and Shell’s explanations were implausible and that the only plausible explanation for the Parallel Conduct was collusion.
Taching’s explanation for the adjustments to the List Price was that it followed Price Adjustment Notices issued by Sinopec (Taching’s sole supplier of industrial diesel), so that they could maintain competitiveness and that their profit margins remained more or less the same.
Shell also explained that the changes in the List Price were independent commercial decisions to adapt to competition in the market, including occasions where Meyer had disclosed Taching’s net price to Shell as a leverage to persuade Shell to match Taching’s net price.
The Tribunal accepted Taching’s and Shell’s respective explanations for their List Price adjustments. As such, collusion was not the only plausible explanation for the Parallel Conduct in this case. The Tribunal therefore rejected Meyer’s case on the contravention of the First Conduct Rule.
Exclusion of Expert Evidence at Trial
Upon Meyer’s application, expert evidence was prepared and filed before the trial. At the trial, however, it became clear that Meyer’s case did not turn on its own expert evidence. Indeed, it was clear from Meyer’s own expert’s report that the expert evidence was irrelevant to any of the issues in dispute in this case. As such, in line with the active and robust case management practice of the Tribunal (CTPD1, §9), the Tribunal excluded the expert reports from the evidence in the course of the trial, after hearing the evidence of the factual witnesses.
Costs on Indemnity Basis
The Tribunal has power to make an order for indemnity costs in appropriate cases, taking into account the litigation conduct of the losing party. The Tribunal’s discretion is a broad one.
In the CT Actions, the Tribunal accepted that it was not Meyer’s intention to use litigation to defer its payment obligations. However, Taching and Shell have put forth their cases at the very first opportunity in their respective pleaded cases and their cases have never shifted. Meyer’s case, on the other hand, was based on no more than a suspicion arising out of the 118 pairs of List Price Adjustment Notices. After discovery, at least, Meyer ought to have known full well that it could not challenge the authenticity of the explanations. Meyer nevertheless pursued its competition defence and repeatedly fished for information both at the interlocutory stage and at trial through cross-examination. The expert evidence, which was filed upon Meyer’s application, turned out to be wholly unnecessary. As a result of Meyer’s unreasonable behaviours, Taching and Shell have been forced to spend 2 more years on an expensive piece of litigation and exposed to the risk of leakage of their confidential business information. In the circumstances, the Tribunal considered this to be an appropriate case to order that costs after the close of pleadings be paid by Meyer on indemnity basis.
Illegality of agreements in contravention of the Competition Ordinance (Cap. 619)
Given the Tribunal’s finding that there was no contravention of the First Conduct Rule in the CT Actions, it was not necessary to consider the defence of illegality in the HC Actions. The Court therefore did not go into detail on this issue in its judgment in the HC Actions. The Court did, however, make two observations on this issue.
First, unlike the EU and UK parallel legislation, the Competition Ordinance does not contain any provision that renders an agreement in contravention of the First Conduct Rule automatically void. Instead, paragraph 1 of Schedule 3 to the Ordinance gives power to the Tribunal to make orders under section 94 which include an order prohibiting a person from giving effect to an agreement, requiring the parties to modify or terminate an agreement, or declaring an agreement to be void or voidable.
The Court has left it to a more appropriate case in the future to determine whether it should be the CFI or the Tribunal which should deal with the question of illegality and how the Tribunal should exercise its discretion under section 94.
Second, on the question of illegality, the Hong Kong courts are bound by the decision of the Court of Appeal in Arrow ECS Norway v M Yang Trading  HKCA 176, Cheung JA, which followed Tingsley v Milligan  1 AC 340. Whilst the Court noted further developments in the UK in cases such as Patel v Mirza  AC 467, it was left to the future courts to determine which approach should be followed in Hong Kong.
1. Litigants can raise allegations of contraventions of competition law as a defence to a civil claim, but they must prove its case on a balance of probabilities. The civil standard of proof should not be conflated with the quality of evidence required to discharge such a burden. Given the serious nature of an allegation of anti-competitive conduct, the party alleging such conduct is usually expected to discharge the burden with evidence of commensurate cogency.
2. Parallel conduct in itself is not illegal. The prohibition of anti-competitive collusion does not deprive economic operators of the right to adapt themselves intelligently to the existing and anticipated conduct of their competitors. In the absence of evidence on explicit concertation, parallel conduct cannot be regarded as furnishing proof of concertation unless collusion constituted the only plausible explanation for such conduct.
3. In general, proceedings in the Tribunal should be heard in open court. The Tribunal has a discretion to order part of the competition proceedings be heard in camera in appropriate cases. Whilst it is acknowledged that evidence given in competition proceedings are often sensitive due to business secrets and competition considerations, the party applying for hearing in camera must justify such an application by cogent evidence and details.
4. Active and robust case management will form a central element of the procedure of the Tribunal. The parties are expected to justify the relevance of the evidence called at trial. If the Tribunal is not satisfied that the evidence is relevant to the issues in dispute, the Tribunal may exclude such evidence in the course of the trial, as it did with the expert evidence in this case.
5. The parties should exercise caution when raising and/or pursuing a competition defence. Whilst it may be a relatively low threshold to defend a summary judgment application relying on a competition defence, the defendant will have to prove the alleged contravention of conduct rules on the balance of probabilities at trial. Given the relatively detailed nature of the pleadings in competition proceedings, a defendant raising a competition defence may be well advised to re-assess the merits of the alleged contravention of competition law after the close of pleadings and/or discovery, before deciding whether to pursue the competition defence, bearing in mind adverse costs consequences (including indemnity costs) should the defendant fail to establish the competition defence at trial.