Mr Justice Blackburne :
Introduction
- This is a dispute about the terms on which the defendant ("Huntsman") supplies ethylene to the claimants for the purpose of producing vinyl chloride monomer ("VCM"), a material from which, using water and other chemicals, polyvinyl chloride resin (PVC") is produced. There are two aspects to the dispute. First, there is the correct interpretation of various clauses in agreements regulating the supply of the ethylene used in the production of the VCM and whether, arising out of that, there have been breaches of any of those agreements. Second, there is the question whether any of the supply terms are void and unenforceable as being in breach of articles 81 and/or 82 of the EC Treaty, alternatively sections 2 and/or 18 of the Competition Act 1998. This trial has been concerned only with issues of liability and, in the case of the competition law claims, what remedies are appropriate. All matters concerned with compensation, if liability is established, are reserved to a subsequent hearing.
- The matters which give rise to this dispute are complex. I propose to start by explaining (1) the processes involved in the production of VCM (the trial was not concerned with the conversion of the VCM into PVC or with the uses to which the PVC is subsequently put), (2) the overall manufacturing set-up, (3) who the parties are and how they fit into the manufacturing set-up, (4) the origin and genesis of the various agreements which regulate the supply arrangements, (5) the events leading up to the launch of these proceedings and (6) the disputes that have arisen. I shall then consider and come to conclusions on each of those disputes, dealing first with those involving the correct interpretation of the various agreements and then dealing, so far as it is necessary to do so, with the competition law claims. To some extent the competition law claims turn on what view I take of the issues of interpretation.
- Mr Leslie Kosmin QC, Mr Mark Brealey QC and Mr Derrick Dale have appeared on behalf of the claimants and Mr Anthony Temple QC, Mr Thomas Sharpe QC and Mr Alexander Hickey have appeared on behalf of Huntsman. As between leading counsel, Mr Kosmin and Mr Temple have focused upon the general background to the dispute and the construction issues while Mr Brealey and Mr Sharpe have focused upon the competition law issues.
The production process
- VCM is produced using a combination of chlorine and ethylene.
- Chlorine is produced by the electrolysis of brine. As supplied for the production of VCM, the chlorine takes three forms: (1) as pure chlorine, (2) as a constituent part of hydrogen chloride ("HCl") or (3) as a constituent part of ethylene dichloride ("EDC").
- Ethylene, which is a gas, is created by a so-called "cracking" process known as pyrolysis. It is derived from naphtha which in turn is a product of the process of refining crude oil. Being a gas, the ethylene is stored and transported under pressure. It is flammable, noxious and subject to stringent health and safety requirements
- EDC, which is a liquid, is produced either by reacting ethylene and chlorine - a process known as direct chlorination - or by reacting ethylene and HCl in the presence of oxygen - a process known as oxychlorination. The resulting EDC is then "cracked" to produce VCM. A by-product of this further cracking process is the production of HCl. The HCl may then be re-cycled and used in the further production of EDC by oxychlorination.
- There are two VCM-producing plants with which these proceedings are mainly concerned. One is at Runcorn in Cheshire and is known for short as "VC3". The other is at Wilhelmshaven in Germany and is known for short as "VC6". Having regard to the process I have just described, these two plants have a choice of the manufacturing process open to them for the production of VCM. They can either produce the EDC themselves (by direct chlorination or by oxychlorination), buying in the constituent materials, ethylene and either chlorine or HCl (or a combination of chlorine and HCl), or they can buy in the EDC, or they can do partly the one and partly the other. As HCl is expensive to transport and/or dispose of, the likelihood is that they will want in any event to undertake their own manufacture of EDC by oxychlorination in order to consume the HCl which has resulted from the production of the VCM.
- For reasons which I will explain later, there is a close interrelationship between the operation of the plants which produce the chlorine and the ethylene. At this stage it is sufficient to note that chlorine, if not used in the production of EDC with a view to the production of VCM, or in the production of other compounds, must be stored or otherwise disposed of. A market or other use must be found for the caustic soda which is the main by-product of the electrolysis of brine from which the chlorine has derived.
- In theory at least ("stoichiometrically") 28 metric tonnes ("mts") of ethylene combine with 70 mts of chlorine to produce, by direct chlorination, 98 mts of EDC. In turn, 98 mts of EDC, on cracking, will produce 63 mts of VCM. In practice, however, the manufacturing process yields impurities which must be removed and their effect on the production process eliminated. This means that in practice a combined quantity of ethylene and chlorine greater than one tonne is needed to produce one metric tonne of VCM. The precise quantities needed depend upon the type of process used although each process produces a broadly similar result. For calculation purposes in the agreements to which I shall shortly come the assumption made is that each tonne of VCM that is produced requires 0.601 mts of chlorine and 0.472 mts of ethylene and that each tonne of EDC contains 0.715 mts of chlorine and 0.285 mts of ethylene. I also understand that 97.2% of each metric tonne of HCl consists of chlorine and the rest is hydrogen.
- At the production level a variety of factors, some of them more or less unpredictable, impact upon the level of VCM output. They range from pipe leakages to variations in weather conditions. (In cooler weather plants can produce more than in warmer temperatures.) Production planning has to factor in more routine matters as well, such as plant maintenance. At the economic level there are further imponderables which can affect production such as fluctuations in the market for VCM or (and this affects the desirability of producing chlorine) in the market for caustic soda. The cost of electricity is another. Electricity is a major cost in the production of the chlorine. These factors can affect the amount of each raw material available and, depending upon availability and cost, the way in which they are utilised in the manufacturing process. How these matters are handled, and in particular what proportions of which raw material (chlorine, HCl, ethylene and/or EDC) are utilised at any particular time and the cost of sourcing these materials, affects the extent to which the production process is more or less profitable.
- Another important factor in the overall production process is the desirability, in order to maximise profit, of running the plants involved as continuously and as close to full capacity as is possible. The plants themselves are very costly to build. For example, I was told that the ethylene cracking plant operated by Huntsman and located at its premises at Wilton on Teesside would cost $2 billion to replace. To achieve the goal of maximum production, while programming for maintenance and avoiding the need to store surplus production yet avoiding sudden changes in plant usage, requires careful planning and close co-operation along the production chain.
The manufacturing set-up
- I must now explain in more detail where the other plants are located in the production chain and the means by which ethylene is supplied.
- I have already mentioned that Huntsman supplies the ethylene and that its ethylene-producing plant is at Wilton on Teesside. That plant has a "nameplate" (or maximum theoretical production) capacity of 865,000 mts per annum. There are other producers of ethylene in the United Kingdom. There is a plant jointly owned by ExxonMobil and Shell at Mossmorran near Dunfermline. Its nameplate capacity is 800,000 mts. A plant owned by Innovene Inc (itself formerly owned by BP but since December 2005 owned by a company associated with the claimants) owns two plants at Grangemouth, near Falkirk, with a nameplate capacity of 1,060,000 mts (or thereabouts). There is a further ExxonMobil plant at Fawley near Southampton with a nameplate capacity of 120,000 mts (Huntsman maintains that it is slightly less). Shell also produces ethylene at Stanlow in Cheshire (located near to the Runcorn site). This plant has a nameplate capacity of 45,000 mts. It is important to point out that there is a difference between (1) the theoretical or nameplate capacity of an ethylene plant, (2) the tonnage that the plant is capable of producing in any year taking into account maintenance and the like and, not least, (3) the actual tonnage that the plant in fact produces in any year. These last two values, particularly the last, are commercially sensitive.
- The existence of these ethylene plants and the extent to which their output is available for purchase on the open market - the so-called "merchant market" - as distinct from being consumed downstream by a captive entity in the same ownership or under the same control as the ethylene producer are matters relevant to the competition law claims. It is also important to appreciate that ethylene has a variety of industrial uses of which the manufacture of EDC is just one. Likewise EDC has a variety of applications and is not confined to the production of VCM.
- The plants which produce ethylene, with the exception of Fawley owned by Shell which I can ignore, are linked by a series of pipelines. Before I describe where they run, how they are operated and to whom they belong, I must first mention the claimants' VCM production and other plants and describe how they are accessed.
- The claimants own and operate two such plants in Northern Europe, one at Runcorn in Cheshire and the other at Wilhelmshaven in North Germany. They are the plants I have already referred to as VC3 and VC6. They also own and operate VCM production facilities in Italy, notably at Porto Marghera near Venice. There was previously a further such plant, at Hillhouse in Lancashire, known as VC4. That plant, which effectively closed down in 1999 or thereabouts, was once owned and operated by the business entity of which VC3 is now a part.
- Adjoining VC3, as I shall henceforth describe it, is a chlorine production plant comprising one or more "cellrooms". Perchlorethylene and Trichlorethylene which are products containing chlorine and ethylene are also manufactured at the plant. The plant also has the facility for producing EDC by direct chlorination. It is from this plant which, at the risk of some inaccuracy, I shall refer to simply as the Runcorn chlorine plant, that VC3 is supplied with the chlorine, HCl and EDC (insofar as it does not produce the EDC itself) needed for the production of VCM.
- At Wilhelmshaven there is also a chlorine producing plant. The chlorine produced at this plant is supplied to the (adjoining) VCM production plant - VC6 - owned and operated by the claimants. Unlike the Runcorn chlorine plant, the chlorine manufacturing plant at Wilhelmshaven has no facility for producing EDC. Situated on the North German coast, Wilhelmshaven is a deep-sea port with a jetty. VC6 is capable of receiving ethylene from anywhere in the world by ship. It has the use of storage tanks for the storage of ethylene but no pipeline facility. It is dependent therefore on the shipment to it of ethylene or (by ship or by rail) of EDC.
- The UK ethylene pipeline system is, so far as material, roughly triangular in shape. One side of the triangle consists of a pipeline linking the Runcorn site (that is VC3 and the adjoining Runcorn chlorine plant) with Huntsman's Wilton site (located in south Teesside) where Huntsman has its "cracker" plant. Nearby, in North Tees, and linked by pipe Huntsman has a liquefaction plant to enable it to liquefy ethylene with a view to its transportation by ship to overseas destinations. The pipeline, which runs underground across the Pennines in a south westerly direction from Wilton to Runcorn, is known as the Trans-Pennine Ethylene Pipeline or TPEP for short. It belongs to Huntsman. It is just over 150 miles in length. It exits above ground into a metering compound at the Runcorn site at valve 19A. Just beyond valve 19A and still in Huntsman's ownership are two flow meter valves (FQ 103 and FQ 104) to enable the quantity of ethylene drawn from the TPEP for use at the VC3 plant and the Runcorn chlorine plant to be measured.
- Just beyond those flow meters are two so-called let-down heaters. The use of a let-down heater is necessary because, as a gas, the ethylene in the pipe is conveyed under pressure. Heat must be applied to the ethylene as it is reduced in pressure on being fed into the VC3 and Runcorn chlorine plants. If heating is not provided the chilling of the ethylene that occurs as it is reduced in pressure risks cooling the pipeline metal to a temperature significantly below 0° C such as to give rise to a danger of pipeline failure. One of the two let-down heaters (let-down heater E805) is the means whereby ethylene is delivered to the VC3 plant. This let-down heater belongs to Huntsman. The other is the means whereby ethylene is delivered to the Runcorn chlorine plant (and is owned as part of the assets of that plant). The set-up at Huntsman's metering compound and the associated let-down facilities is such that Huntsman is able accurately - in fact there are small discrepancies but they are not relevant for present purposes - to measure the volume of ethylene drawn collectively from the TPEP for use at the VC3 plant and, separately, at the Runcorn chlorine plant. Huntsman has no independent means of determining how much ethylene is drawn by the VC3 plant as distinct from the amount drawn by the Runcorn chlorine plant. Instead, it is dependent on being informed of the division between the two plants by regular returns made by those plants. Beyond each let-down heater are separate flow meters (one pair measuring the quantity of ethylene serving VC3 beyond let-down heater E805 and the other measuring the quantity of ethylene passing through the let-down heater serving the Runcorn chlorine plant) which enable the amount of ethylene flowing into each plant to be quantified.
- There is a 12 mile spur pipe linked to (and forming a part of) the TPEP which provides an ethylene storage capability at a place called Holford. The storage is in two underground storage cavities. Depending on pressure, between 5,000 and 20,000 mts of ethylene can be stored there. There is an associated let-down and conditioning facility nearby (at Lostock) to enable the ethylene to be heated when the piped ethylene is depressurised for storage and to enable it to be cleansed of water contamination when it is removed from storage and pumped using compressors back into the main TPEP system. Huntsman also has very extensive ethylene storage facilities at Wilton.
- The eastern arm of the triangle is a pipeline running from what used to be BP's Grangemouth ethylene production plants (there are two of them) to its ethylene-consuming plants at Wilton on Teesside. This pipeline, which is roughly the same length as the TPEP, is owned jointly by Huntsman and Innovene. Known as the Wilton/Grangemouth Ethylene Pipeline (or WGEP for short), this pipeline is operated and maintained by Huntsman but with maintenance of the Scottish section sub-contracted out. Since December 2005 Innovene has been owned by an associated company of the claimants and is now known as Ineos Olefins. I shall nevertheless continue to refer to Innovene as Innovene as that is how it was referred to before me.
- The western arm of the triangle consists of a pipeline, which is approximately 200 miles in length. It runs from Grangemouth to Stanlow in Cheshire. This pipeline is known as the North Western Ethylene Pipeline (or NWEP for short) and is owned and operated by Shell. There is a spur from Grangemouth to Shell's ethylene plant as Mossmorran. There is a further relatively short pipeline linking Shell's Stanlow facility with Huntsman's TPEP. This length of pipeline, which belongs to Shell and is known as the Runcorn-Stanlow Ethylene Pipeline (or RSEP for short), joins the TPEP at valve 25. On the TPEP side of valve 25 are a pair of flow meter valves. These enable the flow of ethylene into and out of the TPEP from the RSEP to be measured. There are, I understand, similar measuring facilities at the Grangemouth end of the pipeline system to enable the flow of ethylene into and out of the NWEP and WGEP to be measured.
- Although these various pipelines are in differing ownerships, from an operational point of view it made sense for them to be connected in the way that I have described to enable each owning company to manage operational issues, shutdowns and the like. That is how they are now operated.
- A computer-based monitoring and control system known as Wilton Ethylene Control (or WEC for short) enables Huntsman continuously to assess the amount of ethylene in the TPEP and WGEP. It does this by means of signals from flowmeters into and out of the pipelines and from pressure instruments along their length.
The parties
- I have not so far described how the various claimants fit into the process of supply of the raw materials which go to make up the production of EDC and VCM. I have explained that Huntsman is a supplier of ethylene to VC3. Its means of supply is the TPEP.
- Since 1986 when it was established as a separate business the VCM produced in this country at VC3 and VC4 and in Germany at VC6 and in Italy at various locations (including Porto Marghera) has been undertaken in the name of a business known as EVC which is short for European Vinyls Corporation. Over the years ownership of EVC's business has changed. For present purposes it is sufficient to note that EVC was established in 1986 as a joint venture owned as to 50% by Imperial Chemical Industries plc ("ICI") and as to 50% by EniChem Spa, an Italian company. ICI's contribution to the joint venture included the plants at VC3, VC4 and VC6. EniChem's contribution included the various Italian plants. The joint venture, as so owned, continued until it was floated on the Amsterdam Stock Exchange in late 1994 when control passed from the two joint venturers (although both retained shareholdings).
- Until 15 April 1999 the ethylene cracker plant at Wilton, together with the TPEP and its associated let-down and metering facilities, the right to use the Holford storage cavities, the joint interest in the WGEP, the liquefaction plants in North Tees, the storage facilities at Wilton and the Wilton Control Centre formed some or all of ICI's petrochemicals division and were vested in ICI Chemicals & Polymers Ltd ("C&P). On 15 April 1999 ICI sold a controlling interest in those assets to Huntsman. ICI retained an interest which it finally surrendered in mid-2003.
