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[2002] FCA 824
Federal Court of Australia
2002-06-28
Goldberg J
Original judgment source is linked above.
Introduction 1 On 21 April 1999 the applicant ("the Commission") filed an application against the first respondent, SIP Australia Pty Limited ("SIP"), two of its directors being the second respondent, Mr Filippo Ippaso and the third respondent, Mr John Edwin Gates and against the fourth respondent, Baker Bros (Aust) Pty Ltd ("Baker Bros") and two of its directors being the fifth respondent, Mr Andrew Clive Baker and the sixth respondent, Mr Guy Edwin Baker. The application alleged contraventions of s 45(2)(a)(i) and (ii) and s 45(2)(b)(i) and (ii) of the Trade Practices Act 1974 (Cth) ("the Act") which were said to arise out of price fixing and customer sharing activities which occurred principally in Victoria and New South Wales between January 1994 and June 1998 in relation to the supply of compressors and compressor parts. The Commission filed a statement of claim in support of its application. On 7 May 1999 Baker Bros and its two directors filed a defence in which they admitted the allegations made against them. On 25 June 1999 I made orders, in substance, restraining Baker Bros and its directors from making, or giving effect to, any contract, arrangement or understanding with any competitor of Baker Bros in relation to the supply of compressors, anywhere in Australia, which contained provisions in contravention of s 45 of the Act. I also ordered that they pay pecuniary penalties pursuant to s 76(1) of the Act in varying amounts: ACCC v SIP Australia Pty Ltd [1999] FCA 858. 2 At that time the statement of claim, in general terms, alleged that SIP and Baker Bros entered into a market sharing and price fixing agreement in March 1994 in relation to the supply and sale of compressors and compressor parts manufactured and supplied by ABAC Area Compressa SpA ("ABAC"). The statement of claim alleged that the two SIP directors were knowingly concerned in these activities. SIP and its directors denied the allegations made against them. In its defence filed on 30 June 1999, SIP alleged that an agreement had been entered into in March 1994 between Baker Bros, ABAC and it for the exclusive distribution of ABAC compressors. Thereafter the Commission sought, and was granted, leave to amend its application and statement of claim to raise allegations of procuring or inducing resale price maintenance in contravention of s 48 of the Act. 3 The Commission's case was that in March 1994, in August 1994 and between November 1997 and February 1998 SIP and Baker Bros entered into, and gave effect to, a contract, arrangement or understanding in relation to the customers to whom SIP and Baker Bros would respectively sell ABAC compressors and compressor parts and the prices at which they would sell such compressors and compressor parts. The Commission also alleged that SIP persuaded ABAC to induce Baker Bros to enter into the contract, arrangement or understanding in March 1994 and thereby procured or induced, or attempted to induce, ABAC to engage in resale price maintenance in contravention of s 48 of the Act. 4 The Commission alleged that Mr Ippaso as managing director of SIP attempted to induce, and was knowingly concerned in, all of SIP's conduct and that Mr Gates, a director of SIP, attempted to induce, and was knowingly concerned in, the conduct relating to the contract, arrangement or understanding entered into or attempted between November 1997 and February 1998. Accordingly, pecuniary penalties were sought against Messrs Ippaso and Gates under s 76(1) of the Act. 5 SIP's defence, in general terms, was that the agreement entered into in March 1994 was entered into by ABAC, SIP and Baker Bros and was a vertical supply agreement which came within s 47(2) of the Act and was therefore excluded from the operation of s 45 of the Act by virtue of the provisions of s 45(6). It was said that that agreement did not involve any horizontal arrangement between SIP and Baker Bros. It was also said that the allegation of price‑fixing came within s 96(3)(b) of the Act and was excluded from the operation of s 45 of the Act by virtue of the provisions of s 45(5). 6 In making the findings and reaching the conclusions to which I shall refer I have adopted the approach, and reached the degree of satisfaction, identified by Dixon J in Briginshaw v Briginshaw (1938) 60 CLR 336 at 362: "But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters 'reasonable satisfaction' should not be produced by inexact proofs, indefinite testimony, or indirect inferences." I have also adopted the approach taken by McLelland CJ in Eq in Watson v Foxman (2000) 49 NSWLR 315. His Honour said at 319: "Each element of the cause of action must be proved to the reasonable satisfaction of the court, which means that the court 'must feel an actual persuasion of its occurrence or existence'. Such satisfaction is 'not … attained or established independently of the nature and consequence of the fact or facts to be proved' including the 'seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding': Helton v Allen (1940) 63 CLR 691 at 712."
The parties 7 ABAC is an Italian manufacturer of a large range of compressors and compressor pumps and accessories. It is the largest piston compressor manufacturer in the world and at relevant times it exported its products to approximately seventy‑six countries. An air compressor consists of a pump, an electric motor, an air receiver or tank and other smaller components. There are two types of air compressors - direct‑drive or belt‑driven. A direct‑drive compressor has its motor mechanically geared to the pump and is usually connected to small air receivers. It is typically used by a handyman or small workshop customer and is used for smaller applications. A belt‑driven compressor has its pump activated by the function of a rubber belt. It has a larger capacity than a direct‑drive compressor and is normally used for larger industrial‑type applications. 8 SIP at relevant times was based in New South Wales and was part of a group that carried on business in other countries, including England and Italy. It had been a large customer of ABAC. Mr Ippaso is the owner and managing director of SIP. Until 31 July 2000 Mr Gates was a director and sales manager of SIP. SIP commenced operations in Australia in about 1988. Between 1988 and 1993 it imported compressor parts manufactured by companies including ABAC and assembled both direct‑drive and belt‑driven compressors. It purchased compressor pumps only from ABAC. SIP was a supplier and distributor in Australia of compressors and compressor parts including those manufactured by ABAC. In 1993 Mr Ippaso came to Australia to take charge of SIP's business. Thereafter the level of ABAC products imported into Australia by SIP increased substantially. 9 Baker Bros has since 1988 been engaged in the business of an importer, or agent for the wholesale, of compressors and compressor parts and other industrial machinery such as bench grinders, bandsaws and woodworking machines. It has imported and distributed air compressor components of various brands including ABAC pumps for compressors to be assembled in Australia. It had entered into a non‑exclusive distribution agreement with ABAC on 21 September 1988 for the distribution of ABAC products. Although the agreement provided that it was to expire on 31 December 1990, after that date ABAC and Baker Bros continued to do business in the same way as they had done pursuant to the agreement. Baker Bros sold ABAC products mainly to assemblers, engineering and power tool distributors, hardware stores and farm suppliers. In 1994 Baker Bros imported about 6,000 ABAC pumps.
