COMMERCE COMMISSION v INTERNATIONAL RACEHORSE TRANSPORT NZ [2020] NZHC 1716

COMMERCE COMMISSION v INTERNATIONAL RACEHORSE TRANSPORT NZ [2020] NZHC 1716 [16July 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-2118[2020] NZHC 1716UNDER the Commerce Act 1986BETWEEN COMMERCE COMMISSIONPlaintiffAND INTERNATIONAL RACEHORSETRANSPORT NZDefendantHearing: On the papersCounsel: D A Laurenson QC, F J Cuncannon, K R Muirhead andP I C Comrie-Thomson for PlaintiffJ C L Dixon QC, A D Matthews and A M W Stewart forDefendantJudgment: 16 July 2020JUDGMENT OF PETERS JThis judgment was delivered by Justice Peters on 16 July 2020 at 10.30 ampursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate: ...................................Solicitors: Meredith Connell, WellingtonMatthews Law, AucklandCounsel: D A Laurenson QC, WellingtonJ C L Dixon QC, AucklandIntroduction[1] International Racehorse Transport NZ is a firm trading in partnership("IRT Partnership"). The Commerce Commission alleges, IRT Partnership admits,and the parties seek declarations to the effect that between 2 October 2009 and28 October 2018 ("relevant period") the partnership breached ss 27 and 30 of theCommerce Act 1986 ("Act").Sections 27 and 30 Commerce Act 1986[2] Section 27 prohibits a person, the definition of which is sufficient to include apartnership, from entering into a contract, arrangement or understanding containing aprovision which has the purpose, effect or likely effect of substantially lesseningcompetition in a market. IRT Partnership's breach of s 27 was by virtue of s 30 which,until August 2017, deemed a provision of a contract etc to have the purpose, effect orlikely effect of substantially lessening competition if it had, amongst other things, theeffect of controlling the price at which parties to the contract etc, otherwise incompetition with each other, would supply services ("price fixing").[3] In August 2017, and subject to specific transitional provisions, s 30 wasamended to prohibit, amongst other things, a party giving effect to a "cartel" provision,such provision being defined to include price fixing. Very broadly, the effect of theamendment was to prohibit price fixing directly, rather than via s 27. Hence IRTPartnership's breach of s 30.Background[4] What follows is a summary of the parties' agreed statement of facts. I recordthe only parties who have participated in compiling the agreed statement are theCommission and the partners of IRT Partnership as of 28 October 2018. Accordingly,other parties said to have been involved have not been heard, and any reference towhat they may or may not have done is essentially an allegation, derives solely fromthe understanding of the Commission and the said partners, and must be read in thatlight.Partners/Services[5] In the period with which I am concerned, the partners of IRT Partnershipcomprised International Racehorse Transport (N.Z.) Ltd as to a two-third share, andBloodstock 2000 Ltd until 31 May 2016 and thereafter Cole IRT Ltd, each as to theremaining one-third share. Bloodstock 2000 Ltd ceased trading on 31 May 2016, hasbeen removed from the Register of Companies.[6] At all material times, IRT Partnership and an unrelated competitor ("ABC")provided equine airfreight services domestically and internationally. Equine airfreightservices are those required to transport a horse by air from point A to point B,domestically or internationally ("services"), from the time the horse enters the airportof origin until it departs the destination airport.Joint venture[7] The Commission and IRT Partnership agree IRT Partnership and ABC wereparties to a joint venture pursuant to which they controlled the prices at which theywould provide the services domestically and trans-Tasman and thereby breached s 27,via s 30, and more latterly s 30 in its own right.[8] A predecessor of IRT Partnership first formed the joint venture with ABC onor about 1 May 1989, entering into what is referred to as the "Overarching Agreement"and a separate "Transportation Agreement". The purpose, effect or likely effect of theOverarching Agreement was to control the retail prices to be quoted and/or chargedand the discounts to be given for the services. Likewise, the effect or likely effect ofthe Transportation Agreement, updated and amended from time to time, was to set theprices to be charged on specified flight sectors and to prohibit discounts except bymutual agreement.