- Until 9 January 2001 the chlorine and related production facilities, including what I have earlier referred to as the Per and Trichlorethylene and EDC production facilities situated at Runcorn and the adjoining VC3 plant, belonged to ICI. They were vested in and operated by C&P. ICI also owned the chlorine manufacturing plant at Wilhelmshaven in north Germany which was operated by ICI Wilhelmshaven GmbH ("ICI-W"). Those assets formed some or all of ICI's chlorchemicals division. On 9 January 2001 or thereabouts ICI sold a controlling interest in those assets to Ineos Chlor Ltd, which is the fourth claimant. ICI finally divested itself of its residual interest in October 2003.
- It will be evident therefore that, insofar as EVC took its supplies of ethylene from the ethylene production plant at Wilton and took its supplies of chlorine, HCl and EDC from the adjoining Runcorn chlorine plant, there was no reason for differentiating between those two sources: they both derived from the same commercial entity, ICI. It is the separation in April 1999 of ownership of those two sources of supply and the need to provide for this in the supply and related agreements entered into between ICI (more particularly C&P and ICI-Wilhelmshaven) on the one hand and EVC and its operating subsidiaries on the other which have given rise to some of the complexity of the structure of agreements to which I shall shortly come. A further complicating factor is that in 2001 EVC became an associated company of Ineos Chlor Ltd. This factor has led Huntsman to believe that EVC (and its operating subsidiaries) and Ineos Chlor Ltd are together operating the supply agreements in an improper manner which is to Huntsman's financial detriment.
- Since June 2005 the first claimant, which I shall call EVC, has owned and controlled the EVC business. (In fact, for reasons explained in paragraph 1.2 of the amended particulars of claim, the first claimant is not the same entity as the EVC that features in the agreements which I am shortly to describe but for convenience - since nothing turns on the distinction - I shall proceed as if they were the same.) That business, it is important to appreciate, continues to operate at VC3 and VC6 (that is to say in this country and Germany) and also in Italy.
- The second claimant, which I shall call EVC-UK, is a wholly-owned subsidiary of EVC. Formerly known as European Vinyls Corporation (UK) Ltd, it operates VC3. The third claimant, which I shall call EVC-D, is also a wholly-owned subsidiary of EVC. Formerly known as European Vinyls Corporation (Deutschland) GmbH, it operates VC6. EVC-UK and EVC-D are parties to some of the agreements to which I am about to come. EVC is a party to them by novation. As a result of the novation it assumed the rights and obligations under those agreements of EVC International NV which was the company which had previously been the vehicle for the joint venture between ICI and EniChem and which was floated on the Amsterdam Stock Exchange in late 1994.
- The fourth claimant, which I shall call Ineos Chlor, owns and runs the Runcorn chlorine plant. This plant produces around 600,000 mts of chlorine annually. It also produces HCl and EDC. It produces EDC partly for supply to EVC-UK (at the adjoining VC3 plant) and partly for supply to others. It also owns and operates plants at Wilton for the production of, inter alia, EDC. As I have mentioned, Ineos Chlor acquired those assets from C&P on 9 January 2001. On 10 October 2003 (following the disposal by ICI of its remaining interest in those assets) the rights and obligations of C&P under the various supply and related agreements were novated to Ineos Chlor.
- The fifth claimant, which I shall call Atlantik, is a company in the Ineos Chlor group. It manufactures chlorine in Germany at the chlorine plant in Wilhelmshaven. It supplies the chlorine to the adjoining VCM plant at VC6. It does so in succession to ICI-W to whose contractual rights and obligations in that respect it was novated on 10 October 2003. As I have mentioned, unlike Ineos Chlor's Runcorn chlorine plant, Atlantik's chlorine plant at Wilhelmshaven does not produce EDC or HCl; EVC-D must buy in any supplies of EDC which it needs over and above what it produces itself, just as it must buy in the ethylene and other raw materials needed in the manufacture of VCM.
- The first, second and third claimants, collectively the EVC companies, and the fourth and fifth claimants, collectively the Ineos Chlor companies, are associated. The first three claimants are part of a group of companies (the "EVC Group") the ultimate holding company of which is Ineos Vinyls Group Ltd. The fourth and fifth claimants form part of a group of which the ultimate holding company is Ineos Chlor Group Ltd.
- Until December 2005 the WGEP was jointly owned by Huntsman and Innovene. Until December 2005 when it was acquired by the Ineos Group Innovene had been owned by BP. As a result of the acquisition Innovene is now part of a group of companies the ultimate holding company of which is Ineos Group Ltd.
- So far as material, therefore, there are three Ineos Groups. According to the evidence of Christopher Tane, chief executive of IneosChlorVinyls which is the name given to the management structure set up recently to manage jointly the first and fourth claimants, a Mr Jim Ratcliffe has a majority shareholding in both Ineos Group Ltd and Ineos Vinyls Group Ltd and has what Mr Tane describes as a substantial shareholding in Ineos Chlor Group Ltd.
The agreements: the original set-up
- I begin with the contractual set-up consequent upon EVC's flotation in 1994.
(1) The Original Raw Materials Agreement
- In advance of EVC's flotation in late 1994 on the Amsterdam Stock Exchange it was necessary to draw up agreements for the supply of raw materials to EVC by its parent companies and for the use, at any rate in this country and in Germany, of the pipeline infrastructure owned by C&P through which the ethylene used by EVC had been transported. The principal agreement was an agreement dated 15 November 1994 known as the Raw Materials Agreement (North). I will refer to that agreement as the Original Raw Materials Agreement (or, more simply, ORMA). The parties to it were C&P, ICI-W, EVC, EVC's various operating subsidiaries (including EVC-UK and EVC-D) and another EVC company, European Vinyls Corporation (International) SA/NV, which was designated under the agreement as the "Agent". EniChem was not a party to the agreement. This, I understand, is because EniChem entered into separate supply arrangements regulating the supply by it to, inter alia, EVC-Italia (another of EVC's subsidiaries) of the raw materials needed to produce VCM at EVC's production plants in Italy.
- The ORMA recited that its purpose included the supply to the EVC Group (defined as EVC and its subsidiary companies) of ethylene at prices which were fully competitive with those of other West European PVC producers "not back-integrated into ethylene" and to supply it with chlorine at prices "which equitably distribute the rewards of the caustic soda/chlorine and PVC businesses". It provided by article 3 for the supply by C&P and ICI-W to EVC's subsidiaries (described as "purchasing subsidiaries") of raw materials (chlorine, HCl, EDC and ethylene) sufficient to enable an annual quantity of VCM to be manufactured falling within a range of 450,000 mts at the bottom of the range and 550,000 mts at the top of the range. I refer to this as "the Range". It provided that the purchasing subsidiaries might elect to purchase in aggregate from C&P and ICI-W in any year and on the terms and conditions therein contained any quantity of raw materials within the Range but that, above the top of the Range, there should be no obligation on C&P or ICI-W to sell, and no obligation on any member of the EVC Group to purchase, any raw materials.
- The terms and condition of the sales were set out in schedules to the agreement. The agreement also provided for a review in the six months ended 31 December 1998 of the Range and level of actual and prospective raw material purchases but with the Range to continue to apply in default of agreement following such review.
- Article 3 also contained a provision to the effect that if for any reason the aggregate needs of the EVC Group for VCM in any year "from all sources for all purposes" should fall below 900,000 mts, backed if C&P should require it by a certificate from EVC Group's auditors, then the minimum quantity of raw materials to be purchased by the purchasing subsidiaries should be 50% of such reduced aggregate needs. Article 4 contained an elaborate mechanism for estimating by annual, quarterly and monthly quantities, the EVC Group's raw materials requirements and for the Agent (on behalf of the purchasing subsidiaries) to place firm orders for the raw materials needed for the ensuing month.
- Other articles provided for plant closures (either by C&P or ICI-W or by any of the purchasing subsidiaries), the specification of the raw materials, the delivery points for them and their measurement, the sites in this country, Germany and Italy contemplated for delivery of the raw materials, pricing of the raw materials and how payment was to be made. EVC guaranteed the due performance by the purchasing subsidiaries of their obligations under the agreement. The Agent's role was set out. There were also hardship, force majeure and temporary-shutdown provisions, a confidentiality clause, a provision for the establishment of a monitoring committee to review the operation of the agreement, a dispute resolution provision and a prohibition against assignment.
- By article 23 the agreement was to come into force on the closing date specified in an underwriting agreement entered into in connection with EVC's share flotation. Upon that happening, the agreement would have retrospective effect from 1 November 1994 and would continue until terminated by 36 months' notice in writing expiring not earlier than 31 December 2002 given either by C&P to the Agent or by Agent to C&P. There was also provision for termination on insolvency or on material breach.
- The ORMA was replaced in 1996 by a new raw materials agreement which itself was subsequently amended. Most of the provisions were repeated in those later agreements. I will come in more detail later to such of the provisions (including, in particular, articles 3 and 4) as are material for the purpose of resolving the disputes which have arisen between the parties.
- It is to be observed that no distinction was made in the ORMA between the supply by C&P (and ICI-W) of ethylene on the one hand and of the other raw materials on the other. This is because, as I have explained, all four raw materials were envisaged as coming from essentially the same source. It was only later that this changed.
(2) The ICI Systems Agreement
- A further agreement, also dated 15 November 1994, was entered into at flotation to enable EVC-UK and EVC-D to obtain the delivery to their VCM production plants of ethylene purchased from sources other than C&P and ICI-W. The need for this sprang from the fact inherent in the ORMA that the EVC Group would not be purchasing all of its ethylene requirements from ICI sources but would wish as an independently controlled company and for reasons I will come to later to have the use of the pipeline systems (owned by ICI) for the delivery of third party ethylene to EVC's VCM plants.
- The agreement ("the ICI Systems Agreement") was between C&P, ICI-W, the Agent (as defined by the ORMA), EVC-UK and EVC-D. It recited that, pursuant to the ORMA, companies in the EVC Group had the freedom to purchase a part of their raw materials requirements from third parties and that to facilitate the purchase of ethylene from third parties and its delivery to their respective sites C&P and ICI-W had agreed to grant EVC-UK and EVC-D rights to use certain ethylene distribution systems in the UK and Germany.
- It defined the "UK System" as the system of jetties, pipelines and storage facilities (but in the case of the latter only to the extent necessary to enable EVC-UK to receive and off-load ethylene cargoes not exceeding 2,500 mts) owned and operated by C&P for supplying EVC-UK's sites at VC3 and VC4 with ethylene. Effectively the UK System was the TPEP with its allied storage facilities up to the limit indicated. The German System was similarly defined but with the substitution of EVC-D and 4,500 mts in place of EVC-UK and 2,500 mts and with the supply being to EVC-D's manufacturing site at Wilhelmshaven.
- Article 2.1, which governed the use of the UK System, provided for the grant by C&P to EVC-UK of:
"The right to use the UK System for the import of Ethylene purchased by EVC-UK from third parties, its storage (as necessary) and for the transportation and redelivery thereof by C&P to the UK Sites subject to the terms and conditions of this Agreement."
Article 2.2 provided that:
"C&P shall, subject to not prejudicing or disrupting its own operations and interests and taking into account its own and third parties' contractual requirements for Ethylene movements through the UK System, accept into the UK System, store (as necessary), transport and redeliver Ethylene to EVC-UK subject to the terms and conditions of this Agreement."
Article 2.4 contained a corresponding limitation on the exercise by EVC-UK of its rights under the agreement. Article 2.3 provided that EVC-UK's right to use the UK System should only arise:
"(A) Where EVC-UK purchases Ethylene from third parties and wishes to have it received into the UK System and to have the same transported and redelivered by C&P to either or both of the UK Sites, but subject to Article 4 hereof …"
or where C&P had declared force majeure under the ORMA in relation to the supply of ethylene to either or both of VC3 and VC4 or where C&P was unable to supply ethylene by reason of a planned shut-down of plant.
- Further restrictions on the exercise by EVC-UK of its rights under the agreement were, by article 2.6, that the UK System should not be used by EVC-UK for the export of ethylene (but should only be used for the transportation and redelivery to VC3 and VC4 of ethylene purchased from third parties) and, by article 2.7, that C&P's obligation to transport and redeliver through the UK System should be subject to the maximum tonnages set out in article 4. Equivalent rights, with corresponding restrictions, were set out in article 3 with regard to the use by EVC-D of the German System.
- Article 4, which applied to EVC-UK's use of the UK System and to EVC-D's use of the German System, confined EVC-UK's right to the transportation and redelivery by C&P to VC3 and VC4 of an annual maximum of 15,000 mts of ethylene purchased by EVC-UK from third parties. It confined EVC-D's corresponding right to the delivery by ICI-W to the Wilhelmshaven site of an annual maximum of 45,000 mts of ethylene. EVC-UK and EVC-D were each to use "all reasonable endeavours" to have the ethylene delivered "as closely as practicable in equal monthly quantities".
- The only other provisions in the agreement I need mention are article 8, which set out the charges for using the two systems and how they were to be adjusted and article 19 which provided for the duration of the agreement. Apart from insolvency and a material default under the agreement (neither of which is suggested to have occurred) the agreement was co-terminous with the ORMA. Although the ORMA has since been replaced (as I shall shortly relate) Huntsman no longer contends, although until the first day of the trial it had continued to do so, that this fact, or any other, has brought the agreement to an end.
- The charging provisions contained in article 8 do not, however, provide for the receipt of third party ethylene into the TPEP system at valve 25 and its redelivery to the VC3 plant at the metering and let-down facility beyond valve 19A. (It deals only with others.) These reception and let-down points are, as it happens, no more than a few meters apart. This omission led to a disagreement between the parties. Negotiations took place in 2003 between Mr Hugh Carmichael, the claimants' Strategic Raw Materials Sourcing Manager (and, as such, responsible for buying ethylene for use by the claimants), and Dr Joe Duffy, Huntsman's Olefins Business Commercial Manager (and, as such, responsible for the strategy and sales of Huntsman's ethylene throughout Europe), in an attempt to agree on the appropriate price. Although they were unable to reach an agreement, Huntsman has in practice levied, and EVC-UK has paid, the same charge per metric tonne (currently £12.38) as Huntsman charges Ineos Chlor (and Ineos Chlor pays) for the equivalent use in connection with the transfer of third party ethylene under the terms of a later use of system agreement (the UK Ethylene Distribution System Agreement) entered into in January 2001 (and to which I refer below).
(3) Other arrangements entered into in November 1994
- A further agreement which I need not explain in any detail regulated the continued provision of various services to facilitate EVC-UK's use of VC3. The agreement was between C&P and EVC-UK alone. The need for this sprang from the fact that VC3 was previously part of the larger Runcorn site and that C&P would be continuing to run its separate chemical businesses (the Runcorn chlorine plant as I have termed them) from the remainder of the site. This fact highlights an important point which is that because VC3 was in poor repair and unattractive to investors but because ICI did not wish to see it closed since it was a significant consumer of C&P's chlorine produced at Runcorn, it was agreed at the time of EVC's flotation that VC3 would be re-acquired by ICI. (From 1986 it had formed part of the assets of EVC.) Thus, although from flotation EVC-UK operated VC3 for the manufacturer of VCM, it did not own that site. It continued to own and run VC4, the Hillhouse site in Lancashire.
The agreements: Project Victor
- By 1995 EVC was giving consideration to a rationalisation of its operations. Its preference was to concentrate its UK manufacture of VCM at VC4 (the Hillhouse site) and cease to use the VC3 plant. There was the possibility that it might cease VCM manufacture in the UK altogether and concentrate its VCM production in Wilhelmshaven, at VC6, (and Italy). Either would have had a drastic effect on the future of C&P's chlorine plant at Runcorn and its ethylene cracker at Wilton. At the least C&P would have had to expand its liquefaction capacity at Wilton to enable more of its ethylene production to be exported. At worst both the chlorine plant at Runcorn and the ethylene plant at Wilton would have had to close.