Background to the March 1994 agreement 10 Until 1994 Baker Bros did not sell completely assembled ABAC compressors in Australia. Towards the end of 1993 Baker Bros decided to import completely assembled ABAC direct‑drive compressors having tank capacities of 2.5 litres and 24 litres (sometimes called 25 litre tanks) as the Australian Standard relating to compressor tanks had changed, thereby allowing completed compressors to be imported into Australia for the first time. Baker Bros discussed its proposal with ABAC. Baker Bros did not intend to import completed belt‑driven compressors at that time and did not do so until April 1998. Baker Bros began importing direct‑drive compressors in early 1994 having placed its first order in November 1993. From 1996 Baker Bros also became a wholesale assembler of belt‑driven compressors with 50 litre tanks that included ABAC compressor pumps and non‑ABAC components. Between 1994 and 1998, ABAC products constituted about two‑thirds of Baker Bros' business. SIP and Baker Bros sold to a number of common customers. 11 Messrs Guy and Andrew Baker first met Mr Ippaso in July 1993. Thereafter there were intermittent meetings between representatives of SIP and Baker Bros. 12 A critical meeting occurred on 23 and 24 March 1994 between Mr Andrew Baker, Mr Ippaso, Mr Paolo Arrigoni (the sales and marketing director of ABAC) and Dr Roberto Balma (the managing director of ABAC). In order to understand how that meeting came about it is necessary to identify the circumstances that led up to, and culminated in, that meeting. 13 Between 1988 and 1993 SIP was an assembler of both direct-drive and belt-driven compressors. Prior to 1994, save for the importation of a small number of direct-drive compressors marketed by SIP under the "Tornado" brand, SIP imported compressor pumps only from ABAC. It incorporated the pumps into its own assembled compressors and distributed the finished compressors to its customers. As a result of incurring trading losses, Mr Ippaso, in or around June 1993, commenced a detailed analysis of more cost effective ways of selling compressors instead of assembling them in Australia. He considered the possibility of importing finished compressor units into Australia. Save for the Tornado compressor, finished compressors complying with Australian Standards had not been imported into Australia by any other company at that time. 14 On 28 July 1993 Mr Ippaso visited Messrs Andrew and Guy Baker at their Melbourne premises, having been told of their existence by Dr Balma of ABAC. Dr Balma asked Mr Ippaso to visit Baker Bros and let him know what their operation was like. Mr Ippaso observed that Baker Bros did not have the facilities to assemble compressors and was told by Mr Andrew Baker that they had a very good business supplying ABAC pumps to assemblers. At that time Baker Bros did not sell compressors. 15 During the second half of 1993 Mr Ippaso investigated the feasibility of importing completely assembled direct-drive compressors with receivers or tanks that would comply with the relevant Australian Standard. A substantial amount of work was involved in preparing the engineering drawings and obtaining the approval of the relevant Work Cover Authority. Ultimately, on or about 18 February 1994, SIP obtained approval from the Work Cover Authority in relation to the importation of portable 25 litre and 38 litre air compressors. 16 By December 1993 Mr Ippaso had become aware that Baker Bros was proposing to import 25 litre tank assembled ABAC compressors and he intended that SIP import compressor components for sale to assemblers in competition with Baker Bros. Mr Ippaso said in his affidavit that during discussions with Dr Balma in October and November 1993 in which he discussed his progress in obtaining approval to import fully assembled compressors Dr Balma told him that Baker Bros might want to sell ABAC compressors. Although Mr Ippaso said that as at January 1994 he did not believe Baker Bros was interested in distributing finished compressors I do not accept that evidence having regard to a record made by Mr Ippaso of a meeting he had with Dr Balma and Mr Arrigoni on 10 December 1993. I am satisfied that by 10 December 1993 Mr Ippaso was concerned about the competitive threat Baker Bros presented to ABAC in relation to its proposal and intention to import fully assembled ABAC direct‑drive compressors and that he wanted to take steps to reduce or eliminate this competition. 17 On 10 December 1993 Mr Ippaso met with Dr Balma and Mr Arrigoni in Turin to discuss the importation into Australia of fully assembled ABAC compressors. In the course of his discussions he told Dr Balma and Mr Arrigoni that Baker Bros was adequate at selling ABAC pumps but was unsuitable for selling complete units and supplying after sales service on finished air compressors. 18 During or shortly after the meeting, Mr Ippaso wrote a report of the meeting. Under the heading "OBJECTIVES", which I take to be the objectives of SIP, Mr Ippaso wrote: "2.1 To agree a 'modus operandi' in relation to the supply of the AIRMATE range with Australian air receivers. Reconciliation of ABAC production with AIR‑COM re Air Receivers. 2.2 To agree the distribution of above mentioned range and ask for the Sole Agency for Australia and New Zealand. 2.3 To investigate the importance for ABAC to support Baker Bros. in relation to Baker's intention to sell ABAC Air Compressors. Obtain full control of marketing of complete units (finished air compressors). 2.4 To investigate direct import of Belt‑driven Compressors." 19 Under the heading "MOST SALIENT ISSUES DEALT WITH" Mr Ippaso wrote: "3.1 Belt‑driven Compressors … 3.1.2 Discussed unsuitability of their importer (Baker Bros.) to sell complete units and do the after‑sale on finished air compressors. Explained why they are pretty good in selling pumps and not for complete units. Explained my proposal in obtaining Baker's co‑operation in marketing SIP and ABAC compressors in our two countries (this for both belt driven and direct driven compressors). … 3.1.5 … In order to have full control of the distribution of Belt‑driven and Direct‑driven Compressors from ABAC, I have asked to have a Sole ABAC Agency. This means: (i) I have to agree something with Baker Bros because they intend to distribute D.D.210/25 (and others with 25 litre tank); (ii) I have committed myself to commence a distribution of ABAC air compressors with or without Baker help. In this way we get the Agency, eliminate (or reduce) the influence of Baker upon ABAC, and limit Baker to the sale of compressor pumps only. The Sole Agency statement and, in a nutshell, our plan have to be confirmed to ABAC to eliminate misunderstandings. If we do not do this, Baker may go and sell D.D. Compressors at a very low price! … 3.2 Direct‑Driven Compressors … 3.2.2 Policy … (a) Sole Agency: We must be in the position to control all ABAC distribution in Australia and New Zealand. We have asked for it and obtained it, provided we agree something with BAKER ON THE TORNADO 210/25". (b) We have to be in the position to attack the market by surpriseandnegotiatesales with all categories, such as: # Assemblers # Industrial Distributors # Retailers … (e) Co‑operation with Baker Bros: We have to devise a stable co‑operation policy with the above mentioned firm." 20 The contents of this report demonstrate that prior to January 1994 Mr Ippaso believed that Baker Bros was interested in selling or distributing completed compressors and that he was concerned to take steps to ensure that Baker Bros was not a competitive threat to SIP's proposed plans. 21 On 5 January 1994 Mr Ippaso wrote to Dr Balma confirming the most salient points agreed during their meeting on 10 December 1993. The letter included extracts from Mr Ippaso's report of the meeting and included the following: "It was agreed that we can reconcile the main strategies for ABAC, SIP and Baker Bros. to the advantage of all the three Companies. As a basic concept, this objective can be reached by: (a) utilising the real expertise of each company; (b) requiring SIP and Baker Bros. to co‑operate; (c) concentrating the distribution of compressor pumps in Baker Bros. (d) concentrating the distribution of complete units (direct drive and beld [sic] driven compressors) in SIP Australia. (e) giving the 'Sole Agency' for ABAC complete compressors to SIP Australia. In this case SIP Australia will be able to determine, with the support of ABAC, the best solutions to increase the overall ABAC business in the area." 22 On 7 February 1994 Mr Ippaso wrote a letter to Mr Arrigoni headed "Marketing Strategy for the Distribution of Air Compressors in Australia and New Zealand". In the letter Mr Ippaso described the structure, expertise and customer coverage of Baker Bros and SIP. He referred to a meeting apparently held with Mr Andrew Baker on 26 January 1994 in which there was a discussion about co‑operation. Mr Andrew Baker said that Mr Ippaso instigated any discussions they had about Mr Ippaso's plans for the Australian market and about coming to an agreement in relation to the best way for ABAC products to be distributed in Australia. Mr Andrew Baker had no independent recollection of the meeting but did not dispute Mr Ippaso's reference to the meeting in the following terms: "They apparently wish to co‑operate and seem very nice. But at the same time, when I gave the opportunity to come back to me with explicit issues and examples, they said that [they] would prefer [to await] the return of Guy from Italy." 23 The letter then set out a number of matters under the heading "Problems and Dangers to Eliminate". There was then criticism of Baker Bros' ability to sell finished products and to provide after sales services. The following observation was then set out: "They sell at very low prices and their assemblers, who work on a consistent mark‑up, will sell the small d.d. compressors cheaply and directly to the end‑users. This will scare off all other distributors and especially the retailers who will not touch the products." An example of the very low price was then set out after which there appeared the following observation: "At the moment they are selling their ABAC pumps with a very small mark‑up which is almost suicidal (it could be increased) and becomes a disaster if the same pricing policy is implemented for the finished units." Mr Ippaso then proposed that SIP should be in charge of creating a marketing strategy for ABAC, SIP and neutral compressors together with ABAC and that Baker Bros should be in charge of distributing all ABAC components. The following conclusion was then set out: "Bearing in mind that with our proposals Baker would make more money, we should be allowed to organise everything including the pricing policy, *invoicing via SIP and in certain cases via ABAC, etc. It is our opinion that if ABAC wants a future in Australia and New Zealand, you should:-