[9] It is agreed the joint venture was not without benefit to customers. Theconsolidated volume, and the pooling of the joint venturers' skills and resources, forinstance professional grooms, allowed for regular, consistent, frequent and scheduledservices.1 June 1999 onwards[10] The predecessor partnership wound down or was dissolved on or about 1 June1999, and IRT Partnership, then comprising the partners referred to in [5] above,succeeded to its place in the joint venture, and adopted and gave effect to theOverarching Agreement.[11] Subsequently, IRT Partnership and ABC agreed "Rate Agreements" in each ofNovember 2010, July 2011, July 2012, November 2013, May 2015, November 2016,and April, July and November 2017. The Rate Agreements were price schedulesdetailing the sums intended to meet the costs for the relevant sector, plus a profitcomponent, and to provide the discounts that could be given. The agreements wererevised from time to time to reflect changes in costs.[12] It was not inevitable IRT Partnership and ABC would charge customers theagreed prices, but that was the general consensus and, at the very least, the agreedprices/discounts were the starting point for discussions with customers.[13] IRT Partnership and ABC also engaged in ad hoc discussions to vary pricesand discounts as circumstances required, for instance for a large shipment or on acharter flight.Investigation[14] The Commission commenced its investigation of IRT Partnership's actions inFebruary 2018. The Commission advised IRT Partnership of this in late-June 2018.The Commission commenced this proceeding in early-October 2019.[15] In late-October 2018, IRT Partnership and ABC entered into revised andcompliant arrangements as to the allocation of costs between them, rather than profit,as was the effect of their prior agreements.Other relevant facts[16] Other relevant facts are as follows. First, directors of the partners ofIRT Partnership, and its Senior Operations Manager, were all involved in the day-to-day management of IRT Partnership; in giving effect to the Overarching Agreement;and in entering into and giving effect to the Rate Agreements.[17] Secondly, the Commission and IRT Partnership have not agreed the financialimpact the conduct of the joint venture had on prices charged to customers. The partiesagree such a resource intensive exercise is not required in the circumstances of thiscase.[18] Thirdly, although IRT Partnership did not seek its own legal advice regardingthe Overarching Agreement or the Rate Agreements, it knew ABC had done so andABC shared its advice, to the effect the various agreements were lawful, on at leasttwo occasions. The Commission accepts IRT Partnership's reliance on this legaladvice indicates it did not necessarily intend to breach the Act. Equally,IRT Partnership acknowledges it should have been more careful to ensure compliance,and to obtain its own advice from time to time.[19] Fourthly, the first iteration of the partnership entered into the joint venture withABC, fearing for its survival if it did not do so. The advantage to the partnership inthe first instance was at least a share of the profit derived from its own volumes. Thestrength of this rationale diminished over time, however, and had ceased to be materialby October 2009, being the start of the relevant period in this case.[20] Fifthly, IRT Partnership has co-operated fully with the Commissionthroughout, including by acknowledging and accepting it had contravened the Act atan early stage of the proceeding.[21] Sixthly, IRT Partnership has not previously been found to have contravenedthe Act, nor previously been warned for conduct the Commission considers likely tobreach the Act.[22] Lastly, IRT Partnership has arranged competition law compliance training forits staff and strengthened internal policies and protocols for engaging with ABC andother competitors.Breach[23] The Commission and IRT Partnership agree:(a) the Overarching Agreement was a contract, arrangement orunderstanding containing a provision with the purpose, effect or likelyeffect of controlling the price at which each of IRT Partnership andABC supplied the services in competition with each other; and(b) each Rate Agreement was a contract, arrangement or understandingwhich had the effect or likely effect of controlling the price at whichIRT Partnership and ABC supplied the services in competition witheach other; and(c) by entering into and giving effect to these various agreements,IRT Partnership breached ss 27 and 30 of the Act.Relief[24] The parties seek declarations to the effect set out below but ask the Court torefrain from imposing a pecuniary penalty pursuant to s 80(1) of the Act.