- In the event, EVC was persuaded to concentrate its VCM production in this country at VC3 and to close VC4 in return for C&P implementing over a three or so year period an upgrading and expansion of the plant at VC3 from 180,000 mts of VCM to a nameplate capacity of 300,000 mts of VCM. This involved the payment by C&P of an annual contribution of £3 million and the reacquisition of the plant by EVC-UK. The overall scheme was known as "Project Victor".
- Several agreements, all dated 24 July 1996, resulted from the negotiation of these arrangements. They comprised (1) an agreement for the sale by C&P to EVC-UK of the plant and equipment at VC3 (the "Sale of Business and Operations Agreement"), (2) an agreement for the conversion of raw materials into VCM by EVC-UK and EVC-D for supply to C&P (the "Toll Conversion Agreement") and (3) a new raw materials agreement (the "New Raw Materials Agreement (North)" or "NRMA" for short).
(1) The Sale of Business and Operations Agreement
- Under this agreement, entered into by EVC-UK and C&P, C&P sold to EVC-UK the VC3 plant and its associated assets. The details of precisely what was sold and the price paid are not material. One of the terms - set out in detail in the agreement - was that EVC-UK would make available facilities for C&P's benefit for the conversion of raw materials into VCM under the terms of the separate Toll Conversion Agreement. Such facilities were to continue until terminated by either side by not less than 24 months' notice in writing given to expire not earlier than the end of 2008. During that period, and in return for making the toll conversion facility available, C&P agreed to pay an annual so-called Toll Conversion Facility charge of £3 million which would be reduced by 36.7% (to £1,899,000) if under article 3.11 of the NRMA (to which I shall come shortly) the range of raw materials to be acquired under that agreement should be reduced.
- It is common ground that, to date, something approaching £30 million has been paid by way of Toll Conversion Facility charge to which, in circumstances I shall later explain, Huntsman has contributed £10 million or so. It is also common ground that these payments were in reality to facilitate the upgrading and expansion of the VCM capacity at VC3 and to ensure that VC3 was kept in operation. To what extent the payments are to be regarded as a subsidy towards the cost to EVC of purchasing ethylene under the raw material agreements has been in dispute between the parties.
(2) The Toll Conversion Agreement
- Entered into by EVC-UK and EVC-D with C&P, this agreement set out the arrangements, which were to become operative once the modification of the VC3 plant had been completed, for converting raw materials into VCM for C&P. The details of this agreement do not matter because, as I was told, no advantage was taken of the agreement in that no toll conversion has occurred. It is sufficient to note that the agreement existed and that under it EVC-UK could be obliged to make available an annual 35,000 mts of VCM capacity (with a minimum of 2,500 mts per month excluding any pre-notified shut-down period) for the conversion at VC3 into VCM of raw materials supplied by C&P. Either EVC-UK or EVC-D could be required to make available a further 10,000 mts annually of VCM capacity at either VC3 (by EVC-UK) or, at their option, at VC6 (by EVC-D). The agreement further provided that the tonnage of raw materials supplied by C&P for conversion to VCM should not form part of the tonnage of raw materials to be purchased under the NRMA.
(3) The NRMA
- I need only refer briefly at this stage to the principal differences between this agreement and the ORMA. The first is that the Range, ie the quantity of raw materials for sale and purchase for the purpose of conversion into VCM, was narrowed by raising the minimum quantity of VCM from 450,000 mts to 475,000 mts. The maximum under the Range remained 550,000 mts of VCM. The second is that the Range excluded any raw materials supplied by C&P to EVC-UK or EVC-D for conversion into VCM under the Toll Conversion Agreement. The third is that the agreement contained, in articles 3.11 and 23.2, provisions for modification or, as it has been described in evidence before me, "ramp-down" whereby upon the Agent giving to C&P, or upon C&P giving to the EVC parties, 36 months' notice in writing expiring not earlier than 31 December 2002 the Range under article 3 could be reduced (with effect from expiry of the 36 months' notice) to 280,000 mts of VCM (at the bottom of the range) and 320,000 mts of VCM (at the top of the range). On exercise of the ramp-down option there was also to be a reduction in the maximum aggregate monthly quantity of raw materials which C&P and ICI-W could be obliged to deliver. It was to be reduced from a quantity sufficient to enable 50,000 mts of VCM to be manufactured in any given month to 30,000 mts of VCM in that month and, when measured on a quarterly basis, from a quantity sufficient to enable 150,000 mts of VCM to be manufactured in any given quarter down to 90,000 mts of VCM in that quarter. Another consequence of ramp-down was that the raw materials sale and purchase obligations, albeit within the modified Range, could not be terminated earlier than 31 December 2008, and then only if 36 months' prior notice in writing was served. The ORMA had been terminable with effect from 31 December 2002 provided 36 months' prior notice in writing was given. So the effect of the altered article 23 was to ensure that the supply agreement continued for at least a further six years.
- The NRMA was agreed to come into force on completion of the upgrading and expansion of the plant at VC3. In the event this was with effect from July 1998.
The agreements: the sale of ICI Petrochemicals to Huntsman
- As I have already mentioned, on 15 April 1999 Huntsman acquired a majority stake in C&P's petrochemical business. This included its ethylene business and its interests in the UK ethylene distribution system. A temporary agreement was entered into to ensure that C&P would be provided with ethylene for onward sale to the EVC Group on terms which ensured that Huntsman would be treated as if it were a party to the NRMA for the purpose of the supply of ethylene under it to the EVC Group. Further agreements were entered into to cater for the change in control of the ethylene supplier from C&P to Huntsman.
(1) The Product Supply Agreement
- In order to ensure the long term supply of ethylene to C&P, C&P entered into an agreement (the "Product Supply Agreement") with Huntsman on 9 January 2001 whereby, from that date until 30 June 2004, Huntsman was obliged to make available up to 7,000 mts of ethylene per quarter (subject to an overall annual maximum of 20,000 mts) for supply to C&P at stated delivery points, including its Runcorn chlorine plant. C&P was obliged to use reasonable endeavours to take at least 1,500 mts annually, but subject to that qualified obligation, was under no duty to nominate any minimum amount. There were also provisions conferring on Huntsman the right of first refusal to supply additional ethylene to C&P in amounts to be specified by C&P and at prices and otherwise on terms which the parties should be able to agree but on the footing that, if not agreed, C&P was to be free to obtain the specified amount from third party sources but only if the terms of such third party supply were more competitive than those on which Huntsman had been willing to supply the amount in quest. It was also to be free to use the UK System (paying the appropriate charges and otherwise fulfilling the terms set out in UK Ethylene Distribution System Agreement - see below) for the purpose of obtaining delivery of the ethylene from such other sources for the manufacture of EDC. There was an option enabling Huntsman to continue the agreement for a further two years but the option was not exercised. The agreement contained provisions fixing the price to be paid for any ethylene purchased under it.
(2) The New Toll Conversion Agreement
- On 9 January 2001 C&P and Huntsman entered into an agreement to permit Huntsman to enjoy C&P's rights contained in the Toll Conversion Agreement of 24 July 1996 and to assume its obligations under that agreement as if Huntsman had been a party to it for the purpose of ethylene supply to the EVC Group. Of immediate significance is a splitting between C&P and Huntsman of liability for the annual £3 million payment by C&P to EVC by way of Toll Conversion Charge so that Huntsman should thenceforward contribute £1.5 million towards that amount. The agreement provided that if the Range under article 3 of the NRMA should be reduced under the ramp-down provisions in that agreement, the amount Huntsman should thereafter be required to contribute to the annual Toll Conversion Facility Charge should be reduced to £949,500 (ie half of the reduced figure of £1,899,000: see paragraph 60 above). This was to reflect the fact that in November 1998 it had been agreed internally within C&P that the burden of the annual payment should be shared equally between its chlorchemicals and its petrochemicals divisions. As by 2001 Huntsman had long since taken control of C&P's petrochemicals division (which included C&P's ethylene manufacturing plant at Wilton and the UK supply system) it was to be expected that the burden of the payment hitherto carried by C&P's petrochemicals division should thereafter be assumed by Huntsman.
(3) The UK Ethylene Distribution System Agreement
- Another agreement entered into between Huntsman and C&P on 9 January 2001 concerned the use of the UK System for the distribution and handling of ethylene via the TPEP and WGEP systems and also the ethylene terminal owned by Huntsman at the North Tees site which had formally belonged to C&P as part of its petrochemicals division. The agreement ("the UK Ethylene Distribution System Agreement") which is still in force (although Ineos Chlor has since been novated to C&P's rights and obligations under it) is designed to ensure that C&P is not "landlocked" on ethylene supplies to its own and EWC's facilities at Runcorn (ie C&P's - now Ineos Chlor's - Runcorn chlorine plant and EVC-UK's VC3 plant) and also (in the case of C&P) the like facility at Wilton. The agreement provides by clause 4.1 that Huntsman grants to C&P the right to use the UK System for the receipt of ethylene purchased by C&P from third parties and for the transportation and delivery of such ethylene to the Runcorn and Wilton sites subject only to (1) operational control of the UK System remaining with Huntsman (2) the payment by C&P of all costs incurred and (3) the payment by C&P of stipulated charges for use of the UK System. The charges which are updated annually by reference to the annual rate of increase of charges for use of the Benelux/Germany common-carrier ethylene pipeline (the so-called "ARG") are, for 2006, £12.38 per mt for ethylene received into the UK System at valve 25 for delivery to the Runcorn site and £31.97 per mt for ethylene received into the UK System at Grangemouth (ie at the northern end of the WGEP) for delivery to the Runcorn site (ie at the let-down points beyond valve 19A). For its part Huntsman agrees by clause 4.2 to accept delivery of ethylene by C&P into the UK System and to transport and deliver it to C&P "on a basis which does not discriminate against [C&P] …". Under clause 5.1 use by C&P of its rights under the agreement is subject to a monthly ethylene maximum of 16,000 mts for delivery at the Runcorn site (ie for both C&P's Runcorn chlorine plant and EVC's VC3 plant) if Huntsman should not itself be supplying ethylene either to the Runcorn site or to the Wilton site or, if it should be, subject to an overall maximum of 10,000 mts per month or an overall annual maximum of 120,000 mts. In particular it is the latter maximum, namely 120,000 mts per annum, that has applied.
- Clause 4.3 set out when C&P's right to use the UK System should arise. It is common ground that in the events that have happened the right to do so has arisen and continues to subsist.
- The agreement goes on by clause 4.6 to provide, however, that the rights conferred on C&P to use the UK System are limited to the receipt of ethylene purchased by C&P from third parties and its transportation and redelivery to the Runcorn and Wilton sites. It is not to be used to enable C&P to export ethylene or to store ethylene in the UK System.
- Clause 4.9 sets out a further restriction on C&P's right to use the UK System. This provision, which is expressed to be without prejudice to C&P's rights under clause 4.3, and, inter alia, the NRMA, prevents C&P from using the UK System for the delivery of ethylene acquired from any third party for supply to EVC in the form of ethylene where to do so would reduce the amount of ethylene supplied to EVC under the NRMA below the total ethylene required to produce the quantity of VCM nominated by a purchasing subsidiary under the NRMA. C&P also agreed by that clause that it would "do all within its power that can be reasonably done without incurring material cost to ensure that the Supplier [ie Huntsman] benefits to the fullest extent possible from the terms of the [NRMA] relating to the supply of ethylene (subject to the burden thereof) and undertakes not intentionally to do anything to interfere with such benefit".
- As I have mentioned, this agreement continues in force although since October 2003 (following novation) Ineos Chlor has been a party to the agreement in place of C&P.
(4) The Wilhelmshaven Ethylene Distribution System Agreement
- This agreement which is between ICI Chlorchem GmbH and Huntsman and is dated 9 January 2001 and which, like the UK Ethylene Distribution System Agreement, continues in force grants to Huntsman access rights to the jetty and ethylene storage facilities at Wilhelmshaven and to the associated pipework and other equipment to enable ethylene to be delivered to EVC-D at the latter's Wilhelmshaven plant (ie VC6). Because, in contrast to the UK Ethylene Distribution System Agreement, ownership of the jetty and other facilities was retained by ICI on the sale by ICI to Huntsman of the ethylene business in 1999, the use of the German System for the delivery of ethylene to EVC-D was in return for a charge payable by Huntsman. Currently Huntsman is required to pay €45 per metric tonne of ethylene delivered to EVC-D at VC6.
The agreements: the sale of ICI Chlorchemicals to Ineos Chlor
- At the same time as these agreements were entered into C&P sold its chlorchemical interests and the German ethylene system infrastructure (which had been the subject of the Wilhelmshaven Ethylene Distribution System Agreement) to Ineos Chlor. In March 2001, control of EVC and its subsidiaries passed to the Ineos Group. As I have mentioned, EVC (the first claimant) is now the owner of EVC-UK and EVC-D and is itself in the ultimate ownership of Ineos Vinyls Group Ltd.
- Notwithstanding this change of control and notwithstanding that since acquiring C&P's petrochemical interests in April 1999 Huntsman had been fulfilling C&P's obligations (and taking the benefit of its rights) in regard to the supply of ethylene to the EVC Group under the NRMA, no alterations were made to that agreement to reflect this fact until July 2003. Likewise, notwithstanding the sale to Ineos Chlor by C&P of its chlorchemical interests in January 2001 and the fulfilment by Ineos Chlor since that date of C&P's obligations (together with an assumption by Ineos Chlor of C&P's rights) in regard to the supply of the other raw materials to the EVC Group under the NRMA, no alterations were made to the to reflect this fact until October 2003.
- Eventually, however, on 31 July 2003 the parties to the NRMA and Huntsman entered into an agreement to amend and novate the NRMA so that from then on Huntsman became a party to it in respect of C&P's and ICI-W's rights, obligations and liabilities insofar as they related to the sale, purchase and delivery of ethylene (subject only to certain immaterial exceptions). The NRMA as so amended ("the Amended Raw Materials Agreement" or "ARMA" for short) was as set out in an appendix to that agreement. At the same time the ICI Systems Agreement was novated so as to include Huntsman in place of C&P and ICI-W in relation to the UK System.
- Three months later, on 10 October 2003, the ARMA was novated to Ineos Chlor so that Ineos Chlor was substituted for C&P in respect of C&P's rights and obligations (by then confined to the supply to the EVC Group of raw materials other than ethylene) under that agreement. At the same time (1) the ICI Systems Agreement was novated to include Ineos Chlor in place of C&P and ICI-W in relation to the remaining rights and obligations of those companies under that agreement, (2) the UK Ethylene Distribution System Agreement was novated to substitute Ineos Chlor for C&P and (3) (I was told) the German Ethylene Distribution System Agreement was also the subject of a novation arrangement by the substitution of Atlantik for ICI Chlorchem GmbH.
(1) The ARMA
- This agreement lies at the heart of the disputes between the parties. It has slightly different recitals to those contained in the ORMA, but continues to have as one of them the recital summarised at paragraph 41 above.
- Coming to the body of the agreement, I start with four of the definitions contained in article 1. The first is of the expression "Raw Materials" which is defined to mean "Chlorine, Ethylene, EDC and HCl". The second is of the expression "Range" to which I have already referred. This is defined to mean "the minimum and maximum quantities of VCM established pursuant to Article 3 by reference to which Raw Materials shall be sold and purchased pursuant to this Agreement". The third is of the expression "Purchasing Subsidiaries" which is defined to mean "those Subsidiary Companies of EVC which shall purchase Raw Materials hereunder, namely EVC-UK, EVC-D and EVC-Italia and any other Subsidiary Company of EVC which is joined as a party to this agreement pursuant to Article 2.2 to purchase Raw Materials hereunder". The fourth is of the expression "Site" which is defined to mean "the EVC Group manufacturing sites listed in the Fifth Schedule hereto at which members of the EVC Group manufacture VCM or cause VCM to be manufactured together with any further EVC Group VCM manufacturing site in Western Europe, details of which are added to the said Fifth Schedule pursuant to Article 9".