The March 1994 agreement 31 A meeting was held at ABAC's offices in Turin on 23 and 24 March 1994. The meeting was attended by Mr Andrew Baker, Mr Ippaso, Mr Arrigoni and Dr Balma. An agreement was entered into by SIP, Baker Bros and ABAC on 24 March 1994. The terms of that agreement are not in dispute as it was reduced to writing and signed. Mr Andrew Baker and Mr Ippaso gave evidence of the discussions leading up to the execution of the agreement. Their accounts of the conversations diverged in some respects and it is necessary to consider their respective versions. 32 It is this agreement which the Commission alleges records a contract, arrangement or understanding in contravention of s 45(2) of the Act. It was in the following terms: " AGREEMENT between ABAC - SIP and BAKER BROS in relation to the distribution of ABAC direct drive air compressors in Australia
Events following the March 1994 agreement 43 Thereafter Baker Bros and SIP implemented the agreement and carried it into effect. SIP gave Baker Bros a price list of its products which included compressors with a capacity of 24 and 50 litres. Issues arose thereafter as to whether the terms of the agreement were being adhered to, particularly in relation to who was to supply particular customers. This issue was demonstrated by a letter sent by SIP over Mr Ippaso's signature to Mr Andrew Baker on 26 July 1994. The letter was in the following terms: "Dear Andrew Just a few comments to your note of 26th July, 1994 as follows: 1. Our broad strategic agreement was that Baker Bros would have covered the category of assemblers and SIP retail chains and distributors. You have been given a free hand on the whole 'assemblers' category. 2. Regarding your hand written notes near 'Larkin' and 'Fisher', I am sorry but this is your interpretation. We have been supplying those firms for a long time and they were not in discussion. 3. Another firm where we have said not to supply direct drive compressors is 'ALL TOOLS', which we are supplying with compressors and welding equipment. 4. To recap: * We have given you Robco and Power Machinery. For 'Indent' - N.Z. - even if we have been contacted, we will have them to you. * We do not need any conflict on the following SIP customers: ALL TOOLS LARKIN FISHER KINCROME Any deviation from our established and reasonable policy will create only aggravation and loss of profit for both firms. If in doubt, please, contact me." 44 On 2 August 1994 Mr Ippaso wrote to Messrs Andrew and Guy Baker in which he confirmed that he was waiting for their "final and unequivocal decision in relation to my letter of 26 July 1994". 45 On 5 August 1994 Mr Guy Baker wrote a letter to Mr Ippaso in which, in general terms, he explained how they were carrying out and giving effect to the March agreement. In the letter he pointed out that Baker Bros was sticking to the agreed discount structure. He also pointed out that they had not supplied quotations to any of what he called the "'agreed' SIP indent customers". The letter also referred to a customer, Kincrome, in respect of which there had been some confusion as to whether the customer was a Baker Bros or a SIP customer. 46 On 8 August 1994 Mr Ippaso wrote to Messrs Andrew and Guy Baker in the following terms: "Many thanks for entrusting me with your confidential data and I am very sorry that you could not make it for a meeting in Sydney. Undoubtedly we will talk on the telephone and, as per your request, I am giving you my frank and brief comments. A. AIR COMPRESSORS
Events in and between November 1997 and March 1998 56 Mr Andrew Baker had arranged to meet with ABAC representatives in Turin in November 1997, but not for the purpose of discussing anything with Mr Ippaso. He was told that Mr Ippaso would be at ABAC's offices at the same time. On 6 November 1997 there was a meeting at ABAC's Turin's offices attended by Mr Andrew Baker, Mr Ippaso, Dr Balma and Mr Arrigoni. The discussions resulted in an agreement which was recorded in a document. The discussions and agreement did not come about as a result of any initiative of Baker Bros. Although Mr Andrew Baker was asked by ABAC to sign the agreement, his reason for doing so was, in his words: "It was more to shut Ippaso up. It was more to stop him badgering us and ringing us and annoying us." The agreement provided for the preparation of a list of existing customers to be supplied by SIP and Baker Bros, the preparation of a list of the differences between compressors sold by SIP and by Baker Bros and the preparation of a list of minimum selling prices for compressors and pumps. The document was in the following terms: "Most Salient issues discussed on which to seek an agreement A. Air Compressors 1. Preparing a list of existing customers which should be supplied by Sip Australia or by Baker Bros. This list should be limited to no more than 20 existing customers. 2. Preparing a differentiation of compressors configuration considering that Sip Australia colour catalogue has already been prepared and is being printed. 3. Preparing a structure of minimum selling prices for quantities and for containers. B. Compressors pumps 1. Formulating an agreement as per points 1 and 3. C. Next steps 1. It was agreed that: 1.1 Andrew Baker will talk to his partner and brother Guy in order to agree above aspects. 1.2 Andrew Baker and Philip Ippaso will meet in Australia in order to: 1.2.1 Formulate an official letter of intent comprising all aspects of a future agreement; 1.2.2 Agree on different aspects of agreement. 2. Once letter of intent has been formulated and an agreement has been reached, then the agreement has to be written down and signed by the three parties: Sip Australia, Baker Bros and Abac 3. After the signature of the three parties the agreement will be executed [signature] [signature] [signature] Sip Australia Baker Bros Abac SpA" 57 On 18 December 1997 Mr Andrew Baker and Mr Ippaso had a telephone conversation in which they exchanged customer lists. The lists were reduced to writing and apparently exchanged by facsimile transmission. The SIP list contained the names of sixteen customers and the Baker Bros' list contained the names of twenty customers. The names of three customers were on both lists. On the following day Mr Ippaso and Mr Andrew Baker had a discussion in which they agreed that both lists were valid for belt‑driven and direct‑drive ABAC compressors. They agreed upon the names to be on each list with the exception that they were unable to agree on four names. 58 On the same day, 19 December 1997, Mr Ippaso gave Mr Gates one or two customer lists and asked him to provide him with information about any business activities the customers on the list had with SIP. Mr Ippaso did not tell Mr Gates why he wanted the information other than that he was discussing customers and their size and purchasing patterns with Baker Bros. 59 On the same day Mr Ippaso directed Mr Gates to send the customer lists by facsimile transmission to Mr John Bowering, who was then a SIP Area Sales Manager, as he wanted to discuss them with him. The lists sent by Mr Gates to Mr Bowering were the SIP and Baker Bros customer lists. 60 On 28 January 1998 Mr Ippaso sent a memorandum to Mr Bowering which he copied to Mr Gates, which attached a copy of the SIP and Baker Bros customer lists. Relevantly, the memorandum stated: "As explained this morning, in order to create a smoother modus operandi we are trying to agree with Baker Bros two lists of customers where both companies will agree not to sell ABAC produced Direct Drive and Belt Drive compressors to customers comprised in the lists of the competing firms. I am enclosing both lists (Encl: I & II). In Baker Bros list I have underlined the customers which are in dispute in this operation and for which will seek an agreement. Considering that we can concede AKEBA (W.A.), I would like for you to let me know what you think about the firms in Victoria and especially those marked 'X'. Any agreement will be valid only when finalized and put in writing. This list is 'Confidential' and, if you have a doubt, call me please." Apart from AKEBA (WA) the four customers earlier referred to were marked "X" on the lists. Mr Gates wrote on the Baker Bros list turnover figures for eleven of the customers either before or after he received the memorandum. The Baker Bros list was headed "Bakers List (1)" and the SIP list was headed "Sip List (2)", both were in Mr Gates' handwriting. The probability is that Mr Gates wrote the turnover figures and the headings on the lists and returned them to Mr Ippaso before Mr Ippaso sent the memorandum enclosing the lists to Mr Bowering and Mr Gates. Mr Gates agreed that at the time he received the memorandum he knew that the memorandum was aimed at sorting out which of SIP and Baker Bros would deal with which customers. Mr Gates' understanding was made clear in the following exchange in his cross‑examination: "MR BURNSIDE: I am suggesting to you that you understood at the time that the way you were trying to make [life] easier with Baker Bros was to sort out which of you would deal which customers?---I didn't really understand the detail of it, but I knew that it was driving at something along those lines, yes. Right, and you were trying to agree with Baker Bros, weren't you - two lists of customers where you would sell to your list and they would sell to their list and you wouldn't cut across each other's tracks?---Yes. Yes, and that was what you understood the process was?---Yes, I did. At what stage I understood that I can't remember exactly, but at some stage I must have understood that. Yes, and certainly you must have understood it by the time you finished your annotation of page 459?---Yes, yes. And that's why you headed one Bakers List and the other SIP List?---Well, I suppose one was from them and one was from us. Yes, but you knew that what you were doing was deciding which ones could fairly be treated as their customers and which ones could fairly be treated as yours?---It was a process of information gathering in order to arrive at such a decision. The information gathering took place; the decision was never arrived at and the thing was never implemented." 61 After Mr Bowering received the memorandum he said he telephoned Mr Gates and asked him if he realised that the proposed arrangement between SIP and Baker Bros may not be legal. According to Mr Bowering, Mr Gates responded with words to the effect that he should not worry about it. Mr Gates could not recall having this conversation and although he said that to the best of his recollection it did not occur, I am satisfied that it occurred. Mr Bowering was a credible witness and I am satisfied I should accept his evidence as truthful. 62 Mr Bowering responded to the memorandum on the following day with his views on which customers SIP could concede to Baker Bros without incurring a loss of business. 