[25] There is no objection to parties presenting a joint proposal to the Court as towhat is a suitable remedy in the circumstances of a particular case. As Venning J saidin Commerce Commission v Carter Holt Harvey Ltd:1 there can be no objection to a joint view of the parties on submissions as topenalty nor to such a view being reached as a result of negotiations so that itrepresents what could be described as a settlement. Such settlements are inthe interests of the parties, the community and the judicial system, enabling asthey do early disposal of the proceedings and encouraging a realistic view ofculpability and penalty. They also avoid the need for a full hearing.1 Commerce Commission v Carter Holt Harvey Ltd [2014] NZHC 531 at [30]. See also CommerceCommission v Air New Zealand Ltd [2013] NZHC 1414 at [23]; and Commerce Commission vVisy Board (NZ) Ltd [2013] NZHC 2097 at [34].[26] However, it is always necessary for the Court to be satisfied what is proposedis suitable on the facts of the particular case. Conduct in breach of ss 27 and 30 of theAct is serious, and even more so if it occurs over an extended period.Pecuniary penalty[27] The Commission has made it clear that in the usual course of events it wouldseek both a declaration of breach and the imposition of a pecuniary penalty for conductsuch as that IRT Partnership has admitted. That the Commission is not doing so is dueto the following.[28] First, the Commission is satisfied IRT Partnership would be unable to pay apecuniary penalty. Independent expert evidence, commissioned before the full effectof COVID-19 on economic conditions was felt, indicated IRT Partnership would beunable to pay a penalty.[29] IRT Partnership's financial position and outlook has worsened since.New Zealand was previously a "hub" for horses from Chicago destined for Australia,those horses having to be quarantined in New Zealand before being transported toAustralia. Direct flights between the Chicago and Australia now mean that source ofrevenue has ceased. In addition, another large customer is facing financial difficultiesand can no longer be relied upon to generate income. Further, the international travelrestrictions occasioned by COVID-19 mean diminished revenue. All quarantinebusiness has ceased for the foreseeable future.[30] Secondly, employees would lose their positions and an effective monopoly inthe provision of the services might result if IRT Partnership ceased to trade. Such anoutcome cannot be discounted, indeed is clearly possible, if a pecuniary penalty wereimposed.[31] The parties accept none of these matters is determinative, and the Court mightimpose a pecuniary penalty regardless, particularly if a defendant's conduct has beenegregious and the Court considers a penalty required for deterrence purposes.22 Commerce Commission v Koppers Arch Wood Protection (NZ) Ltd (2006) 11 TCLR 581 (HC) at[34].[32] In this case, however, the Commission acknowledges IRT Partnership'sconduct is not so egregious as to require the imposition of a pecuniary penalty, and theneed for deterrence in this case can be met by declarations.Declarations[33] The Act does not include specific provision for the Court to make a declarationif a defendant has a breached the Act. However, it is well established the Court maydo so in the exercise of its inherent jurisdiction, and pursuant to the DeclaratoryJudgments Act 1908.3 The Court of Appeal confirmed this in Telecom Corporation ofNew Zealand Ltd v Commerce Commission:4[303] The starting point is that the High Court has jurisdiction to grantdeclaratory relief, as all counsel accept, even though that remedy is mentionednowhere in the Commerce Act [Sections 75 and 76] say nothing aboutwhich Court can grant declaratory relief. Nor do the sections purport to permitdeclaratory relief only if tied to an application for or an order of specificCommerce Act relief. Indeed, such a construction of the Commerce Act wouldbe contrary to s 2 of the Declaratory Judgments Act[34] The Court's discretion to grant declaratory relief is broad, but not unfettered.The test is whether a declaration is required in the interests of justice on the facts ofthe case:5As to the exercise of that discretion, I doubt if there has been a more conciseand (with respect) insightful statement than that of Viscount Radcliffe inIbeneweka v Egbuna:"[The] two primary considerations [are] that the power to makedeclarations is conferred, surely not by accident, in wide and generalterms, and that what is conferred is a discretion to be exercisedaccording to the facts of each individual case.