- The 5th schedule defines the "Sites" for the purposes of the ARMA as VC4 (for ethylene and HCl), VC3 (for ethylene, chlorine, HCl and EDC), VC6 (for ethylene, chlorine and EDC) and three Italian sites (one of them for ethylene and three of them for EDC). (It is pertinent to point out that at the time the NRMA was entered into, which the ARMA does no more than amend, the site at VC4 was still being operated.) Article 9 effectively limits any new sites to the establishment of a new VCM plant on any of the existing sites or on a new site in the UK. Article 1 makes clear that the schedules form part of the agreement and that to the extent that there is conflict or ambiguity relating to any schedule and the remainder of the agreement, the wording of the schedule is to prevail.
- Article 2 which is headed "The Purchasing Subsidiaries", provides as follows:
"2.1 As at Start-up the Purchasing Subsidiaries shall be EVC-UK, EVC-D and EVC-Italia. As regards EVC-UK, EVC-D and EVC-Italia each of them manufactures VCM at the relevant Site or Sites and orders for Raw Materials placed by them shall be for delivery to the Site or Sites operated by the Purchasing Subsidiary in question.
2.2 It is contemplated that during this Agreement the Agent may by notice in writing to C&P (in relation to Raw Materials other than Ethylene) or HICI (in relation to Ethylene) require any other Subsidiary Company of EVC to become a Purchasing Subsidiary for the purposes of this Agreement. On each such occasion the parties hereto shall procure that each such Subsidiary Company shall be joined as a party to this Agreement as a Purchasing Subsidiary and be entitled to the rights and be subject to the obligations of a Purchasing Subsidiary hereunder with effect from the date specified in the notification by the Agent to C&P or HICI as the case may be."
"HICI" refers to Huntsman.
- Article 3, which contains the provisions which are central to the parties' present differences, is headed "the Basic Raw Materials Sale and Purchase Obligations" and is as follows:
"3.1 C&P and ICI-W shall sell and the Purchasing Subsidiaries shall purchase Raw Materials (other than Ethylene) on the terms and conditions of this Agreement. HICI shall sell and the Purchasing Subsidiaries shall purchase Ethylene on the terms and conditions of this Agreement.
3.2(A) The quantity of Raw Materials to be sold and purchased hereunder in each Year shall be measured in terms of the quantity of Raw Materials required to manufacture given quantities of VCM. A tonne of VCM shall be deemed to comprise 0.472 tonne of Ethylene and 0.601 tonne of Chlorine. However, for the avoidance of doubt the Purchasing Subsidiaries shall not be obligated to purchase Raw Materials hereunder in that proportion so long as the quantity of each Raw Material purchased hereunder in any Year is separately within the Range.
(B) C&P and ICI-W shall (in the case of Raw Materials other than Ethylene) or HICI shall (in the case of Ethylene) in each Year of this Agreement have available for purchase by the Purchasing Subsidiaries a quantity of Raw Materials being a maximum quantity, categorised as the higher end of the Range.
(C) The Purchasing Subsidiaries shall be obliged to purchase in aggregate from C&P and ICI-W (in the case of Raw Materials other than Ethylene) or from HICI (in the case of Ethylene) hereunder a quantity of Raw Materials categorised as the lower end of the Range.
(D) The following provisions shall apply to establish the maximum and minimum quantities of Raw Materials constituting the Range in each Year:
(i) Subject to (ii) below, the minimum quantity constituting the lower end of the Range shall be the quantity of Raw Materials necessary for the manufacture of 475,000 tonnes of VCM. This does not include Raw Materials supplied under the New Toll Conversion Agreement in the Year in question by C&P to EVC-UK or EVC-D.
(ii) If for any reason the aggregate needs of the EVC Group for VCM in any Year from all sources for all purposes falls below 900,000 tonnes, the provisions set out below shall apply. This does not include Raw Materials supplied under the New Toll Conversion Agreement in the Year in question by C&P to EVC-UK or EVC-D. C&P and/or HICI may by notice in writing to the Agent require a certificate from the auditors of the EVC Group as to whether and to what extent in any Year such aggregate needs of the EVC Group for VCM have thus fallen below 900,000 tonnes. If in any Year such aggregate needs for VCM are shown to have fallen below 900,000 tonnes, the minimum quantity of Raw Materials to be purchased hereunder by the Purchasing Subsidiaries in that Year shall be an amount which is approximately equal to one half of such aggregate needs of the EVC Group for VCM in that Year.
(iii) The maximum quantity of Raw Materials constituting the higher end of the Range shall be the quantity of Raw Materials necessary for the manufacture of 550,000 tonnes of VCM. This does not include Raw Materials supplied under the New Toll Conversion Agreement in the Year in question by C&P to EVC-UK or EVC-D.
(iv) It is contemplated that after Completion EniChem and EVC-Italia may enter into a series of agreements, included in which will be agreements for EniChem to purchase the VCM plant at the Porto Torres Site currently owned by EVC-Italia and for EniChem to toll-convert Raw Materials for EVC-Italia into VCM for consumption by EVC-Italia using that plant. If this occurs the tonnage of Raw Materials supplied by EVC-Italia to EniChem for toll conversion in each Year shall be included in the calculations to be done pursuant to (ii) and (iii) above but any tonnage used by EniChem for the purposes of the manufacture of VCM for sale to EVC-Italia for the purposes of resale shall not be regarded as being within this Agreement or be taken into account for the purpose of these calculations.
(E) All Ethylene deemed to be contained in any quantity of EDC purchased by any Purchasing Subsidiary from C&P under this Agreement or, if such purchase is made under Article 15.2(A) and/or (C), from a third party, shall be counted towards the Purchasing Subsidiaries' obligations to purchase a quantity of Ethylene from HICI hereunder by reference to the Range applicable to the Year in question. The quantity of Ethylene contained in any quantity of EDC shall be determined by multiplying the quantity of EDC by a factor of 0.285.
3.3 The Purchasing Subsidiaries may elect to purchase in aggregate from C&P, ICI-W and HICI, in respect of the Year in question and on the terms and conditions herein contained, any quantity of Raw Materials equal to or above the lower end of the Range applicable to that Year and up to the quantity representing the higher end of the Range.
3.4(A) To the extent to which the Hillhouse Site and the Runcorn Site can accept delivery of HCl, EVC-UK shall be obliged to accept such quantities of HCl up to the limits specified in the Fourth Schedule, subject to normal maintenance requirements and operational capability.
(B) To the extent to which the Wilhelmshaven Site and the Runcorn Site can accept delivery of Chlorine, EVC-D and EVC-UK shall be obliged to accept such quantities of Chlorine up to the limits specified in the Fourth Schedule, subject to normal maintenance requirements and operational capability.
(C) If C&P is unable to supply Chlorine and/or HCl by the normal route, it shall supply EDC to the relevant Purchasing Subsidiary hereunder in full satisfaction of that Purchasing Subsidiary's requirements hereunder for Chlorine or HCl.
3.5 As regards any requirements by the EVC Group to purchase in any Year any quantity of Raw Materials above the higher end of the Range applicable hereunder to that Year, the following provisions shall apply:
(A) C&P, ICI-W and HICI shall have no obligation to sell and no member of the EVC Group shall have any obligation to purchase any such quantity of Raw Materials.
(B) However, if in respect of a Year the Purchasing Subsidiaries wish to purchase in aggregate a quantity of Raw Materials in excess of the higher end of the Range, then as regards such excess nothing herein shall prevent the parties hereto from entering into discussions in good faith with a view to all or part of such excess being supplied on such terms and conditions as may be agreed between them.
3.6 Schedules One - Four (inclusive) hereto set out the terms and conditions applicable to the sale and purchase of each of the four individual Raw Materials hereunder and are to be read in conjunction with the main body of this Agreement.
3.7(A) C&P shall be at liberty to supply to the Purchasing Subsidiaries Raw Materials (other than Ethylene) which have been produced or supplied by any member of the ICI Group or by any third party, provided always that C&P shall supply all such Raw Materials to the Purchasing Subsidiaries on the terms and conditions of this Agreement.
(B) HICI shall be at liberty to supply to the Purchasing Subsidiaries Ethylene which has been produced or supplied by Huntsman Corporation or any of its subsidiaries or by any third party, provided always that HICI shall supply all such Ethylene to the Purchasing Subsidiaries on the terms and conditions of this Agreement.
3.8 The parties hereto recognise that the Range has been agreed between them having particular regard to their current view of the likely business of the EVC Group in the Products during the term of this Agreement. However, various factors such as an unforeseen expansion in the demand for VCM by the EVC Group or an unforeseen restriction on such demand arising from environmental regulatory provisions may affect the Range either positively or negatively. They therefore agree that in the period of six months ending 31 December 1998 they will review both the Range and the level of actual and prospective purchases of Raw Materials by the Purchasing Subsidiaries hereunder and consider whether in the light of the then actual and prospective demand for VCM by the EVC Group a new higher and lower end of the Range should be agreed between them. If any such revision of the Range is agreed between them the parties hereto shall record the same and the consequential amendments to this Agreement in an agreement supplemental hereto and the relevant provisions of this Agreement shall be amended accordingly. If they do not agree to revise the Range the provisions of this Agreement shall remain in full force and effect.
3.9 The primary role of ICI-W under this Agreement shall be to sell to EVC-D Chlorine manufactured at the ICI-W Atlantik plant to be delivered by pipeline to the VCM plant at the Wilhelmshaven Site of EVC-D. Orders shall be placed accordingly by EVC-D for execution by ICI-W on the terms and conditions of this Agreement. However, C&P may at any time elect to sell to ICI-W EDC hereunder for onward sale by ICI-W to EVC-D hereunder and delivery to such VCM plant. Alternatively C&P may elect to sell such EDC direct to EVC-D hereunder. Hence orders by EVC-D for EDC shall initially be placed by EVC-D with C&P and C&P shall notify the Agent in writing as to whether C&P or ICI-W will execute such orders; invoicing and payment shall follow such election.
3.10 If the aggregate needs of the EVC Group for VCM in any Year from all sources for all purposes falls below 900,000 tonnes, C&P, HICI and the Agent shall meet to discuss whether they have a mutual interest in agreeing different pricing terms for a proportion of the annual tonnage of Raw Materials purchased under this Agreement in order to facilitate the sale of VCM and Products by the EVC Group in export markets.
3.11(A) On modification of this Agreement pursuant to Article 23.2 below, the Raw Materials sale and purchase obligations of this Agreement shall continue in full force and effect as modified by the terms of this sub-Article 3.11 and sub-Articles 4.5(H) and (I) for the period set forth in Article 23.3. For clarification, such Raw Materials are primarily intended to be supplied by C&P (in the case of Raw Materials other than Ethylene) and HICI (in the case of Ethylene) to EVC-UK for VC3.
(B) The minimum quantity of Raw Materials constituting the lower end of the Range as specified in Article 3.2(D)(i) above shall be the quantity of Raw Materials necessary for the manufacture of 280,000 tonnes of VCM.
(C) The maximum quantity of Raw Materials constituting the higher end of the Range as specified in Article 3.2(D)(iii) above shall be the quantity of Raw Materials necessary for the manufacture of 320,000 tonnes of VCM.
(D) The provisions of Article 3.2(D)(ii) of this Agreement shall be considered to have no further effect.
(E) If either C&P or HICI have given notice to modify this Agreement pursuant to Article 23.2 below, and the lower and higher ends of the Range are therefore to be reduced as set out in sub-Articles 3.11(B) and (C), then EVC and whichever of C&P and HICI has not given the notice shall meet in good faith so as to discuss whether that other party may, notwithstanding the modification, continue to supply EVC with Raw Materials other than Ethylene (where HICI gave notice to modify) or Ethylene (where C&P gave notice to modify) at the original levels of the Range and otherwise on the existing terms of this Agreement.
(F) Except as specifically altered by this sub-Article 3.11 and sub-Articles 4.5(H) and (I) or as otherwise agreed in writing between C&P, ICI-W and EVC (in relation to Raw Materials other than Ethylene) or by HICI and EVC (in relation to Ethylene), all terms shall continue in full force and effect."
- Of the schedules to which article 3.6 refers the first schedule deals with ethylene and provides, inter alia, for the specification and measurement of the ethylene supplied, identifies the various ethylene delivery points and sets out how the ethylene is priced. The second, third and fourth schedules deal respectively with the supply of chlorine, EDC and HCl and do so in a similar manner to the first schedule except that, in contrast to ethylene, there is a maximum and minimum limit to the quantity of chlorine and HCl, but not EDC, which EVC-D at VC6 and EVC-UK at VC3 can be required to take, namely (taking annual figures) between 100,000 and 130,000 mts of chlorine at VC6 and between 20,000 and 100,000 mts of chlorine at VC3 and, in the case of HCl, a maximum (but with no minimum specified) of 52,560 mts at VC3 and with no minimum or maximum HCl take-up requirement at VC6. The HCl schedule also provides that EVC-UK might itself be a supplier of HCl to C&P (and not just the other way round).
- Article 4, which is headed "Estimates of Raw Materials Requirements and Orders", provides so far as material as follows:
"4.1 The parties hereto recognise that the reliability of supply of Raw Materials to the relevant continuous process consuming plants of the EVC Group from C&P's, ICI-W's and HICI's relevant continuous process production plants (taking into account the normal inherent fluctuations in operational supply and consumption) requires a high level of close co-operation and flexibility in the relationships between them. This will involve timely passing of information between each of them and contact between each of them to optimise the smooth implementation of this Agreement throughout its life. The parties hereto therefore agree that they will do this in good faith for the period of this Agreement.
4.2 Annual Estimate
(A) Not later than 15 August in each Year (commencing 15 August 1998 in respect of the Year 1999) C&P shall provide to the Agent in writing a bona fide best estimate of the quantities of Chlorine and HCl expected to be available from C&P and ICI-W hereunder for delivery by pipeline to the relevant Sites in the United Kingdom and Germany in the following Year. Each estimate shall be expressed in terms of the tonnages of Chlorine and HCl respectively expected to be available at each such Site in each Quarter of the Year to which the estimate relates.
(B) Not later than the end of August in each Year (commencing August 1998 in respect of the Year 1999) the Agent shall make available to C&P and HICI in writing a bona fide detailed best estimate of the aggregate tonnage of VCM which the EVC Group plans to require for consumption and sale in the following Year. The following provisions shall apply to each such estimate:
(i) it shall be expressed in terms of the tonnage of VCM planned to be required for consumption and sale by the EVC Group in each Quarter of the Year to which the estimate relates and the tonnages of Chlorine, Ethylene, EDC and HCl required to be purchased by the Purchasing Subsidiaries from C&P, ICI-W and HICI hereunder towards meeting such planned requirements of VCM;
(ii) it shall include the estimates of Chlorine and HCl availability given by C&P pursuant to (A) above and the provisions of Article 3.4;
(iii) it shall take into account (as far as practicable) planned maintenance and shutdowns of the relevant EVC Group plant;
(iv) it shall be segregated on a Site by Site basis; and
(v) it shall include an estimate of the tonnage of Raw Materials to be toll converted by EVC-UK or EVC-D into VCM for C&P.
4.3 Revised Annual Estimate
(A) Not later than 15 November in each Year (commencing 15 November 1998 in respect of the Year 1999) C&P shall provide to the Agent in writing and in the same format an update of the estimate given by C&P pursuant to Article 4.2(A).
(B) Not later than the end of November in each Year (commencing end November 1998 in respect of the Year 1999) the Agent shall make available to C&P and HICI in writing:
(i) an updated estimate of the requirements of the Purchasing Subsidiaries for each of the Raw Materials at each of the Sites, such estimate in the case of Chlorine and HCl, being identical to the respective tonnages thereof set out in C&P's updated estimate referred to in (A) above; and
(ii) an update of the estimate of the aggregate tonnage of VCM required by the EVC Group for consumption and sale provided to C&P and HICI pursuant to Article 4.2 (B)(i).
(C) C&P, HICI and the Agent shall in relation to sub-clauses (A) and (B) each include in their own updated estimates details of the planned timing and duration of relevant plant shutdowns scheduled for the Year in question.