63 On 29 January 1998 Mr Ippaso wrote to Mr Andrew Baker. The letter stated, relevantly: " … I need you to call me in relation to our telephone conversation of 19.12.97 before my departure for Europe. To recap what we discussed: 1. On 18.12.97 you sent me a list of the firms you want to retain for direct supplies of Direct Drive and Belt Drive ABAC manufactured compressors. 2. On the same day I sent you a similar list. 3. On 19.12.97 I telephoned you and I said that 3.1 Broadly speaking your list was going to be accepted except the following firms = . Akeba (Eventually I said I could concede on this firm) . Bridges Wade . Glenfords . Tool Power . United Tools 3.2 We should meet in order to discuss the list and formalise any agreement, bearing in mind that in order for the operation to be finalised and made operative the whole matter has to be in writing and signed by the three parties. 3.3 At that stage the lists were knowledge to you and me alone and that my people did not know anything. …" 64 On 31 January 1998 Mr Andrew Baker replied to Mr Ippaso's letter in the following relevant terms: "A few things need comments in reply to our telephone conversation yesterday and your fax 29 Jan 98. a) We will come to Sydney to finalise our lists and formalise agreement. b) We agreed that the only customers still to discuss are :- Glenfords Tool Power United Tools c) All other customers on my list will not be canvassed by SIP All other customers on your list will not be canvassed by Baker Bros e) I do not understand that this agreement must be signed by all parties until it becomes operative. d) A copy of quotation for B3000/2,5 compressor package follows. e) After we exchanged lists, we spoke prior to your departure to Europe and it was agreed that where there was no conflicting interests with a customer, the other party would respect this and not contact that customer. …" 65 On 2 February 1998 Mr Ippaso replied to Mr Andrew Baker's letter in the following terms: "Just a few words to thank you for your quotation dated 31st January, 1998, and for your fax of the same date. I have noted your comments and since you are coming to Sydney I think it is sensible to expand the most salient aspects of an Agreement at our meeting. A few clarifications, however, are as follows:- 1. All of the three parties involved in the 'Original Agreement' (SIP, ABAC, BAKER BROS) on 6th November, 1997, agreed what has to be discussed and that the whole matter becomes operative only when the final agreement has been reached and signed by the three parties. Our Original Agreement of 6‑11‑1997 confirms that. 2. The reasons are obvious and I am sure you will realize that:- 2.1 'VERBA VOLANT SCRIPTA MANENT' (Words fly but written things remain). With a fluid situation like the one we are experiencing, it is advisable to know exactly what we are agreeing. This will eliminate future doubts and misunderstandings. 2.2 A lot of aspects have to be discussed, independently from a mere list. 2.3 In terms of directed imported finished compressors any superficiality will hit us but not you; you have nothing to lose, because we are talking about a market (Direct Drive and Belt Compressors) created by us at SIP Australia. 2.4 We gave you a 'broad' view of ours on your list but we have to discuss the acceptance of both lists also in the light of what is our present turnover with them." 66 On 17 February 1988 Mr Ippaso told Mr Bowering that he would be meeting with Baker Bros at 11.00am that day to confirm the customer lists for the purposes of the agreement. 67 On 17 February 1998 Messrs Andrew and Guy Baker met with Mr Ippaso and Mr Gates in SIP's offices in Sydney in order to finalise the customer lists and formalise the agreement. The meeting lasted from about 11.00am to 3.30pm. The main matter discussed was the customer lists and who was to service the customers. Mr Gates was not present for the whole meeting. He was called into it by Mr Ippaso after it had commenced and remained for about half an hour to an hour. (There was disagreement between the witnesses as to the time during which Mr Gates was present. The difference is of no consequence, the relevant point being that Mr Gates was not present for the whole meeting). Mr Gates was asked by Mr Ippaso to describe the size and general purchasing activities of a number of SIP customers on the lists and what they were likely to buy from SIP in the future. Mr Gates talked about his estimate of the turnover and goods purchased of ten or twelve SIP customers. Mr Ippaso then asked Mr Gates to leave the room. Apart from providing information sought from him about SIP customers, Mr Gates did not otherwise participate in the meeting. In the course of the meeting Mr Ippaso and Messrs Andrew and Guy Baker reached agreement as to which of a number of customers would be regarded as the customer of SIP or the customer of Baker Bros. However they could not reach agreement on a number of the customers as to which company the customers belonged. 68 I am satisfied that at this point of time Mr Ippaso and Messrs Andrew and Guy Baker were well advanced on a proposed agreement whereby they would divide up customers between them and would agree not to sell to each other's customers. Although Mr Ippaso vacillated on whether he was trying to reach an agreement with Baker Bros, I am satisfied that he was doing so and that he was an instrumental moving party in that activity. Although he said in cross‑examination that he was trying to agree with Baker Bros on two lists of customers where SIP and Baker Bros would not sell to each other's customers and that he was doing that under duress from ABAC, I reject that evidence. There is no evidence of any duress being applied by ABAC. Mr Ippaso was not candid in his evidence about what he was trying to achieve with this proposed agreement as the following exchange in cross‑examination disclosed: "You were trying to agree with Baker Bros two lists of customers where both companies would agree not to sell ABAC compressors to customers of the competing firm?---Yes. You were trying to agree that, weren't you?---I was not interested in agreeing anything. Have a look at the first paragraph in the memorandum, if you would?---Yes. … MR BURNSIDE: Was that true or was that a lie?---Yes, this was true under duress by ABAC. It was true?---Yes. Okay. You wanted to try and reach that agreement with the Baker Bros on 18 February?---Actually I didn't want to reach anything." 69 A document was prepared, presumably by SIP because it is on SIP letterhead, entitled "Draft Agreement reached in Sydney on 17th February 1998". It was in the following terms: "1. The Parties SIP Australia Pty Ltd - Sydney Baker Bros Import & Exporters - Melbourne ABAC and Balma Companies - Italy 2. Objective To find an agreement by which both Companies (SIP Australia and Baker Bros) decide not to supply the products mentioned in paragraph 3 to the firms indicated in the enclosed lists. 3. Products Direct Drive and Belt Driven Air Compressors produced by ABAC with their or other Trademarks or assembled in Australia with ABAC pumps. The products involved in this agreement do not comprehend any other ABAC products such as componentry or compressor pumps. 4. Agreement It is agreed that both Companies (SIP Australia and Baker Bros) undertake not to supply products as at paragraph 3 to firms comprised in the enclosed lists. In relation to establishing minimum nett selling prices as per indication in the letter of intent dated 6th November 1997, it is agreed that in view of the fluid price situation created in Australia by a massive attack of some manufacturers it is not advisable to formulate any price agreement." There was attached to the agreement Baker Bros' list of customers (sixteen in all) and SIP's list of customers (thirteen in all). The draft agreement recorded what was agreed between the parties at the meeting on 17 February 1998. 70 On the same day Mr Ippaso told Mr Bowering and other SIP area managers that they were not to quote or supply ABAC compressors to any trade customer on the Baker Bros list and that if they were approached by one of Baker Bros' customers, they were not to quote any discount from the wholesale list price. Mr Bowering also gave evidence that on a number of occasions during 1994, Mr Ippaso told him that there was an arrangement that SIP did not sell compressor components to manufacturers and Baker Bros did not sell made‑up units in the marketplace. Mr Ippaso also told Mr Bowering that he should not offer discounts on quotations to Baker Bros' customers. 71 On 24 February 1998 Mr Ippaso received a further draft agreement from Baker Bros in the following terms: "1. The Parties SIP Australia Pty Ltd - Sydney Baker Bros (Aust) Pty Ltd - Melbourne Abac Spa - Robassomero 2. Objectives To find an agreement by which both companies (SIP Australia and Baker Bros) decide not to supply products mentioned in paragraph 3 to the firms indicated on the attached lists. 3. Products i) Units assembled by Abac using Abac Grouppi Compressori ii) UnitsassembledbyBaker BrosusingAbacGrouppiCompressori The products involved in this agreement do not include any other Abac products, such as componentry or Abac pumps. SIP Australia indicates that they require these products available for supply on a spare parts basis and they are not interested in volume sales of these products. 4. Agreement It is agreed that SIP Australia and Baker Bros undertake not to supply products listed in paragraph 3 to firms on the attached lists. In relation to establishing a minimum selling price (as indicated in letter of intent dated 6th November 1997) it is agreed that in view of the fluid price situation created in Australia by a massive attack of some manufacturers it is not advisable to formulate any price agreement." 72 The draft agreement was never finalised, executed or put into effect. 73 On 18 March 1998 Mr Ippaso wrote to Mr Andrew Baker referring to the draft agreement dated 24 February 1998. He referred to changes he would like to make and enquired whether Mr Baker was still interested in finalising the agreement. He noted that "up to now we have religiously observed our agreement re finished compressors". Mr Ippaso in cross‑examination could not recall the agreement to which he referred in his letter. He did not think that it meant an agreement that was already in place and that had been operating for some significant time. I do not accept Mr Ippaso's evidence on this issue. It is not credible. He did not suggest that any other agreement had been put in place other than the March 1994 agreement. I am satisfied that Mr Ippaso was informing Mr Andrew Baker that SIP had observed the March 1994 agreement. The letter admits of no other interpretation. 74 The evidence did not disclose whether Mr Andrew Baker replied to this letter, but the agreement was never finalised or executed.