[I]t is doubtful if there is more of principle involved than theundoubted truth that the power to grant a declaration should beexercised with a proper sense of responsibility and a full realisationthat judicial pronouncements ought not to be issued unless there arecircumstances that call for their making.3 Commerce Commission v Fletcher Challenge Ltd [1989] 2 NZLR 554 (HC) at 611.4 Telecom Corporation of New Zealand Ltd v Commerce Commission [2012] NZCA 278.5 Kung v Country Selection NZ Indian Association Inc [1996] 1 NZLR 663 (HC) at 665-666(citations omitted).This kind of approach is very like the approach of a Court to equitableremedies, the broad question being whether justice requires a declaration. Awide range of factors will then be relevant: whether a plaintiff has a sufficientinterest in the proceedings; whether an issue is now moot; and the practicalutility of issuing a declarationSubmissions[35] The Commission and IRT Partnership agree it is in the wider public interest tomake the declarations they seek. Such declarations will confirm IRT Partnershipengaged in conduct in breach of the Act; will assist the Commission to educate boththe public and commercial sector about the forms of conduct likely to breach the Act,particularly in relation to joint ventures which have been the subject of relatively fewcases under the Act even though they are a common form of commercial arrangement;will deter contraventions of the Act; and promote the purpose of the Act, which is:1A PurposeThe purpose of this Act is to promote competition in markets for the long-termbenefit of consumers within New Zealand.[36] The parties also agree there is practical utility in the Court making the agreeddeclarations as such will promote the speedy and inexpensive resolution of theproceedings.[37] Venning J referred to many of these considerations in Commerce Commissionv ANZ Bank New Zealand Ltd, when he said:6(a) there is public interest in a Court declaring a defendant's conduct to bein breach of the Act rather than such breach being admitted andacknowledged in a private settlement;(b) a declaration may be placed in front of the Court again in the event ofany future breach;(c) the public nature and effect of the Court's declaration acts as a deterrentto other parties engaging in similar conduct; and6 Commerce Commission v ANZ Bank New Zealand Ltd [2015] NZHC 1168, (2015) 14 TCLR 71at [18].(d) a declaration confirms to the public and the commercial community theCommission will enforce the Act where appropriate.Discussion[38] I accept the circumstances of this case do not require the imposition of apecuniary penalty, and to impose one at the present time might have undesirableconsequences, not only for the partners but their staff and their customers. I alsoaccept that a declaration itself, without more, may serve the public interest and, in thiscase, the declarations proposed will meet the objectives identified in [35] and [36]above. I note also there is precedent for this approach. In Commerce Commission vPGG Wrightson Ltd, the defendant had ceased trading in New Zealand and was unableto pay a pecuniary penalty.7 In granting the declaratory relief sought, Courtney Jrecognised that a declaration on its own "would serve the purposes of deterrence andassisting the Commission in its ongoing educative function".8Result[39] I make the following declarations:(a) IRT Partnership gave effect to the Overarching Agreement:(i) between, on, or around 2 October 2009 and 14 May 2018 incontravention of s 27, by virtue of s 30, Commerce Act 1986;and(ii) between 15 May 2018 and 28 October 2018 in contravention ofs 30 Commerce Act 1986.(b) Prior to 14 August 2017, IRT Partnership entered into theRate Agreements in contravention of s 27, by virtue of s 30, CommerceAct 1986.7 Commerce Commission v PGG Wrightson Ltd [2017] NZHC 2584.8 At [21].(c) On or after 15 August 2017, IRT Partnership entered into theRate Agreements in contravention of s 30 Commerce Act 1986.(d) Prior to 15 May 2018, IRT Partnership gave effect to theRate Agreements entered into between 2 October 2009 and 14 August2017 in contravention of s 27, by virtue of s 30, Commerce Act 1986.(e) On or after 15 May 2018, IRT Partnership gave effect to theRate Agreements entered into between 2 October 2009 and 14 August2017 in contravention of s 30 Commerce Act 1986.(f) On or after 15 August 2017, IRT Partnership gave effect to theRate Agreements in contravention of s 30 Commerce Act 1986.[40] I make no order as to costs, the parties having agreed they are to lie where theyfall.Peters J