4.4 Quarterly Estimates
(A) Not later than the 10th day of the Month immediately preceding each Quarter (commencing on 10 June 1998 in respect of Quarters 3 and 4 1998 and 1 and 2 1999) C&P shall make available to the Agent in writing an update of the revised estimate given by C&P pursuant to Article 4.3(A) for each of the following four Quarters.
(B) Not later than the 20th day of the Month preceding each Quarter (commencing on 20 June 1998 in respect of Quarters 3 and 4 1998 and 1 and 2 1999) the Agent shall make available to C&P and HICI in writing an updated bona fide estimate of the tonnages of VCM which the EVC Group requires for consumption and sale in each of the following four Quarters, expressed in terms of the tonnage of VCM required by the EVC Group at each of the Sites in each such Quarter and the tonnages of Raw Materials (expressed as Chlorine, Ethylene, EDC and HCl) required to be purchased by the Purchasing Subsidiaries at each Site from C&P, ICI-W and HICI hereunder towards meeting such planned requirements of VCM; in the case of Chlorine and HCl such tonnages shall be identical to the respective tonnages thereof for the Quarter in question set out in C&P's update of the revised estimate as referred to in (A) above.
(C) C&P, HICI and the Agent shall in relation to sub-clauses (A) and (B) each include in their own updated estimates details of the planned timing and duration of relevant plant shutdowns scheduled for the Quarter in question.
4.5 Monthly Orders and Estimates
(A) C&P shall for itself and on behalf of ICI-W make available to the Agent in writing by the 20th day of each Month during the term of the Agreement a declaration of the tonnages of Chlorine and HCl respectively which they expect to be available at each of the relevant Sites for purchase by the Purchasing Subsidiaries in each of the next three Months.
(B) The Agent shall make available in writing by the 25th day of each Month during the term of this Agreement:
(i) to C&P and HICI, a declaration of the firm requirements of each Purchasing Subsidiary at each Site for delivery of Raw Materials under the Agreement for the next following Month expressed as Chlorine (to be provided by C&P and/or ICI-W) and Ethylene (to be provided by HICI);
(ii) firm orders from the Purchasing Subsidiaries to C&P and/or ICI-W (as appropriate) for Chlorine, EDC and HCl and from the Purchasing Subsidiaries to HICI for Ethylene for such next following Month on a Site by Site basis subject to planned plant shutdowns. Such firm orders shall in respect of Chlorine and HCl be for the tonnages of Chlorine and HCl at the respective Sites set out for the first Month of the declaration referred to in sub-clause (A) above;
(iii) to C&P and HICI, detailed estimates of the requirements of the Purchasing Subsidiaries for Raw Materials hereunder (expressed as Chlorine, EDC and HCl to be provided by C&P and/or ICI-W and Ethylene to be provided by HICI) in each of the two following Months taking into account planned shutdowns. Such estimates shall in respect of Chlorine and HCl be in aggregate tonnages of Chlorine and HCl set out in the declaration referred to in subclause (A) above for such following Months.
(C) The quantities of Chlorine and/or HCl actually available for sale to the Purchasing Subsidiaries at a Site in a Month under subclause (B) may vary up or down from the respective quantities set out in the declaration set out in sub clause (A) in the following situations and with the following consequences:
(i) If such variation is for reason of Force Majeure the provisions of Article 15 shall apply to regulate the obligations under this Agreement for any tonnage shortfall in Chlorine and/or HCl available for sale to the Purchasing Subsidiary in the Month in question to be made up by HICI making Ethylene available for sale and/or by C&P making EDC available for sale.
(ii) If any such variation is for any reason other than Force Majeure (including any commercial decision by C&P or ICI-W as to tonnages of Chlorine and/or HCl to be made available for sale hereunder to the Purchasing Subsidiary in the Month in question) it is recognised that this would affect the quantities of Ethylene and/or EDC contained in the firm orders from the Purchasing Subsidiary for the Site in the Month in question. If this occurs, C&P, ICI-W and/or HICI (as appropriate) shall promptly adjust (up or down as the case may be) either or both of such firm orders for Ethylene or EDC so that C&P, ICI-W and/or HICI shall comply fully with the relevant Monthly declaration applicable to that Purchasing Subsidiary pursuant to subclause (B)(i) above for the Site in question and in so doing C&P, ICI-W and/or HICI shall have full regard to the applicable despatch, reception and consumption logistics and C&P, ICI-W and/or HICI shall make no changes to such order if the said logistics would render it impossible for corresponding adjustments to be made to the actual supply of Ethylene or EDC.
(D) In the case of any variation in accordance with subclause (C), the relevant firm order placed by the relevant Purchasing Subsidiary under paragraph (B)(ii) shall, subject to the provision of subclause (C) be adjusted accordingly and shall remain legally binding as so adjusted.
(E) The monthly quantities of Raw Materials contained in a firm order referred to in (A) above shall constitute a legal commitment to take such quantities on the part of the Purchasing Subsidiary placing the order unless, due to circumstances outside the control of that Purchasing Subsidiary (which may not constitute Force Majeure), that Purchasing Subsidiary makes an unforeseen reduction in VCM manufacture to meet actual market conditions and explains its actions accordingly. In this latter case the commitment to take the tonnages of Raw Materials in such firm order shall be abated downwards to meet such reduction in VCM manufacture and the commitment to supply shall be likewise abated.
(F) The parties shall operate on an ordering basis no less strict than that practised at the date of this Agreement.
(G) C&P, ICI-W and HICI shall accept such firm orders on the terms and conditions of this Agreement.
(H) In respect of any Month, C&P, ICI-W and HICI shall not be obliged to deliver in aggregate Raw Materials hereunder to manufacture more than 50,000 tonnes of VCM in that Month provided that on modification of this Agreement under Article 23.2, in respect of any Month, C&P, ICI-W and HICI shall not be obliged to deliver in aggregate Raw Materials hereunder to manufacture more than 30,000 tonnes of VCM in that Month.
(I) In respect of any Quarter, C&P, ICI-W and HICI shall not be obliged to deliver in aggregate Raw Materials hereunder to manufacture more than 150,000 tonnes of VCM in that Quarter provided that on modification of this Agreement under Article 23.3 in respect of any Quarter, C&P, ICI-W and HICI shall not be obliged to deliver in aggregate Raw Materials hereunder to manufacture more than 90,000 tonnes of VCM in that Quarter.
(J) Subject to planned maintenance, planned plant shutdowns and availability of Chlorine and HCl or, as the case may be, of Ethylene notified by C&P or, as the case may be, by HICI under this Agreement, the Purchasing Subsidiaries shall use all reasonable endeavours to order Raw Materials as closely as practicable in equal monthly quantities.
4.6(A) It is agreed that, having regard to the relevant logistics of supply of Raw Materials by C&P and HICI to the EVC Group, it is intended that, subject to Article 3.9, C&P shall predominantly supply Raw Materials other than Ethylene hereunder and HICI shall supply Ethylene hereunder to the United Kingdom Sites of EVC-UK and ICI-W shall predominantly supply Raw Materials other than Ethylene hereunder and HICI shall supply Ethylene hereunder to the Wilhelmshaven Site of EVC-D. However, it is mutually agreed that, for bona fide business reasons, EVC-Italia may place orders with C&P and HICI for Raw Materials for supply on the terms and conditions of this Agreement to the relevant Italian Sites of EVC-Italia.
(B) The Agent will use all reasonable endeavours to optimise the logistics of supply of Raw Materials by C&P and HICI hereunder…"
Article 4.6(B) goes on to deal with deliveries of raw materials to the Italian sites.
- Article 10.1 states that the prices for the raw materials are set out in the schedule to the ARMA relevant to the particular raw material. The pricing provisions, which have remained unchanged since the ORMA was entered into, are complex. It is not necessary to set out or even summarise those provisions at this stage beyond noting that the prices are for a single or blended price (in the case of each raw material) for the delivery of the raw material in question to the relevant sites, whether in this country or abroad. I deal in more detail with the provisions for ethylene pricing when I come to consider one of the competition law claims later in this judgment (see paragraph 214 below).
- Article 16.5(B) contained in a section headed "Liability", provides that:
"(B) If for any reason any Purchasing Subsidiary materially breaches its obligations under this Agreement by failing to accept delivery of any tonnage of a Raw Material in respect of which C&P or ICI-W or HICI has accepted a firm order hereunder, such Purchasing Subsidiary shall use all reasonable endeavours to remedy such breach of its obligations hereunder and the limit of its liability hereunder for loss or damage to whichever of C&P, ICI-W or HICI accepted the relevant firm order shall be 80 per cent of the final DM price/tonne of the Raw Material in question applicable to the Month in which the failure to accept delivery of that Raw Material occurred, but subject to the obligation on the part of whichever of C&P, ICI-W or HICI accepted the relevant firm order to use all reasonable endeavours to mitigate the loss or damage (if any) incurred by it as a result of such breach by the Purchasing Subsidiary in question."
- Article 23, which is headed "Term and Termination", provides so far as material as follows:
"23.1 This Agreement shall come into force on Start-up and shall supersede the Raw Materials Agreement made on 15 November 1994 … which shall automatically be terminated at Start-up."
(The agreement made on 15 November 1994 is the ORMA.)
"23.2 Unless agreed otherwise by the parties, this Agreement may only be modified as set out in Articles 23.3, 3.11 and 4.5(H) and (I) by either C&P or HICI having given to the other parties hereto or the Agent having given to C&P and HICI, in each case, thirty-six months' notice in writing of its modification as set out in Article 23.3, such notice not to be given to expire prior to 31 December 2002.
23.3 On modification of this Agreement pursuant to Article 23.2, the sale and purchase and other obligations of the parties shall continue in full force and effect as amended by and in accordance with Articles 3.11 and 4.5(H) and (I), unless terminated by either C&P or HICI having given to EVC-UK or the Agent having given to C&P and HICI, in each case, thirty-six months' notice in writing of its termination, such notice not to be given to expire prior to 31 December 2008.
23.4 This Agreement shall only be terminated earlier than contemplated under Article 23.3 in the circumstances described in Article 23.5 and Article 23.6."
Article 23.5 refers to various insolvency events and article 23.6 to various defaults.
- In fact, Huntsman gave written notice under article 23.2 on 19 December 2002. The effect of this has been that as from 1 January 2006 the modified Range of VCM tonnages has applied for which article 3.11 provides. On 6 April 2004 EVC-UK served notice of termination under article 23.3 on behalf of itself and the other companies in the EVC Group. It is common ground that this will have the effect of terminating the ARMA on 31 December 2008.
- I have already referred to some of the other provisions when summarising the ORMA: see paragraph 55 above. So far as material, those provisions did not change when the NRMA and later the ARMA were entered into.
(2) The EDC for EVC Agreement
- There is a further agreement which I must mention before I seek to draw together the various strands and summarise the contractual and production arrangements as they now operate. This agreement is dated 31 July 2003 and is between Huntsman and C&P. It has been referred to, and I shall therefore refer to it, as the EDC for EVC Agreement. I understand that this agreement replaced an earlier agreement dated 9 January 2001 between Huntsman and C&P the terms of which, it is assumed, were of broadly similar if not identical effect. On 10 October 2003 Ineos Chlor was substituted for C&P pursuant to a novation agreement.
- Recital (E) to the EDC for EVC Agreement states that its purpose:
"is to provide for the supply by HICI to C&P of Ethylene to enable C&P to supply Chlorine in the form of EDC to the EVC Group under the Amended Raw Materials Agreement on identical (or substantially identical) terms to the terms relating to the supply of Ethylene contained in the Amended Raw Materials Agreement."
The same recital continues:
"This agreement also sets out the terms governing the relationship of HICI and C&P in relation to certain matters contained in the Amended Raw Materials Agreement in circumstances where the Amended Raw Materials Agreement does not specify the interaction in the supply of Raw Materials thereunder by two independent suppliers, it being recognised that each party shall perform their obligations under the Amended Raw Materials Agreement and this Agreement so as not to prejudice the other party's rights, benefits and obligations under such agreements."
- Clauses 2, which is headed "The Basic Ethylene Sale and Purchase Obligation", provides so far as material as follows:
"2.1 HICI shall sell and C&P shall purchase Ethylene to enable C&P to supply Chlorine and/or HCl in the form of EDC to the EVC Group under the Amended Raw Materials Agreement. Such Ethylene shall be delivered by HICI in such quantities and to such of the Sites as is directed, from time to time, by C&P on the terms and conditions of this Agreement.
2.2 HICI shall in each Year of this Agreement have available for purchase by C&P a sufficient quantity of Ethylene to enable C&P to meet its obligations to supply Chlorine and/or HCl in the form of EDC under the Amended Raw Materials Agreement up to the quantity of Ethylene required to supply the quantity of Chlorine and/or HCl as EDC necessary for the manufacture of VCM under the Amended Raw Materials Agreement categorised as the higher end of the Range.
2.3(a) The quantity of Ethylene to be sold and purchased hereunder in each Year of this Agreement shall be determined by C&P by reference to the quantity of Chlorine and/or HCl that C&P will supply in the form of EDC under the Amended Raw Materials Agreement.
(b) Other than any quantity of Ethylene comprised in any EDC purchased by C&P from third parties (other than HICI) pursuant to sub-clause 2.3(d) below, in each Year of this Agreement C&P shall not acquire, or supply to EVC, Ethylene or EDC acquired from any person other than HICI which will reduce the aggregate of:
(i) the Ethylene supplied by HICI to the EVC Parties under the Amended Raw Materials Agreement; and
(ii) the Ethylene supplied to C&P for the purposes of the manufacture of EDC for supply to the EVC Parties under the Amended Raw Materials Agreement, below the total supply of Ethylene required to manufacture the quantity of VCM nominated by the EVC Group in that Year under the Amended Raw Materials Agreement in respect of the supply of Ethylene.
(c) Notwithstanding the provisions of sub-clause 2.3(b), nothing in this Agreement shall oblige the C&P to purchase any Ethylene from HICI in any Year.
(d) It is acknowledged by HICI that, in order for C&P to meet its obligations under the Amended Raw Materials Agreement to supply Chlorine and/or HCl in the form of EDC to the EVC Group, C&P is entitled, from time to time, to obtain EDC from third parties (other than HICI) to supply the EVC Group with Chlorine and/or HCl under the Amended Raw Materials Agreement. C&P agrees that such EDC obtained from third parties (other than HICI) for supply to EVC under the terms of the Amended Raw Materials Agreement shall not in aggregate exceed 60,000 tonnes of EDC in any Year (save that where Huntsman has failed to deliver Ethylene in accordance with the terms of this Agreement and C&P has acquired EDC from third parties (other than HICI) as a consequence thereof, the tonnage of such EDC obtained in such circumstances shall not count towards the limit of 60,000 tonnes of EDC in the Year during which such failure to deliver occurs).
(e) It is acknowledged that all Ethylene deemed to be contained in any quantity of EDC supplied to the EVC Group under the Amended Raw Materials Agreement (either in EDC purchased from C&P or, if such purchase is made under clause 15.2(C) of the Amended Raw Materials Agreement, from a third party) shall count towards the EVC Group's obligations to purchase a quantity of Ethylene from HICI under the Amended Raw Materials Agreement as determined thereunder. Accordingly, the aggregate amount of Ethylene supplied by HICI to the EVC Group under the Amended Raw Materials Agreement may not equal the quantity of Ethylene necessary for the manufacture of VCM under the Amended Raw Materials Agreement categorised as the lower end of the Range, or if a different sum, the quantity of VCM nominated by the EVC Group in a Year under the Amended Raw Materials Agreement.
…
2.8 Without prejudice to the provisions of this clause 2, C&P agrees that it will do all within its power that can be reasonably done without incurring material cost to ensure that HICI benefits to the fullest extent possible from the terms of the Amended Raw Materials Agreement relating to the supply of Ethylene (subject to the burden thereof) and undertakes not to intentionally do anything to interfere with such benefit."