Did ss 45(5) and 45(6) exclude the March 1994 agreement and the proposed agreement in November 1997/February 1998 from the operation of s 45? 75 SIP's principal defence was that the March 1994 agreement and the proposed agreement in November 1997/February 1998 contained provisions which: (a) if given effect to would, but for the operation of the competition test in s 47(10), result in a contravention of s 47(2); (b) related to conduct that contravened s 48. It followed, submitted SIP, that as a result of the operation of ss 45(5) and 45(6) of the Act there was no contravention of s 45. Section 45(5) provides: "This section does not apply to or in relation to: … (c) a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding in so far as the provision relates to: (i) conduct that contravenes section 48; or …" Section 45(6) provides: "The making of a contract, arrangement or understanding does not constitute a contravention of this section by reason that the contract, arrangement or understanding contains a provision the giving effect to which would, or would but for the operation of subsection 47(10) or 88(8) or section 93, constitute a contravention of section 47 and this section does not apply to or in relation to the giving effect to a provision of a contract, arrangement or understanding by way of: (a) engaging in conduct that contravenes, or would but for the operation of subsection 47(10) or 88(8) or section 93 contravene, section 47; or (b) …" 76 Whether these provisions result in SIP and Baker Bros not contravening s 45 by making the March 1994 agreement or attempting to conclude an agreement in November 1997/February 1998 depends on SIP establishing that those agreements are to be construed only as vertical agreements between a distributor, ABAC, and two of its customers, SIP and Baker Bros, creating rights and obligations between ABAC on the one hand and SIP and Baker Bros on the other hand. However if they are also to be construed as constituting or evidencing horizontal agreements between SIP and Baker Bros creating rights and obligations between SIP and Baker Bros, SIP's defence, based on ss 45(5) and (6) will fail. 77 The critical issue to be determined is whether the course of conduct of SIP and Baker Bros and the documentation which came into existence is such that a finding can be made that, notwithstanding the fact that ABAC was a signatory to the agreement signed on 24 March 1994, SIP and Baker Bros agreed between themselves by that agreement that they would divide the market, or part of the market relating to particular customers, between themselves and would charge customers particular prices. 78 The Commission's case was that such an agreement between SIP and Baker Bros was to be found in Mr Ippaso's memorandum on 8 March 1994 (par [26] above), Mr Andrew Baker's letter on 18 March 1994 (par [30] above), the March 1994 agreement document and in conversations on 3, 23 and 24 March 1994. 79 SIP's case was that nothing was agreed between SIP and Baker Bros until ABAC, as supplier, imposed terms of supply upon each of them in terms which, relevantly, brought the agreement within s 47(2)(f) of the Act. The Commission's response was that an agreement between SIP and Baker Bros as to market sharing and price fixing can be spelled out of the written agreement signed on 24 March 1994 and the conduct and dialogue between SIP and Baker Bros which preceded it. 80 I do not consider that it is a bar to finding a horizontal agreement between SIP and Baker Bros containing rights and obligations between them that the agreement signed on 24 March 1994 was a tripartite agreement, one of the parties to which was a supplier and the other two parties to which were customers of the supplier. The form and structure of the agreement does not necessarily dictate the substance of any contract, arrangement or understanding which might be distilled from the form and structure of the document. One can conceive of situations in which a distribution agreement between a distributor and more than one customer of the distributor contained provisions whereby the customers entered into obligations, or restrictions on conduct, between each other. 81 SIP started out, in December 1993, by seeking to obtain a sole agency for ABAC's fully assembled compressors. SIP was concerned about competition from Baker Bros which was proposing to import these compressors and the prices Baker Bros might charge. Mr Ippaso recognised in his report of the meeting on 10 December 1993 that he had "to agree something with Baker Bros" and had "to devise a stable co‑operation policy" with Baker Bros. He was concerned that if his sole agency proposal was not implemented Baker Bros might sell direct‑drive compressors "at a very low price". 82 Mr Ippaso progressed his need to reach an agreement with Baker Bros in relation to the distribution of fully assembled ABAC compressors in Australia at the meeting with Messrs Andrew and Guy Baker on 3 March 1994. In his memorandum of the discussion at that meeting he proposed co‑operation on direct‑drive compressors between the two companies in relation to lists of customers and level of prices, albeit within a context of SIP having a sole agency for the importation of ABAC products. Further, on 14 March 1994 Mr Ippaso wrote to Baker Bros referring to activities of SIP's enlarged sales organisation which "could partially jeopardise or affect our agreement at large on customers" if SIP did not get a quick answer to SIP's proposals. 83 On 18 March 1994 Mr Guy Baker rejected the proposal based on SIP having a sole agency for ABAC products as, in substance, he wanted a direct relationship with ABAC. Nevertheless he looked forward to further discussion in relation to dividing the customers, setting a pricing structure and organising a marketing policy. It was precisely these matters which were dealt with in the terms of the agreement signed on 24 March 1994. Although Mr Ippaso's first choice was for SIP to obtain a sole agency from ABAC, when that was not available to him he was prepared to make an agreement with Baker Bros, albeit in the context of the tripartite agreement. 84 Although the March 1994 agreement is described as an agreement between ABAC, SIP and Baker Bros in relation to the distribution of ABAC direct‑drive air compressors in Australia, I am satisfied that it also records and evidences provisions which may properly be characterised as part of a contract, arrangement or understanding between SIP and Baker Bros. As I have found earlier, Mr Ippaso was the driving force behind the March 1994 agreement as it was he who wanted to reach an accommodation with Baker Bros. I reject SIP's submission that ABAC was the driving force behind the March 1994 agreement; rather the driving force was Mr Ippaso. ABAC was the facilitator of that agreement and it provided a framework or structure within which SIP and Baker Bros could reach an agreement between themselves as to how they would divide up customers in the market between them and as to the prices they would agree each other would charge those customers. ABAC was a party to the agreement, but there were no express provisions in the document which imposed obligations on ABAC or created rights in favour of it, although it did in an enigmatic way "refer" to the 21 September 1988 Distribution Agreement between ABAC and Baker Bros without otherwise making any provisions in relation to that agreement. It was convenient to structure the agreement around ABAC, but the substance of the agreement was to impose obligations on and between SIP and Baker Bros as to market sharing and pricing, rather than to provide a substantive role in the agreement for ABAC. 85 SIP pointed to numerous features of the March 1994 agreement which it submitted demonstrated the vertical nature of the agreement. For example, it referred to: · The different levels of price to be charged by SIP and Baker Bros which reflected different functioning levels of the market into which they sold - Baker Bros selling to assemblers and some industrial distributors who were at an earlier stage of the supply chain than retailers and automotive distributors to whom SIP was selling. It was said that a horizontal agreement would be more likely to fix prices at the same level for each party to the agreement. · The main objective of the agreement set out in cl 2(par [32] above) relating to the "smooth distribution of direct drive compressors". · The heading to the agreement "in relation to the distribution" of ABAC compressors. 86 Even if one accepts that the March 1994 agreement may be characterised as a vertical agreement, that is to say one between a distributor and two of its customers, I am satisfied that the document contained provisions whereby SIP and Baker Bros accepted and undertook mutual obligations to each other, that is to say the agreement created rights and obligations between, and enforceable by and against, SIP and Baker Bros. To that extent, the document contained and evidenced a horizontal agreement between SIP and Baker Bros. 87 I draw attention to the following provisions in the March 1994 agreement which created or identified mutual rights and obligations between SIP and Baker Bros: (a) The main objective is to proceed speedily and aggressively in a smooth distribution of ABAC direct‑drive compressors by maximising "our common efforts, allocating certain marketing functions to the different firms and focusing the channels and customers to attack and sell to." - cl 2; (b) Baker Bros would sell to assemblers, engineering and power tool distributors and the customers specifically identified in enclosures to the agreement and SIP would sell to chains of major retailers and automotive dealers - cl 4; (c) Baker Bros would pay SIP a commission of 3% on the price of the direct‑drive compressors with a capacity of 24 and 50 litres that it purchased from ABAC - cl 5; (d) Mr Ippaso and Mr Andrew Baker would consult each other on important matters and would meet once every quarter - cl 6; (e) SIP and Baker Bros would stick to the price levels set out in cl 7(a) and (b) of the document - cl 7. 88 SIP submitted that the March 1994 agreement was in ABAC's interests and that cl 2 in particular was consistent with ABAC wishing to reduce competition amongst its distributors for its, ABAC's, benefit. It was said that such a provision, insofar as ABAC was a party to it, was conduct which fell within s 47(2) of the Act. It was also said that cl 7 was consistent with a strategy by ABAC for smooth distribution of its products. I am prepared to accept those submissions for present purposes, particularly bearing in mind that the agreement is described as an agreement between the three parties, ABAC, SIP and Baker Bros in relation to the distribution of ABAC compressors. I am also prepared to accept SIP's submission that Baker Bros entered into the March 1994 agreement because ABAC asked it to do so and because it was dependant upon ABAC for the supply of products. 89 But accepting those submissions is not to deny or negate a finding or conclusion that the agreement, properly understood and construed, contained provisions which constituted and evidenced terms of an agreement between SIP and Baker Bros and that, concurrently with an agreement between ABAC, SIP and Baker Bros, there came into existence an agreement between SIP and Baker Bros. Put another way, by the agreement signed on 24 March 1994, SIP and Baker Bros not only bound themselves to ABAC to perform the agreement for ABAC but also bound themselves to each other to perform the agreement for the benefit of each other in respect of the provisions to which I have referred in par [87] above. In particular, SIP and Baker Bros agreed with each other that each would only supply certain products to their identified customers and would not supply the other's customers. The purpose of their agreement was to divide the market, or part of the market, between them and agree with each other as to the prices they would charge for their products. When the agreement signed on 24 March 1994 is understood in this way, it exposes the fallacy of SIP's reliance on ss 45(6) and 45(5)(c)(i) of the Act. 90 The Commission submitted that there were no obligations imposed upon ABAC under the March 1994 agreement so that it was not an agreement to supply goods which could come within s 47(2) of the Act. I do not accept that submission. Section 47(2) does not apply to agreements to supply goods on the proscribed conditions. Rather it catches the supply of goods on the proscribed conditions. In this context it should be noted that the term "condition", when used in s 47(2) means, according to s 47(13): "… any condition, whether direct or indirect and whether having legal or equitable force or not, and includes a reference to a condition the existence or nature of which is ascertainable only by inference from the conduct of persons or from other relevant circumstances; …". Accordingly any supply of compressors by ABAC to SIP or Baker Bros after the making of the March 1994 agreement which was governed by the terms of the March 1994 agreement would fall within s 47(2) and therefore, as against ABAC, would come within s 45(6). I am satisfied that ABAC, SIP and Baker Bros intended that the March 1994 agreement would govern the supply thereafter of direct‑drive compressors by ABAC to SIP and Baker Bros. By virtue of the agreement any direct‑drive compressor sold thereafter to SIP was not to be re‑sold by SIP to Baker Bros' customers. SIP and Baker Bros were not to supply each other's customers.