- Clause 8, which is headed "The Sites", is as follows:
"8. The Second Schedule hereto sets out the Sites in the United Kingdom which are contemplated for delivery of Ethylene by HICI hereunder. If during this Agreement any member of the ICI Group establishes a new EDC manufacturing plant either: (i) on one of the existing Sites; or (ii) on a new site in the United Kingdom as a result of any member of the EVC Group establishing a new VCM plant pursuant to clause 9 of the Amended Raw Materials Agreement, C&P shall notify HICI in writing accordingly and the said Second Schedule and other relevant provisions of this Agreement shall be amended accordingly to the intent that such EDC manufacturing plant shall be included as a plant to receive Ethylene on the terms and conditions of this Agreement…"
The sites set out in the second schedule are Runcorn and Wilton.
- Clause 9.1(a), contained in a provision headed "Pricing of Ethylene, Payments and Records", states that:
"9.1(a) The price per tonne of Ethylene to be applicable in each Quarter in respect of Ethylene delivered hereunder in that Quarter shall be the same price as the price per tonne of Ethylene applicable in the relevant Quarter under the Amended Raw Materials Agreement. If at any time the price per tonne of Ethylene is determined under the Amended Raw Materials Agreement on any basis other than on a quarterly basis, for the avoidance of doubt, the price per tonne of Ethylene supplied under this Agreement shall at all times be the same as the price per tonne of Ethylene applicable in the relevant period under the Amended Raw Materials Agreement."
- Clause 13.5(b), contained in a section headed "Liability", provides that:
"(b) If for any reason C&P commits a material breach of its obligations under this Agreement by it failing to accept delivery of any tonnage of Ethylene in respect of which C&P has placed a firm order accepted by HICI, C&P shall use all reasonable endeavours to remedy such breach of its obligations hereunder and the limit of its liability for loss or damage to HICI hereunder shall be 80 per cent. of the final Euro price/tonne of Ethylene applicable to the Month in which the failure to accept delivery occurred, but subject to the obligation on HICI to use all reasonable endeavours to mitigate the loss or damage (if any) incurred by it as a result of such breach by C&P."
This provision mirrors the terms to be found in article 16.5(B) of the ARMA.
The agreements: the resulting position
- The result of all of this is that, so far as concerns the disputes which I have to determine, the following are, in the events which have happened, the material agreements which are currently in operation: (1) the ARMA under which Huntsman supplies ethylene either directly to EVC or indirectly to Ineos Chlor and Ineos Chlor supplies chlorine, HCl and EDC to EVC; (2) the EDC for EVC agreement of July 2003 under which Huntsman supplies ethylene to Ineos Chlor for incorporation by Ineos Chlor into EDC for supply to EVC under the ARMA; (3) the ICI Systems Agreement of November 1994 under which Huntsman grants EVC rights over its UK ethylene distribution system and Ineos Chlor grants rights to EVC over its German ethylene distribution system; (4) the UK Ethylene Distribution System Agreement of January 2001 under which Huntsman grants Ineos Chlor rights over its UK ethylene distribution system and (5) the German Ethylene Distribution System Agreement, also of January 2001, under which Atlantik grants Huntsman rights over its German ethylene distribution system.
- Those arrangements result in the parties operating in the following manner: (1) Huntsman produces ethylene in the UK which it supplies (a) to Ineos Chlor in the UK (under the EDC for EVC Agreement) and (b) to EVC in both the UK and Germany (under the ARMA); (2) Ineos Chlor and Atlantik produce chlorine in the UK and Germany which they supply to EVC in those two countries (under the ARMA); (3) Ineos Chlor produces EDC in the UK (for supply to EVC and others) using (a) its own chlorine and (b) ethylene supplied by Huntsman under the EDC for EVC Agreement or by third party suppliers (making use of the UK Ethylene Systems Agreement); and (4) EVC produces (a) EDC in the UK and Germany by direct chlorination using ethylene supplied by Huntsman (under the ARMA) or by third party suppliers (making use of the ICI Systems Agreement) and chlorine and HCl supplied by Ineos Chlor (under the ARMA), (b) EDC in the UK and Germany by oxychlorination using ethylene supplied by Huntsman (under the ARMA) or by third party suppliers (making use of the ICI Systems Agreement) and HCl supplied by Ineos Chlor and/or recycled following its production during cracking EDC to produce VCM, (c) VCM in the UK and Germany by using EDC produced by the processes described in (a) and (b) above and (d) VCM in the UK and Germany by using the EDC supplied by Ineos Chlor (under the ARMA) and by other third party suppliers. Finally EVC makes PVC resin using the VCM produced by the processes described in 4(c) and (d).
The events leading up to these proceedings
- Apart from a disagreement over the amount Huntsman was charging for EVC-UK's use of the TPEP for the delivery of third party ethylene from valve 25 to VC3 (see paragraph 55 above) and the claimants' unhappiness, ventilated from time to time in 2002 if not earlier, at the prices that they were having to pay for ethylene supplies under the ARMA (including an unsuccessful attempt in May/June 2004 to find a solution by recourse to the hardship provisions under article 14 of the ARMA) the parties were able until late 2004 to deal with each other on a reasonably consistent and amicable footing. One feature of the relationship was Huntsman's willingness to supply and be paid for ethylene on the basis of the tonnages actually drawn by the claimants at the Runcorn site rather than by reference to the quantities which they had ordered. The strict terms of article 4 were not insisted upon and the monthly tonnages ordered were regarded more as approximate targets to be achieved than as commitments to acquire. In part, I do not doubt, this was a recognition of the fact that, given the variables involved in the manufacture of VCM and the absence of any ethylene storage capacity at the Runcorn site, it was extremely difficult, if not impossible, for the claimants to consume in any one month the exact amount of the ethylene that they had ordered for that month.
- All of this changed in late 2004 when Huntsman came to believe that the claimants were wrongly manipulating the contractual supply and delivery arrangements between them. Huntsman considered that Ineos Chlor and EVC-UK were taking advantage of their UK System rights (under the ICI Systems Agreement and the UK Ethylene Distribution System Agreement) to obtain ethylene from third parties at cheaper delivered prices than the price for Huntsman's ethylene under the ARMA and were resorting to purchases from Huntsman sufficient only to meet the balance of their ethylene needs while ensuring that the tonnage so purchased was within the Range. In particular, Huntsman considered that when placing orders Mr Carmichael, who since 2001 had been responsible as Purchasing Manager for the raw material requirements of both Ineos Chlor and the EVC Group, was failing to disclose the EVC Group's true intended VCM production tonnage. He was doing so, Huntsman felt, in order to keep the claimants' ethylene purchases from Huntsman to a minimum whereas, on the basis of the actual VCM production tonnage figures, Huntsman believed that the claimants should have been purchasing a much greater quantity of ethylene under the ARMA. The matter was raised in a telephone conversation between Mr Carmichael and Dr Joe Duffy of Huntsman on 14 December 2004. In the course of that conversation, on being informed that the VCM tonnage planned for VC3 in 2005 was greater than the figures which had earlier been notified to Huntsman, Dr Duffy asserted that the ARMA required the claimants to purchase from Huntsman all of the ethylene needed for VCM production by the EVC Group up to the maximum of the Range.
- In an e-mail to Dr Duffy on 17 December 2004, Mr Carmichael put the claimants' position beyond doubt by stating that the claimants planned to produce a quantity of VCM over and above the amount for which it was intending to purchase ethylene from Huntsman under the ARMA and that EVC-UK intended to use its rights under the ICI Systems Agreement to import 15,000 mts of third party ethylene to achieve the overall VCM target. He stated that Ineos Chlor had no plans to source ethylene from Huntsman in 2005 except through the EDC for EVC Agreement. He disagreed with Dr Duffy that the contractual arrangements between them did not allow EVC to act in the way proposed.
- The parties were clearly at odds over how their contractual arrangements were intended to operate. Huntsman's first response, as expressed in an e-mail to Mr Carmichael on 24 December 2004, was to insist upon "a much more formal notification process so that when the constraints become apparent we can take immediate action to ensure everyone is being treated in accordance with their rights under the various contracts".
- Then on 11 January 2005 a meeting took place between Mr Carmichael and Dr Duffy (and one other from Huntsman) to discuss the dispute and see whether a code of practice for nominations could be agreed. This was followed by a letter to Ineos Chlor from Huntsman dated 19 January 2005 in which Huntsman stated that it was "in the process of a full and comprehensive review of the contracts between EVC and Huntsman and Ineos Chlor and Huntsman". It went on to say that Ineos Chlor was in breach of clause 4.9 of the UK Ethylene Distribution System Agreement and that the breach was "exacerbated" by breaches of the nomination procedure laid down by the ARMA and by breaches of confidentiality under the UK Ethylene Distribution System Agreement and the EDC for EVC Agreement. The letter stated that the seriousness of the matter was such as "to require resolution by formal process" and that once its review was concluded and failing a satisfactory resolution of the parties' differences under the dispute procedures laid down by their various agreements "we shall commence court proceedings so that neither party can be left in any doubt in the future as to their respective rights and obligations". The letter threatened a claim for substantial damages. It stated that it would allow Ineos Chlor continued use of the UK System but claimed that Ineos Chlor was failing to comply with the requirements laid down by the UK Ethylene Distribution System Agreement. It warned that "unless that situation is rectified access will be denied".
- What had hitherto been a polite and amicable disagreement over the parties' rights and obligations under their various contracts was elevated by this letter into an altogether more contentious dispute.
- Ineos Chlor responded on 24 January 2005 by rejecting Huntsman's claim that it was in breach of the UK Ethylene Distribution System Agreement. It reminded Huntsman of the earlier understanding that Huntsman should put forward proposals for a code of practice with a view to Ineos Chlor improving "the management of the normal fluctuating demand for ethylene across the Runcorn EVC and Ineos Chlor system". It warned of the very serious consequences for Ineos Chlor's business if Huntsman should deny or delay Ineos Chlor's access to the UK system.
- Huntsman replied on 28 January 2005 rejecting any threatened breaches of contract on its part, in particular that it had any intention of threatening Ineos Chlor's plant with shutdown. It pointed out that ethylene was available from Huntsman at commercial rates and that Huntsman was only concerned to protect its own commercial rights. The letter reiterated that Huntsman was carrying out "a full and comprehensive review of the relevant contracts".
- In a later e-mail response Mr Carmichael regretted the stance that Huntsman was adopting and pointed out that the parties had over the years established a flexible mode of operation which had worked well enough. This had included, he pointed out, the regular importation of third party ethylene.
- Nevertheless, on 18 February 2005, Huntsman requested EVC and, by a separate e-mail, Ineos Chlor to ensure that further forecasts and nominations were in accordance with article 4 of the ARMA (and clause 3 of the EDC for EVC Agreement). Among its requirements was that Huntsman be supplied with the previous two quarterly estimates and the annual and revised annual estimates for 2005 which, under article 4, should have been supplied to Huntsman during the second half of 2004. Mr Carmichael responded by again drawing attention to the parties' previous course of dealings where compliance with the notification and ordering provisions had not been insisted upon. He queried aspects of Huntsman's change of stance and stated that he was unable to supply quarterly estimates from 2004 which, he said, did not exist.
- There then followed a debate on whether a course of dealing had become established between the parties over the past years with regard to the provision of information under article 4, the basis on which Huntsman charged for ethylene (by reference to what was taken by the claimants rather than by reference to what they had ordered) and whether it was open to Huntsman to insist upon a strict compliance with article 4 (and clause 3 in the case of the EDC for EVC Agreement). By this time, Huntsman was insisting that the claimants pay for the ethylene ordered, and not just for the ethylene actually taken, and that, to the extent that ordered tonnage was not taken, they should pay Huntsman for having to store the tonnage in question in its system. Among other matters debated was whether it was open to Huntsman to exact storage charges, Huntsman's duty to mitigate any loss or damage it could show that it was suffering as a result of ordered ethylene not being drawn down, and the limitation on liability contained in article 16.5(B) of the ARMA (and clause 13.5(b) of the EDC for EVC Agreement).
- The dispute dragged on. A further requirement now entered the debate, namely Huntsman's insistence that (in accordance with article 4.5(J) of the ARMA) EVC should spread its orders evenly over the course of the year. A wholly new and altogether more serious area of dispute also arose. This concerned the correct interpretation of article 3.11(A) with regard to the destination of ethylene deliveries starting with the first quarter of 2006 (by when the ramp-down provisions of the ARMA would be taking effect). This culminated in a letter dated 27 May 2005 in which Huntsman's solicitors asserted that the "intended impact of the Ramp-Down provisions was the termination of supplies to Germany" so that "with effect from 31 December 2005, EVC had no right to call for supplies of Huntsman ethylene at Wilhelmshaven". Its only concession was that "the most generous meaning" which could be applied to the wording of article 3.11(A) "is that product could be ordered for Wilhelmshaven only insofar as they became necessary in order to allow EVC to consume the new contract minimum because its VCM requirements in the UK fell below 280 kts". But it then went on to say that "in truth it is clear that the intended effect of the exercise of this provision was that supplies to Wilhelmshaven would cease altogether". The letter also ventilated the many other disputes between the parties which had been identified during the preceding weeks over the interpretation and operation of the supply and other agreements.
- By mid-2005 the claimants had accepted that, whatever the past course of dealings had been, Huntsman was entitled to insist upon the estimating and ordering provisions set out in article 4 of the ARMA (and, in the case of Ineos Chlor, under clause 3 of the EDC for EVC Agreement). They endeavoured thereafter to carry out these obligations. But the other disputes remained.
- These proceedings were launched on 3 August 2005. The claimants' concern was to establish the true meaning and effect of articles 3.2(A) and 3.11(A). With ramp-down about to take effect the claimants considered that there was an urgent need to establish what the parties' rights and obligations were under the latter provision. A preliminary issue was directed in order to resolve that area of dispute. Subsequently, with an interim supply agreement in place between the parties (entered into for a limited period and without prejudice to their respective contentions), it was possible to vacate the hearing of the preliminary issue and obtain an early listing of the trial of all of the various issues, including by a late amendment, competition law issues, which the parties' statements of case identified.
- As I mentioned at the start of this judgment, the trial before me has been concerned with questions of liability alone. All matters concerned with compensation, to the extent that liability is established, are reserved for determination at a later hearing.
A summary of the issues
- I confine this summary to those issues which remained live by the time of counsels' closing submissions. There were others which have fallen by the wayside.
(1) Article 3.2(A) of the ARMA
- What is the meaning and effect of this provision? Does it mean, as the claimants maintain, that in each calendar year EVC's purchasing subsidiaries are only obliged to purchase ethylene from Huntsman within the relevant Range applicable to that year? Or does it mean, as Huntsman maintains, that for every tonne of VCM actually manufactured in each calendar year by EVC's purchasing subsidiaries within the relevant Range EVC's purchasing subsidiaries must, as regards ethylene, collectively purchase 0.472 tonne of ethylene from Huntsman?
- If Huntsman is correct in its interpretation of this provision and there is no avoidance of the provision by recourse to competition law (as to which see later) Huntsman has a counterclaim for damages for the failure since 2001 of EVC-UK and EVC-D (as the relevant purchasing subsidiaries) collectively to purchase the required volume of ethylene. In this regard, it is common ground that if Huntsman's interpretation of the article is correct the purchasing subsidiaries have not purchased ethylene from Huntsman up to the required level in each year. On the basis of VCM production figures disclosed by the claimants in the course of these proceedings (but which Huntsman has not yet been able it says to check) Huntsman contends that between 1 January 2001 and 31 December 2005 the aggregate shortfall in ethylene purchase amounts to 172,888 mts and that the failure is continuing. The claimants dispute these figures. These are issues which, if Huntsman's interpretation of the article is correct, will fall to be decided at the further hearing concerned with matters of quantum.
- By contrast, if the claimants' interpretation of the article is correct it is, I understand, common ground, subject to two possible points, that because in each year since 2001 the purchasing subsidiaries have between them purchased ethylene within the Range the counterclaim fails. The first of these two points is that there was a shortfall below the bottom of the Range in respect of the ethylene purchases made in 2002. I understand, however, that Huntsman was subsequently compensated for the shortfall. The second is that there was a shortfall below the minimum of the Range for 2005 but the claimants rely on the force majeure provisions of the ARMA on the basis that VCM production was affected by a plant breakdown. I did not understand the force majeure claim to be disputed in principle, even though there may be issues arising out of its application, but, in any event, this is not a matter which I was asked to deal with.
- I deal with these issues at paragraphs 139 to 161 below.
(2) Article 3.11(A) of the ARMA
- What is the meaning and effect of this provision, in particular the second sentence? Is the second sentence, as the claimants maintain, a non-binding statement by the parties of their future intentions as to where, with effect from 1 January 2006 (following ramp-down), deliveries of the majority of raw materials (within the modified Range) were anticipated to be made such that there is no restriction on the proportion of ethylene purchased under the ARMA which EVC can require to be delivered to VC6? Alternatively, if it does have contractual force, does it require EVC to take delivery at VC3 of no more than a bare majority of the quantity of raw materials it is obliged to purchase under the ARMA and is entitled to require the balance to be delivered to VC6? Or does it, as Huntsman maintains, have contractual force and mean that with effect from 1 January 2006 raw material supplies under the ARMA (within the modified Range) are in the first place to be delivered to VC3 so that it is only after the raw material requirements needed to meet the VCM planned for production at VC3 in each year have been or will be fulfilled that Huntsman can be required to supply ethylene (within the modified Range) to VC6 (and/or to other sites envisaged under the ARMA) and then only if EVC has given firm monthly orders for such balance?
- I deal with these issues at paragraphs 162 to 177 below.
(3) Clause 2 (and Recital E) of the EDC for EVC Agreement and clause 4.9 of the UK Ethylene Distribution System Agreement
- Huntsman alleges, but the claimants deny, that Ineos Chlor is in breach of clause 2 (and recital E) of the EDC for EVC Agreement in three respects: first, by purchasing ethylene from third parties rather than from Huntsman for the purpose of making EDC for supply to EVC under the ARMA so as to reduce the aggregate of the ethylene which EVC would otherwise have purchased from Huntsman; second, by failing to do all within its power that could reasonably be done without incurring material cost to ensure that Huntsman benefited to the fullest extent possible from the terms of the ARMA; and third, by intentionally acting to prevent Huntsman from enjoying the fullest possible benefit under the ARMA. Huntsman also alleges, but the claimants deny, that Ineos Chlor is in breach of clause 4.9 of the UK Ethylene Distribution System Agreement in three respects: first, by using the TPEP to receive and deliver third party ethylene purchased by Ineos Chlor for the purpose of making EDC for supply to EVC so as to reduce the aggregate of ethylene supplied by Huntsman to EVC and to Ineos Chlor below the total of ethylene required to manufacture the quantity of VCM nominated by any member of the EVC Group under the ARMA; second, by failing to do all within its power that could reasonably be done without incurring material costs to ensure that Huntsman benefited to the fullest extent possible from the terms of the ARMA; and third, by intentionally acting to prevent Huntsman from enjoying the fullest possible benefit under the ARMA. Huntsman further alleges, but the claimants deny, that EVC has procured and participated in Ineos Chlor's breaches.
- During the course of his closing submissions Mr Temple accepted that these allegations turn on whether Huntsman's interpretation of article 3.2(A) is correct. He accepted that if Huntsman's interpretation is wrong there is no breach of these provisions (or none that has led to any loss) and that, even if it is correct, any breach of these provisions does not add anything to its counterclaim for damages under that article. This is because, as Mr Kosmin submitted and as I accept, if on the true construction of article 3.2(A) EVC is only obliged to purchase ethylene from Huntsman up to the minimum level stipulated by the applicable Range and has a choice whether to require Huntsman to supply ethylene beyond that level up to the maximum stipulated by the Range, Huntsman can have no complaint that, having fulfilled that minimum purchase requirement, EVC has purchased from Ineos Chlor (and Ineos Chlor has been willing to supply to it) ethylene in the form of EDC which it has obtained from third party sources. In such event it is their right to do so. For this reason I do not propose to take up any further space considering any breaches of those provisions.
(4) Article 4.1 of the ICI Systems Agreement
- In his written closing submission, Mr Temple submitted that in each of the years 2003, 2004 and 2005 EVC-UK was in breach of this provision because it had used the UK System to import quantities of ethylene in excess of its right, limited to 15,000 mts per annum, under this agreement. However, this is an unpleaded claim. (It is also a claim which the claimants deny on its merits.) It is unpleaded because, until the first day of the trial, Huntsman was denying that this agreement survived the termination of the ORMA. Moreover, it is without merit because, as I understand matters, Huntsman has charged EVC-UK for the use of the UK System for the distribution of the ethylene (the ethylene in question had entered the TPEP at valve 25 and had been drawn out at the let-down and metering facility nearby at valve 19A). In any event, as Mr Temple accepted in the course of his closing oral submissions, this claim adds nothing to Huntsman's claim under article 3.2(A) or, as he put it, "it leads nowhere in terms of money". I do not therefore propose to take up further space considering this issue either.
(5) Invoices
- Huntsman contends that, starting in early 2005, EVC (meaning principally if not exclusively EVC-UK) and Ineos Chlor have failed in certain months to take delivery of quantities of ethylene which each has ordered for those months (pursuant to the monthly regime for the placing of firm orders contained, as regards EVC, in article 4.5(B)(ii) of the ARMA and, as regards Ineos Chlor, in clause 3.5(a)(ii) of the EDC for EVC Agreement) and, conversely, that in certain months each has drawn tonnages which exceed the amounts ordered. Huntsman claims accordingly for the non-payment of invoices for the amounts ordered but not taken and for damages for conversion in the case of amounts of ethylene drawn in excess of the amounts ordered.
- It is not in dispute that EVC and Ineos Chlor have not taken delivery of the exact amounts of ethylene which each has ordered month by month from Huntsman. To that extent liability is not disputed. What is in dispute and what it is appropriate that I should consider, even though on this trial I am not concerned with questions of quantum, is whether in computing Huntsman's loss (a) it is appropriate to net off as between EVC and Ineos Chlor the respective quantities which each has drawn in any one month (so that any quantity underdrawn against the amount ordered by, say, EVC is set off against any quantity overdrawn against the amount ordered in that month by Ineos Chlor) and (b) to the extent that, after any such netting-off, there is an undrawn balance at the end of a month (as against the aggregate quantity ordered for that month) and after netting-off there is an aggregate excess of tonnage drawn at the end of a succeeding month, it is appropriate to treat the excess drawn as a pro tanto drawing-down of any tonnage previously ordered but not taken up. Huntsman's stance, as I understand it, is to deny any obligation on its part to net off (either within a month or as between one month and another) whereas the claimants contend that this should occur.
- Allied to this claim is a claim by Huntsman for storage of the ordered but undrawn tonnages. Huntsman has claimed for storage at a rate of £10 per mt per month. Since Huntsman's claim for undrawn tonnage (denying any right in the claimants to net off in the way that I have described) is for a total of 9420 mts - I am not concerned with precise quantities - the storage claim is considerable and, at £10 per mt per month, is steadily mounting. (Figures appended to the second witness statement of Mr Alan McMahon of Huntsman suggest that by January 2006 the storage charges which it is claiming amount to around £130,000 per month.)
- I deal with these issues at paragraphs 178 to 192 below.
(6) Article 4.5(J) of the ARMA
- This provision requires the purchasing subsidiaries, subject to planned maintenance and plant shutdowns and raw materials availability, to "use all reasonable endeavours to order Raw Materials as closely as practicable in equal monthly instalments".
- There was an issue whether EVC-UK and EVC-D had complied with this qualified obligation with regard to the ordering of ethylene from Huntsman. Combining and treating as a composite whole the amount of ethylene ordered from Huntsman by those two entities and adding in the ethylene ordered from Huntsman by Ineos Chlor under the EDC for EVC Agreement, as seems to me to be appropriate, there was one period - in June and July 2005 - when it might be said that there had been a failure to carry out this obligation. There was a difference over the quantity of ethylene ordered by EVC-D in August and September 2005 but on this I accept the figures referred to in Mr Carmichael's evidence (at paragraph 72 of his third witness statement).
- I do not propose to take up space considering whether the lower aggregate quantity of ethylene ordered from Huntsman in June and July 2005 (as compared with the overall quantities ordered for the other months of the year) can be said to constitute a breach of the obligation to use reasonable endeavours to spread orders evenly over the months since, as Mr Temple acknowledged, it is not alleged that Huntsman suffered any loss as the result. It is at best a make-weight point raised by Huntsman to give emphasis to a recurring theme in its complaints against the claimants, namely that over and above any issues arising out of articles 3.2(A) and 3.11(A) of the ARMA the claimants have not taken sufficient steps to comply with their notification and ordering obligations under the ARMA (and, to a lesser extent, the EDC for EVC Agreement).
(7) Article 4 of the ARMA and clause 3 of the EDC for EVC Agreement
- The issue here is whether, as part of the relief sought by Huntsman's counterclaim, I should order the relevant claimants to comply with the notification and ordering requirements set out in articles 4.2, 4.3, 4.4 and 4.5(A) to (C) of the ARMA (in the case of EVC-UK and EVC-D) and of clauses 3.2, 3.3, 3.4 and 3.5(a) and (b) of the EDC for EVC Agreement (in the case of Ineos Chlor). Huntsman says that I should. The claimants say that this is unnecessary.
- I deal with this at paragraphs 193 to 199 below.
(8) The competition law issues
- These can be conveniently summarised as follows: (1) whether Huntsman has a dominant position in (a) the UK merchant market for ethylene and/or (b) the use of the TPEP and WGEP pipelines and the Runcorn metering and letdown facility and/or (c) the UK ethylene pipeline and supply network generally; (2) whether Huntsman abuses its dominant position in the UK merchant market for ethylene by levying excessive charges for the ethylene supplied in the UK to EVC-UK under the ARMA (and to Ineos Chlor under the EDC for EVC Agreement); (3) whether Huntsman abuses its dominant position in respect of the use of its pipeline and supply system (whether confined to the TPEP and WGEP pipelines and the Runcorn metering and letdown facility or in respect of the UK System generally) by levying excessive charges for the use by the claimants of Huntsman's pipeline system for the delivery to the claimants at the Runcorn site of ethylene imported through valve 25; and (4) whether Huntsman abuses it dominant position or is in breach of article 81 of the EC Treaty in limiting the market for the supply of third party ethylene by foreclosing competitors from supplying ethylene to EVC-UK and Ineos Chlor by a combination of (a) the requirements under articles 3.2(A) and 3.11(A) of the ARMA (and the corresponding provisions in the EDC for EVC Agreement) that EVC-UK and Ineos Chlor purchase the large majority of their ethylene requirements from Huntsman, and (b) the limited quantities of third party ethylene that EVC-UK is permitted to purchase from third parties using the UK System coupled with the charges levied by Huntsman for the use of its metering and letdown facility at valve 19A for the delivery of third party ethylene.
- The last of those issues assumes at the least that Huntsman is correct in its construction of article 3.11(A).
- The parties are at odds, inter alia, over whether Huntsman is dominant in any of the specified markets and over whether the charges which it levies are excessive, whether for ethylene under the ARMA and EDC for EVC Agreement or in respect of the use by the claimants of its pipeline between valve 25 and 19A and the metering and letdown facility at valve 19A to enable third party ethylene to be delivered to the Runcorn site.
General observations on the oral evidence
- During the course of the trial some at least of the cross-examination – on both sides – appeared to be directed to matters of motivation for actions taken and whether, in this respect or in that, the person in question was or was not acting in good faith. Subject to one or two possible exceptions, none of this seemed to me to be of any relevance to the issues that I have to decide. One possible exception is whether there are grounds for thinking that Huntsman was intent on denying to EVC and/or Ineos Chlor use of the TPEP in deliberate breach of their rights to such use. Another was whether Mr Carmichael was unscrupulously manipulating the supply and system agreements to ensure a maximum flow of ethylene for both Ineos Chlor and EVC at as cheap a price as possible and was doing so to Huntsman's financial disadvantage ethylene and in deliberate defiance of Huntsman's rights. I make it clear that I am quite unpersuaded that there were any such intentions. The strong impression left by the evidence was that actions on both sides have been misconstrued because each has entertained a different understanding of their respective rights and obligations. My impression of the witnesses was that each was attempting to give as honest and as accurate an account of matters as he could. In particular, I did not have the impression that any of those who gave evidence had attempted at any stage to do other than act in good faith in the interests of his employer, having regard to his understanding (or assumptions as to the operation) of the relevant contractual arrangement.
- I have no reason to think that once these misunderstandings have been removed each party will not adhere to its obligations or seek to deny the other's rights.
- I mention one further matter. There was a suggestion that Mr Carmichael had no business to be acting as the person in overall charge of the raw material purchase requirements of both Ineos Chlor and the EVC Group and that in doing so he was acting wrongly. I have been unable to discern any reason why Mr Carmichael should not have acted both for Ineos Chlor and for the EVC Group in this way. Mr Temple was not able to point to any particular matter, let alone to any contractual obligation, in respect of which it could be said that Mr Carmichael was wrong to do so.
The remaining disputes
- I come now to the disputes which remain. I start with the issues which prompted these proceedings and which, from start to finish, have been at the heart of the parties' disagreements, namely the true construction of articles 3.2(A) and 3.11(A) of the ARMA. I take article 3.2(A) first.
Article 3.2(A) of the ARMA
- The claimants contend that article 3.2(A) means that in any one year the purchasing subsidiaries are only obliged to purchase a quantity of ethylene which is "within the Range". They contend that this is made explicit by the third sentence of the provision. They therefore contend that Huntsman is mistaken in its contention that the EVC Group must nominate under article 4 the quantity of VCM that it intends to make in the forthcoming year and must then order ethylene from Huntsman (directly under the ARMA and/or indirectly via Ineos Chlor under the EDC for EVC Agreement in the case of ethylene purchased for supply as EDC to the EVC Group) sufficient in amount to manufacture the nominated tonnage of VCM except to the extent that it exceeds the top of the applicable Range but subject to a minimum purchase at the bottom of the Range.
- Mr Kosmin's submissions in support of the claimants' interpretation of article 3.2(A) were as follows:
(1) The Range to which article 3 refers establishes the amount of raw materials which the purchasing subsidiaries are required to purchase and which the suppliers (following novation in October 2003, they are Ineos Chlor and Atlantik in the case of raw materials other than ethylene and Huntsman in the case of ethylene) must make available for purchase during a particular contract year. The tonnages which determine the range are set by reference to article 3.2(C) in the case of the bottom of the Range and by article 3.2(D) in the case of the top of the Range with a proviso, set out in 3.2(D)(ii), for scaling down the minimum if the "aggregate needs of the EVC Group for VCM" (ie of the EVC Group as a whole) in any year can be shown to have dropped below 900,000 mts.
(2) The minimum purchase obligation provides protection to the suppliers. In return the purchasing subsidiaries have the opportunity to purchase up to the top of the Range. The minimum exists, whatever the actual quantity of VCM that is proposed for manufacture.
(3) Although article 3.2(A) refers to "the quantity of Raw Materials required to be sold and purchased" under the ARMA and does so by reference to "the quantity of Raw Materials required to manufacture given quantities of VCM" the reality is that the Range is directed to the raw materials to be purchased. This is evident from, for example, articles 3.2(D), 3.3 and 3.5 where the reference is to the range of raw materials and not just to particular quantities of VCM. Thus, article 3.2(D), refers to "…the maximum and minimum quantities of Raw Materials constituting the Range in each Year".