SIP's reliance on s 45(6) of the Act: the exclusive dealing submission 91 SIP submitted that in determining whether the exclusion in s 45(6) applied to the making of, and the giving effect to, the March 1994 agreement, two questions were to be asked: · Would the giving effect to the provision constitute a contravention of s 47(2) but for the competition test in s 47(10)? This question is referable to the making of the March 1994 agreement. · Is the engaging in conduct that contravenes s 47(2), but for the competition test, the giving effect to the provision? This question is referable to giving effect to the March 1994 agreement. When these questions are asked by reference to the agreement between ABAC and each of SIP and Baker Bros, and by reference to ABAC's supply of direct‑drive compressors to each of them, the answer is that s 45(6) has operative effect because of the supply by ABAC to SIP and Baker Bros on the relevant proscribed condition. The prohibition in s 47(2)(f) is on a corporation supplying or offering to supply goods to a customer on condition that the goods not be re‑supplied by the customer to particular persons. 92 Accordingly s 45(6) excludes from the operation of s 45(2) the vertical or distribution agreement between ABAC on the one hand and SIP and Baker Bros on the other hand. This exclusion is in accordance with the traditional view of s 45 which is that it does not apply to vertical exclusive dealing arrangements which are regulated by s 47: South Sydney District Rugby League Football Club Ltd v News Ltd (1999) 169 ALR 120, at 135 per Hely J; (2000) 177 ALR 611, at 680 per Finn J. This proposition was accepted on the appeal: South Sydney District Rugby League Football Club Ltd v News Ltd (2001) 181 ALR 188, at 211 per Heerey J, at 246 per Merkel J. See also Australian Competition and Consumer Commission v Visy Paper Pty Ltd (2002) 186 ALR 731, at 749. 93 It can be seen that s 45(6) only excludes the making of a contract from the operation of s 45 where the contract contains a provision, the giving effect to which would, but for the competition test, constitute a contravention of s 47(2). The relevant provision, for present purposes, is s 47(2)(f) which provides: "(2) A corporation engages in the practice of exclusive dealing if the corporation: (a) supplies, or offers to supply, goods or services; … on the condition that the person to whom the corporation supplies, or offers or proposes to supply, the goods or services or, if that person is a body corporate, a body corporate related to that body corporate: … (f) in the case where the corporation supplies or would supply goods or services, will not re-supply the goods or services to any person, or will not, or will not except to a limited extent, re-supply the goods or services: (i) to particular persons or classes of persons or to persons other than particular persons or classes of persons; or (ii) in particular places or classes of places or in places other than particular places or classes of places." The giving effect to of the provision in cl 4 of the agreement relied on by SIP is that ABAC supply or offer to supply direct‑drive compressors to SIP and to Baker Bros on condition that they will not re‑supply those compressors to particular persons, namely each other's customers, a contravention of s 47(2)(f)(i). In this case, the contravention of s 47(2)(f)(i) by ABAC occurs because ABAC gives effect to the provision of the agreement. 94 But s 45(6) does not exclude, as a contravention of s 45(2)(a), the making of a contract whereby SIP and Baker Bros agree, between themselves, by way of obligation to each other, to share the market and divide up customers or potential customers between them on the basis that they will not supply compressors, supplied to them by ABAC, to each other's customers. When each of SIP and Baker Bros give effect to this provision, found in cl 4 (par [32] above), no contravention of s 47(2)(f)(i) occurs as neither is supplying compressors to the other on the proscribed condition or at all. Section 45(6) excludes the component of the vertical agreement from the operation of s 45 but not the component of the horizontal agreement. 95 Put another way, s 45(6) excludes the March 1994 agreement from the operation of s 45 to the extent that, and insofar as, cl 4 of that agreement contains a provision that ABAC agrees to supply direct‑drive compressors to SIP and to Baker Bros on the condition set out in cl 4, or ABAC supplies direct‑drive compressors to SIP and Baker Bros subsequently on the terms of cl 4. That is consistent with the traditional view of s 45. But that traditional view is not impinged upon to the extent that, and insofar as, SIP and Baker Bros agree with each other in the terms of cl 4. It is important to recognise that s 45(6) excludes from the operation of s 45 the making of an agreement, not where it contains a provision in particular terms, but rather where the giving effect to the provision would, but for the competition test, constitute a contravention of s 47. Read this way, the March 1994 agreement is excluded from the operation of s 45 where ABAC agrees to supply direct‑drive compressors to SIP and Baker Bros on the condition contained in cl 4. But the March 1994 agreement is not so excluded where, by its terms, SIP and Baker Bros do not agree to supply direct‑drive compressors to each other on a condition, but rather agree not to sell compressors supplied to them by ABAC to each other's customers. 96 SIP submitted that the fact that both SIP and Baker Bros were parties to the same agreement did not mean that s 47(2) of the Act did not apply, nor did it mean that s 45(6) of the Act did not have any application. That may be so insofar as the March 1994 agreement is seen as an agreement between the supplier and two of its customers whereby the supplier agrees with each of the two customers as to the terms upon which it will supply each of those customers. The submission fails to take into account the fact that the two customers make an agreement between themselves and accept and impose obligations upon each other enforceable at the suit of each other. 97 SIP submitted that the usual type of s 47(2) arrangement was one imposed by a supplier in order to reduce competition between its distribution outlets, and that where there was more than one distributor of the supplier's products commonly the restriction would be provided for in separate distributorship agreements between the supplier and each distributor. No s 45 issue would arise because there would be no agreement or understanding between the distributors. That may be so in what was said to be the usual type of distribution arrangement with multiple agreements with individual distributors. But the March 1994 agreement is not what was said to be the usual case. In the present case two customers of the supplier are parties to the one agreement and they accept obligations from, and impose obligations upon, each other. 98 SIP then submitted that there was no reason why a supplier might not enter into one agreement with a number of distributors and include a provision that each distributor should sell only to certain categories of customer or within an identified geographic area. Whether such an agreement ought to be regulated as a vertical dealing under s 47, and so excluded from the operation of s 45 by s 45(6), depends upon the terms of the agreement and whether one can distil out of it a horizontal agreement between the distributors. I am satisfied, as I have found, that an agreement between SIP and Baker Bros can be distilled out of the terms of the March 1994 agreement in circumstances where s 47(2) of the Act has no operation.
SIP's reliance on s 45(5) of the Act: the resale price maintenance submission 99 I turn to SIP's contention that the March 1994 agreement related to conduct by ABAC which resulted in a contravention of s 48 of the Act. Section 45(5) excludes from the operation of s 45 a provision of a contract where the provision relates to conduct that contravenes s 48, that is to say, conduct which falls within s 96(3) of the Act. The relevant provision for present purposes is s 96(3)(c) and perhaps s 96(3)(b). When ABAC, as a supplier, enters into an agreement with either SIP or Baker Bros or, for that matter, both of them, and it is a term of that agreement that SIP and Baker Bros will not sell compressors supplied by ABAC at a price less than a price specified by ABAC, there is a contravention of s 96(3) by ABAC because ABAC has entered into the agreement with SIP and with Baker Bros. 100 But there is no contravention of ss 48 and 96(3)(c) or s 96(3)(b), or of any other sub‑paragraph of s 96(3), when SIP and Baker Bros agree between themselves, as they did in cl 7 of the agreement (par [32] above), that they will not sell compressors at a price less than the price specified in the agreement. In such circumstances neither is a supplier to the other and there is no situation of a supplier supplying goods on terms that its customer will not sell the goods at a price less than the price specified by the supplier. Put shortly, s 45(5) excludes the component of the vertical agreement from the operation of s 45 but not the component of the horizontal agreement. 101 This conclusion is consistent with the reasoning of Fisher J in Trade Practices Commission v David Jones Pty Ltd (Australia) (1986) 13 FCR 446 where his Honour said at 473‑474: "It is important to note that s 45(5)(c) does not refer to and exclude from s 45 an understanding which includes a provision relating to conduct contravening s 48. It merely provides that the Act does not apply to or in relation to the provision relating to such conduct. Therefore, s 45(5)(c) does not apply to exclude the understanding from s 45 but only a particular provision of the understanding." 102 SIP also submitted that the Commission's case, based on the fact that the March 1994 agreement contained an exclusionary provision within s 4D(1), failed because the Commission had not established that Baker Bros' subjective purpose in agreeing to the provision in relation to market sharing of customers was an illegal purpose. It was said that the evidence was that Baker Bros' purpose in entering into the agreement was to keep a positive working relationship with ABAC. It was also said that the purpose of SIP and Baker Bros had to be a common purpose. 103 It is true that Mr Andrew Baker said that he agreed to the proposed arrangement because Mr Arrigoni and Dr Balma asked him to do so, and that Baker Bros entered into the agreement to keep a positive working relationship with ABAC who was the lifeline of its business. But to say that that was his purpose in agreeing to the exclusionary provision is to confuse motive with purpose. Mr Andrew Baker's motive for entering into the agreement was to keep the peace with ABAC. His purpose in so doing was to achieve a market‑sharing and price‑fixing situation. Further, that purpose was shared by Mr Ippaso and thereby by SIP. 104 It was the intended result of the March 1994 agreement, that is, intended by Mr Andrew Baker on behalf of Baker Bros and Mr Ippaso on behalf of SIP, that the market‑sharing of customers and price‑fixing provided for in the agreement be put in place. That was the effect they sought to achieve. Put shortly, as Heerey J (who dissented in the result) accepted in South Sydney District Rugby League Football Club Ltd v News Ltd (supra) at 202, one's purpose is "what you wish to achieve" (see also Merkel J at 246). Heerey J adopted the construction placed on "purpose" in s 260 of the Income Tax Assessment Act 1936 (Cth) by the Privy Council in Newton v Federal Commissioner of Taxation [1958] AC 450, at 465: "The word 'purpose' means, not motive but the effect which it is sought to achieve - the end in view." (See also ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) (1990) 27 FCR 460, at 464‑467). 105 SIP submitted that there were numerous instances of SIP acting contrary to the market sharing provisions in cl 4 of the March 1994 agreement. That may be so, but I am satisfied that both SIP and Baker Bros in fact implemented the March 1994 agreement as to market sharing and pricing. So much was admitted by Mr Ippaso in his letter of 8 August 1994 (par [46] above) and in his letter of 18 March 1998 when he noted that "up to now we have religiously observed our agreement re finished compressors". That SIP carried the March 1994 agreement into effect was also acknowledged by SIP in its submissions when it accepted that the evidence showed there was "some limited compliance with the customer sharing provisions by SIP". That is not to say that from time to time, both SIP and Baker Bros did not observe the agreement. The fact remains that the market sharing and price‑fixing provisions of the March 1994 agreement were given effect by SIP. 106 Although SIP and Baker Bros operated at different functional levels of the market at the time of the March 1994 agreement I am satisfied that the market sharing provisions of the agreement in cl 4 constituted an exclusionary provision between two companies, SIP and Baker Bros, where, for the purposes of the definition of an exclusionary provision in s 4D(2) of the Act, Baker Bros was, or was likely to be, or, but for cl 4 of the agreement, would be or would be likely to be, in competition with SIP in relation to the supply of finished or assembled compressors. 107 Mr Andrew Baker identified certain customers in respect of which there was an overlap with SIP. Although that evidence was challenged I am satisfied there was an overlap of customers as at March 1994. However it is significant that at the end of 1993 Baker Bros was proposing to import finished compressors for sale in competition with SIP. This was recognised by, and was a matter of concern to, Mr Ippaso as recorded in his memorandum of the meeting on 10 December 1993. Mr Andrew Baker's evidence, which I accept, was that by the end of 1993 Baker Bros had decided to import complete 2.5 litre and 24 litre direct‑drive compressors. The sale of such units by Baker Bros would have competed with SIP. As Mr Andrew Baker put it: "There was a good market for these sizes of direct drive compressors with handymen and tradespeople." Baker Bros' first order for such compressors was placed in late November 1993, the invoice was received on or about 31 January 1994 and the compressors were received in Melbourne around mid‑March 1994.
Findings 108 I am satisfied that: (a) The making of the March 1994 agreement by SIP contravened s 45(2)(a)(i) of the Act. It contained an exclusionary provision within s 4D(1) of the Act. It was made between competitors, SIP and Baker Bros, and it divided up the market for direct‑drive compressors with a receiver capacity of 24 and 50 litres and for compressor parts between SIP and Baker Bros. The purpose of the agreement was to achieve that object, that is, to prevent, restrict or limit the supply of compressors and compressor parts to the respective customers of SIP and Baker Bros. Accordingly there was a contravention by SIP and Baker Bros. (b) The making of the March 1994 agreement by SIP contravened s 45(2)(a)(ii) of the Act having regard to the provisions of s 45A of the Act, as it contained provisions which had the purpose of fixing, controlling or maintaining the prices at which SIP and Baker Bros would sell the compressors. So much is clear from cl 7 of the March 1994 agreement which states, inter alia, "It was agreed that both parties operating in Australia will stick to the following price levels …". By virtue of the operation of s 45A this provision is deemed to have had the purpose, or to have had or have been likely to have the effect, of substantially lessening competition. Accordingly there was a contravention by SIP and Baker Bros. (c) Mr Ippaso was directly knowingly concerned in, and a party to, SIP's contraventions of s 45(2)(a)(i) and s 45(2)(a)(ii) of the Act and is therefore liable to a penalty under s 76(1) of the Act. (d) SIP contravened s 45(2)(b)(i) of the Act by giving effect to the March 1994 agreement in respect of the market sharing provisions of the agreement. (e) SIP contravened s 45(2)(b)(ii) of the Act by giving effect to the price fixing provisions of the March 1994 agreement. (f) Mr Ippaso was directly knowingly concerned in, and a party to, SIP's contraventions of s 45(2)(b)(i) and s 45(2)(b)(ii) of the Act and is therefore liable to a penalty under s 76(1) of the Act. 109 I am not satisfied that SIP attempted in or about August 1994 to vary the March 1994 agreement so as to broaden its scope to apply to all compressors and compressor product lines imported into Australia by Baker Bros or SIP, or that SIP attempted to contravene s 45(2)(a)(i) of the Act in or about August 1994. In amplification of the allegation of an attempt to vary the March 1994 agreement, the Commission particularised Mr Ippaso's letter of 8 August 1994 (par [46] above) and sought to draw an implication of that attempt from later attempts in ABAC's letter of 21 October 1994 seeking Mr Ippaso's comments on the SIP brochure (par 48] above), Mr Ippaso's letter of 27 November 1995 to Messrs Andrew and Guy Baker (par [52] above) and a letter on 22 August 1997 from SIP to ABAC. I am not satisfied that Mr Ippaso's letter of 8 August 1994 was an attempt to vary the March 1994 agreement. Rather it was couched in terms of recording what the March 1994 agreement covered. 110 I do not consider the correspondence after the letter of 8 August 1994 to be supportive of an attempt in or about August 1994 to vary the March 1994 agreement. It is too remote in point of time but, in any event, the correspondence rather relates to SIP's complaints about the manner in which Baker Bros had observed, or had not been observing, the March 1994 agreement. Mr Ippaso's letters and complaints were couched in terms of his understanding as to the terms of the March 1994 agreement. Rather than seeking to widen the agreement, he was complaining, whether he was right or wrong in his interpretation, that the agreement was not being observed by Baker Bros. His dissemination of the sales brochure in October 1994 was more a response to his concern about Baker Bros' activities than an attempt to vary and widen the March 1994 agreement. 111 I am not satisfied that SIP or Mr Ippaso sought to persuade, or in fact persuaded, ABAC to induce Baker Bros to enter into the March 1994 agreement and thereby induced ABAC to contravene the resale price maintenance provisions of ss 48 and 96 of the Act. Mr Ippaso's first choice was to obtain a sole agency but he was not successful. The documentation relied on by the Commission does not support the allegation of SIP or Mr Ippaso seeking to persuade ABAC to impose resale price maintenance on Baker Bros. Although Mr Ippaso's letter of 7 February 1994 and his memorandum of 8 March 1994 contain references to pricing, those references were made in the context of SIP having a sole agency for ABAC products in Australia, or in the context of all Baker Bros purchases from ABAC being channelled through SIP. I do not consider that the fact that Mr Ippaso signed the March 1994 agreement on behalf of SIP warrants a finding that SIP or Mr Ippaso persuaded ABAC to induce Baker Bros to enter into that agreement and thereby induced ABAC to contravene ss 48 and 96 of the Act. 112 An attempt to induce particular conduct can take a number of forms. As is made clear by s 76(1)(d) of the Act, an inducement may occur although no threat or promise is involved. Section 76(1)(d) of the Act empowers a court to impose a penalty where a person has induced or attempted to induce a person to contravene a provision of the Act "whether by threats or promises or otherwise". What is required for an inducement is that there be an affirmative or positive act or course of conduct directed to the person who is said to be the object of the inducement. Accordingly "mere persuasion, with no promise or threat, may well be an attempt to induce": The Heating Centre Pty Ltd v Trade Practices Commission (1986) 9 FCR 153 at 164. See also Yorke v Lucas (1983) 49 ALR 672, at 681‑682 (affirmed on appeal (1985) 158 CLR 661). The evidence does not warrant a finding that SIP or Mr Ippaso aided, abetted, counselled or procured ABAC, or induced or attempted to induce ABAC, to contravene ss 48 and 96 of the Act. 113 I am not satisfied that in and between November 1997 and February 1998 SIP, Baker Bros and ABAC entered into an agreement, arrangement or understanding whereby SIP and Baker Bros agreed that they would divide up customers between them and that each of them would supply compressors to particular customers to the exclusion of the other. There was certainly documentation prepared and discussions along those lines between SIP and Baker Bros in particular, but no concluded agreement, arrangement or understanding was reached or arrived at. What was discussed between the parties at ABAC's offices in Turin on 6 November 1997, and what was recorded in the document signed by ABAC, SIP and Baker Bros, contemplated an agreement. However it required further agreement, particularly between SIP and Baker Bros, before it could be said that even an understanding had been arrived at. 114 Although customer lists were exchanged, no concluded agreement was reached on their content and they were never finalised or accepted by SIP and Baker Bros. Further, the draft agreements prepared on 17 and 24 February 1998 were never signed. 115 However, I am satisfied that in and between November 1997 and February 1998 SIP attempted to contravene s 45(2)(a)(i) of the Act by propounding, and being involved in attempts to reach, an agreement in the terms of the draft agreements which were prepared in and during that period. The terms of those draft agreements, like the March 1994 agreement, provided for market sharing of customers and constituted an exclusionary provision for the purposes of s 4D(1) of the Act. Certainly there was an attempt to contravene s 45(2)(a)(i) of the Act by propounding and seeking to agree on the lists of customers who would be supplied by SIP and Baker Bros to the exclusion of the other of them. However, the evidence does not disclose that there was any attempt to reach a pricing arrangement in what was proposed. Indeed the draft agreement of 17 February 1998 stated: "… In relation to establishing minimum nett selling prices as per indication in the letter of intent dated 6th November 1997, it is agreed that in view of the fluid price situation … it is not advisable to formulate any price agreement." 116 The draft agreement was never executed or put into effect as there was no final agreement on the content of the customer lists. Nevertheless, I am satisfied that there was an attempt by SIP for the purposes of s 76(1)(b) of the Act to contravene s 45(2)(a)(i). Steps had been taken by SIP to achieve the result of an agreement, and those steps were well advanced. The structure of an agreement had been propounded as had proposed lists of customers. In Trade Practices Commission v Parkfield Operations Pty Ltd (1985) 7 FCR 534, the Full Court of the Federal Court said at 538-539: "We agree that an attempt must involve the taking of a step towards the commission of the illegal act and that it is not sufficient that it be merely remotely connected or preparatory to the commission of it." In the present circumstances the steps which had been taken by SIP through Mr Ippaso were much more than preparation, they had reached the stage of getting very close to the making of the agreement. Only the finalisation of the decision as to the list upon which three or perhaps four customers were to appear stood between the steps which had been taken and the completion and execution of the agreement. SIP's intention to attempt to contravene s 45(2)(a)(i) is to be found in Mr Ippaso's intention which was to bring about the result of a concluded agreement. That was the purpose of his actions and activities between November 1997 and February 1998, namely to bring about an agreement between SIP and Baker Bros which divided up customers between the two companies: See Australian Competition and Consumer Commission v Visy Paper Pty Ltd (supra) at 761. 117 I reject the submission that the contravention attempted would have been a contravention of s 47(2) of the Act, so that s 45(6) would have applied, for the reasons to which I have referred above. 118 As SIP only attempted to contravene s 45(2)(a)(i), and did not in fact contravene it by entering into the proposed agreement, Mr Ippaso and Mr Gates cannot be found to have been directly or indirectly knowingly concerned in, or party to, a contravention. However, I am satisfied Mr Ippaso's conduct was such that he attempted to induce SIP and Baker Bros to contravene s 45(2)(a)(i). He was SIP's representative in the discussions and he was instrumental in the preparation of the customer lists. 119 I am not satisfied that Mr Gates was guilty of attempting to induce SIP and Baker Bros to contravene s 45(2)(a)(i). An inducement involves some positive act but all that Mr Gates did was to supply to Mr Ippaso information which Mr Ippaso had requested. Mr Ippaso did not tell Mr Gates on 19 December 1997 why he required the information. Mr Gates was not a moving force in the events which were occurring. Rather he was a conduit for the passage of information to Mr Ippaso. Mr Gates may have had an understanding as to which Mr Ippaso was seeking to achieve but he was not actively involved in pursuing that objective himself. In particular, at the meeting on 17 February 1998, apart from providing information sought by Mr Ippaso he did not otherwise participate in the meeting and was only present for a relatively short time having regard to the total length of the meeting. Mr Ippaso's memorandum of 28 January 1998 was sent to Mr Bowering for his action and was only copied to Mr Gates. Mr Gates' comment to Mr Bowering in response to Mr Bowering's concerns that he should not worry about it is not such as to constitute part of an attempt to induce contravention by SIP having regard to Mr Gates' role in the proposal at that time, that is a role of being a conduit of information to Mr Ippaso. 120 Applying the Briginshaw test, I am not satisfied that Mr Gates attempted to induce SIP and Baker Bros to contravene s 45(2)(a)(i) of the Act. 121 I am therefore satisfied that SIP and Mr Ippaso are liable to penalties under s 76(1) of the Act and I will give the parties the opportunity to address the issue of the form of orders which should be made and to make submissions as to the level of penalties which should be imposed. 122 The application against Mr Gates will be dismissed.
I certify that the preceding one hundred and twenty-two (122) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg.
Associate: Dated: 28 June 2002 Mr J W K Burnside QC and Counsel for the Applicant: Mr T J Ginnane
Solicitor for the Applicant: Australian Government Solicitor
Counsel for the First, Second & Third Respondents: Mr J R J Lockhart
Solicitor for the First, Second & Third Respondents: Blake Dawson Waldron
Dates of Hearing: 16, 17, 18, 20 October 2000 13 and 14 November 2000
Date of Judgment: 28 June 2002
Australian Competition & Consumer Commission
SIP Australia Pty Limited
(1986) 13 FCR 446
(1938) 60 CLR 336
(2000) 49 NSWLR 315
(1986) 9 FCR 153
(1983) 49 ALR 672
(1999) 169 ALR 120
(2000) 177 ALR 611
(2001) 181 ALR 188
(1990) 27 FCR 460
(2002) 186 ALR 731
(1940) 63 CLR 691
(1985) 158 CLR 661
(1985) 7 FCR 534