(4) Because of the variable quantities of chlorine, HCl, EDC and ethylene that may be needed to produce a given quantity of VCM, depending upon the production method used, article 3.2(A) provides a mechanism for translating this into the Range for the purchase of each raw material, namely 0.472 tonne of ethylene and 0.601 tonne of chlorine - the only chemical ingredients which are in play - for each tonne of VCM. Likewise, article 3.2(E) provides a mechanism applicable to the make-up of EDC; it deems the quantity of ethylene contained in any EDC purchased under the ARMA (and as such to be counted towards the purchasing subsidiaries' ethylene purchase obligation under the agreement) to be 0.285 of the quantity of EDC in question.
(5) Prior to modification (under article 23.3) the bottom of the Range was 475,000 mts of VCM (equivalent to 224,200 mts of ethylene and 285,475 mts of chlorine) and the top of the Range was 550,000 mts of VCM (equivalent to 259,600 mts of ethylene and 335,550 mts of chlorine).
(6) Within the Range, the purchasing subsidiaries have the freedom to purchase as much or as little of each raw material as they like. Quite apart from the third sentence of article 3.2(A), the fact that there is this freedom is made abundantly clear by article 3.2(C) which provides that the purchasing subsidiaries are "obliged to purchase in aggregate from … HICI [ie Huntsman] (in the case of Ethylene) …a quantity of Raw Materials categorised as the lower end of the Range" and by article 3.3 whereby "The Purchasing Subsidiaries may elect to purchase in aggregate … in respect of the Year in question …any quantity of Raw Materials equal to or above the lower end of the Range applicable to the Year and up to the quantity representing the higher end of the Range" (emphasis added).
(7) Huntsman's approach to the construction of article 3.2(A) means, effectively, treating the third sentence as surplusage. But the third sentence cannot be ignored. It is plainly intended to make clear what might otherwise be unclear. Nor can it be intended, as paragraph 85 of Huntsman's amended defence and counterclaim suggests, to "reinforce the obligation on EVC to purchase ethylene in the proportion 0.472 tonne of ethylene for every tonne of VCM manufactured up to the top of the Range". Nor can it mean that there is no obligation to purchase raw materials in the stated proportions to one another so long as collectively they are sufficient to produce VCM at the nominated level. Such a construction ignores article 3.3 which entitles the purchasing subsidiaries to elect to purchase in aggregate "any quantity of Raw Materials equal to or above the lower end of the Range …up to the quantity representing the higher end of the Range".
(8) The third sentence of article 3.2(A) clearly and unambiguously provides that the purchasing subsidiaries are only obliged to purchase from the suppliers quantities of raw materials which are within the Range and are not obliged to do so in a manner which ensures that the quantities of ethylene and chlorine purchased under the ARMA are in the proportion of 0.472 (in the case of ethylene) to 0.601 (in the case of chlorine). This would be so even without the third sentence which, as it states, is inserted "for the avoidance of doubt". The reason for its insertion is because the first two sentences prescribe that the Range for each raw material is set by reference to a notional or "given" VCM figure and a notional conversion equivalence for ethylene and chlorine. The reference in the second sentence is, in relation to any year, to "given quantities of VCM" and not to just one nominated quantity. In other words, the third sentence has been inserted to avoid precisely the submission that Huntsman makes, namely that the purchasing subsidiaries are obliged to purchase ethylene and chlorine in the deemed proportions within the Range. The third sentence makes explicit that the raw materials need not be purchased in the stated proportions "so long as the quantity of each Raw Material purchased hereunder in any year is separately within the Range" (emphasis added).
(9) If it had been intended that the ORMA (and subsequently the NRMA and ARMA) should be an exclusive supply agreement up to the maximum of the Range, the draftsman could easily have so provided. He has not.
(10) Moreover, the ICI Systems Agreement, which was entered into at the same time as the ORMA, and by clause 4.1 of which EVC-UK was given the right to deliver into the UK System an annual maximum of 15,000 mts of ethylene purchased from third parties and EVC-D was given the right to deliver an annual maximum of 45,000 mts of ethylene purchased from third parties, contains no restriction to the effect that EVC-UK is only entitled to use the UK System once it has purchased ethylene under the ORMA up to the maximum of the Range. Such a restriction is implicit if Huntsman's interpretation is correct and EVC-UK is obliged to purchase its ethylene from Huntsman up to the amount necessary to enable VCM to be manufactured in any given year up to the top of the Range. In short, Huntsman's construction of article 3.2(A) leaves little if any scope for EVC-UK and EVC-D to take advantage of their rights under the ICI Systems Agreement.
(11) Article 4 is irrelevant to the true construction of article 3.2(A). As its heading indicates, it is concerned merely with the regime for estimating and ordering. By contrast, article 3 sets out, as its heading indicates, the raw materials sale and purchase obligations.
(12) In summary, the true meaning of the third sentence is not in doubt. Provided the minimum quantities of ethylene and chlorine are purchased, the deemed ratio of ethylene to chlorine can be ignored in calculating the minimum purchase obligations of the purchasing subsidiaries. In order therefore to get within the Range, it is not necessary that for each 0.601 tonne of chlorine bought from Ineos Chlor the purchasing subsidiaries must buy 0.472 tonne of ethylene from Huntsman. The reference to VCM is no more than a means of calculating the Range of each raw material and nothing more.
- Huntsman contends that article 3.2(A) requires EVC to purchase a quantity of raw materials sufficient to manufacture EVC's nominated VCM production for the year in question which is within the Range. The Range is a range of VCM and not, as the claimants contend, different ranges of raw materials. This means, as regards ethylene, that for every tonne of VCM for manufacture in the year, the purchasing subsidiaries must purchase from Huntsman, either directly or via Ineos Chlor under the EDC for EVC Agreement, a proportionate volume of ethylene, taking the proportion to be 0.472 tonne of ethylene for each tonne of VCM.
- Mr Temple's submissions in support of this interpretation were as follows:
(1) The first sentence of article 3.2(A) makes clear that the purchase obligation of the purchasing subsidiaries is not confined to ethylene or to any one raw material but to a quantity of raw materials required to manufacture given quantities of VCM, namely the quantities nominated each year by EVC-UK and EVC-D under article 4. Article 4 requires the nomination - the same nomination - to be given both to Huntsman and to Ineos Chlor.
(2) The second sentence of the provision makes clear how the quantity of ethylene required to be purchased is calculated. It is to be 0.472 tonne for every tonne of VCM. There would be no point in the second sentence unless the volumes of chlorine and ethylene to be purchased (howsoever made up in the raw materials to be used) are proportionate to the nominated VCM tonnage. This means that for every tonne of VCM manufactured within the Range, the purchasing subsidiaries are required to buy 0.472 tonne of ethylene (and 0.601 tonne of chlorine). This obligation, the proportionate purchase obligation, makes sense commercially (and marries in with the requirements of article 4) especially having regard to (a) the limited number of purchasers to whom, given its limited liquefaction facilities and therefore its limited export opportunities, Huntsman is able to sell its ethylene, (b) the long business lead time for ethylene production and (c) the need, if it is to be economically viable, for Huntsman's ethylene cracker to operate as fully and continuously as possible.
(3) The proportionate purchase obligation is reinforced by article 3.2(C), where the respective purchase obligations are linked as the quantity at the lower end of the Range, and by article 4.5(C)(ii) providing for adjustment to the purchasing subsidiaries' ethylene orders in circumstances where there is a variation in the quantity of chlorine and/or HCl that can be supplied.
(4) Since by article 3.2(A) the suppliers of raw materials must have available for sale to the purchasing subsidiaries a quantity of raw materials sufficient to meet the maximum quantity "categorised as the higher end of the Range" it would be uncommercial and improbable if, given this obligation, the purchasing subsidiaries were only obliged to buy the minimum tonnage of ethylene within the Range but were free to source from third parties any balance of their ethylene requirements needed to manufacture any tonnage of VCM in excess of the minimum within the Range but at or below the maximum of the Range. It would be positively inequitable if the purchasing subsidiaries should only be obliged to purchase the minimum tonnage of ethylene from Huntsman but be free to purchase above that minimum the chlorine (and chlorine equivalent) tonnages from Ineos Chlor needed to manufacture tonnages of VCM above the minimum of the Range.
(5) The third sentence of article 3.2(A), which is obscurely drafted, purports to provide the purchasing subsidiaries with a release from what would otherwise be their proportionate purchase obligations in respect of raw material purchases. The sentence gives rise to three possibilities.
(6) The first is that the sentence is to be read literally so that EVC is released from its proportionate purchase obligation if, but only if, EVC has purchased each of the four raw materials necessary to make the nominated quantity of VCM expressed as a tonnage at the bottom of the Range. However, as this gives rise to impossibly large quantities of VCM in that the quantities, when added up, are in excess of the maximum of the Range this possibility is to be disregarded.
(7) The second possibility is that the third sentence is meaningless and unworkable in practice and therefore the release which it embodies, ie the let-out from having to purchase raw materials in accordance with the proportionate purchase obligation, can be ignored. This does not mean that the third sentence is entirely without point. On the contrary, its premise is that there is a proportionate purchase obligation. By postulating an impossibility in the release, the sentence ends up by reinforcing that obligation.
(8) The third possibility requires the literal meaning to be disregarded and the third sentence to be construed as recognising that because the configuration of the raw materials which EVC may wish or be required to follow in making its nominated amount of VCM is variable, dependent on how much of each is used or is available, raw materials can be purchased in amounts sufficient to make the nominated quantity of VCM but with the precise proportions of the chlorine and the other chlorine containing raw materials (ie the HCl and EDC) being, as between themselves, disproportionate in quantity. Although the language is not entirely apposite, support for this construction of the third sentence is to be found in the use of the words "in aggregate" in articles 3.2(C) and 3.3. In short, the sentence is a recognition that from year to year the volume of VCM produced may fluctuate. It explains why article 3.3 gives EVC the right to elect to purchase a quantity of raw materials within the Range which is referable to its anticipated production for that year.
(9) The scheme for purchasing raw materials set out in article 3 is consistent and fits in neatly with the procedure for estimating and ordering raw materials laid down by article 4 (and with the dovetailed procedure laid down by clause 3 of the EDC for EVC Agreement). It is clear from that procedure that the variables of chlorine and HCl availability are determined first and form the basis of EVC's VCM requirements and therefore the volume of raw materials to be purchased to meet those requirements. See, in particular, article 4.5(B), especially 4.5(B)(ii). The article prescribes that EVC is obliged to purchase from Ineos Chlor whatever chlorine and HCl is available subject only to the limits in article 3.4 which in turn refers to the limits set out in the relevant schedules to the ARMA (summarised at paragraph 83 above). These amounts effectively dictate what ethylene and EDC are to be purchased by EVC from Huntsman and Ineos Chlor respectively.
(10) The EDC for EVC Agreement provides by clause 2.3(a) that the amount of ethylene which Ineos Chlor must purchase from Huntsman is to be determined by reference to the quantity of EDC which Ineos Chlor will supply to EVC in the form of EDC under the ARMA, the only proviso to this being that, by clause 2.3(d), Ineos Chlor is entitled to purchase from third parties (ie excluding Huntsman) for supply to EVC on the terms of the ARMA up to 60,000 mts of EDC, ignoring any tonnage of EDC acquired from third parties as a result of any failure by Huntsman to deliver ethylene under the ARMA.
- In my judgment, the claimants' construction of article 3.2(A) is correct. It is correct for the reasons given by Mr Kosmin summarised at paragraph 140 above.
- The principal difficulty about Huntsman's construction is that it fails to give any or any effective meaning to the third sentence of the article. Mr Temple was ultimately driven to submit that the sentence, like much else in the ARMA, was badly drafted and that it was either to be ignored or was to be given a meaning which, as he accepted, did not accord with the words used.
- I agree with him that the ARMA is in many respects poorly drafted. The more one studies it the clearer this becomes. But on the meaning to be ascribed to the third sentence I do not consider that there is any real doubt, particularly when viewed with the other provisions to which Mr Kosmin drew my attention, especially articles 3.2(C) and 3.3.
- I regard article 4, upon which Mr Temple placed reliance, as shedding no useful light on the meaning of article 3.2(A). It is true that the quantities of chlorine and HCl which C&P and ICI-W (now Ineos Chlor and Atlantik) are entitled to nominate and the sites where such raw materials are to be made available would appear to dictate the minimum amount of ethylene that will have to be purchased, and at the sites stated, if the chlorine and HCl in question are to be used in the production of VCM. Particularly striking in this regard is article 4.5(B)(ii) stipulating that the firm orders for raw materials for the ensuing month should, in respect of chlorine and HCl, be for the tonnages declared by C&P and ICI-W. But it does not follow from this requirement that the purchasing subsidiaries must purchase ethylene proportionately (using the deemed ratio of 0.472 tonne of ethylene per tonne of VCM) to the quantity of VCM, if within the Range, that they intend (and have nominated) to make. The extent to which C&P and ICI-W (and later Ineos Chlor and Atlantik) are entitled to specify the quantities of chlorine and HCl to be purchased is constrained by the second and fourth schedules (see article 3.4(A)). Prior to ramp-down the quantities were in aggregate roughly sufficient in amount (taking the deemed ratio of 0.601 per tonne of chlorine for each tonne of VCM) to enable a quantity VCM at the bottom of the Range to be manufactured and no more. The fact that these amounts were not adjusted to take account of the modified range following ramp-down does not mean that article 3.2(A) somehow acquires a different meaning. In truth, article 4 and in particular the chlorine/HCl nomination provisions do not assist in ascertaining the meaning to be ascribed to article 3.2(A).
- I find support for my acceptance of the claimants' construction of the article in the circumstances in which the ORMA came to be agreed. So far as material they are as follows.
- In the months leading up to the signing of that agreement and the flotation of EVC on the Amsterdam Stock Exchange (which resulted in the former joint venture operating for the first time independently of EniChem and ICI), there was concern over how the raw materials supply arrangements to be embodied in what became the ORMA would be viewed by the European Commission competition authorities. At the time, DGIV (as the EC Commission's competition arm was then known) was approached for its views on what EniChem and ICI were proposing. Very little of the relevant contemporary documentation setting out what passed between DGIV and the joint venturers was before me or, as I understand it, is still available. What has survived, and was in evidence, was a 56 page draft memorandum dated 7 July 1994 which, or a later draft of which, was (or was intended to be) sent to DGIV. The memorandum was prepared jointly by EniChem, ICI and EVC for submission to DGIV.
- The memorandum explained the background to the EVC Group, including its establishment in 1986 as a joint venture between EniChem and ICI, and the communications with the Commission that took place at the time. It recalled that these resulted in the Commission permitting the joint venture to operate for five years from March 1986 subject to various terms and conditions as set out in a declaration of exemption. The need for the exemption was prompted by the fact that, as the Commission found, the setting-up of the jointly owned company (EVC) to operate in the VCM and PVC sectors fell within the scope of article 85(1) of the EC Treaty. (Article 85 has since been re-designated as article 81.) The Commission's decision on the matter, and the terms of the exemption granted under article 85(3), are to be found in Re Agreements between EniChem and ICI [1989] 4 CMLR 54.
- During the currency of the five year exemption period further discussions took place with the Commission. According to the memorandum, they resulted in the provision by the Commission of a so-called "comfort letter" (it probably took the form of a negative clearance but since the document in question has not survived or is not available its precise form remains a matter of doubt) which enabled the EVC Group to continue to operate as a joint venture beyond the expiry of the original five year period but without the need for a formal extension. One of the terms was that EniChem and ICI would transfer to the EVC Group their respective VCM/PVC manufacturing fixed assets. The Commission reserved the right to reconsider the position "if the factual or legal situation should change with respect to an essential aspect of the agreements which affects their evaluation".
- A serious recession in the chemical industry worldwide was said by the memorandum to have led EniChem and ICI to decide to dispose of the EVC Group and thus to their decision to float the Group in late 1994. After describing the difficulties in the transportation and storage of the constituent raw materials involved in the manufacture of VCM/PVC (especially affecting ethylene) the memorandum went on to explain that the original VCM manufacturing capacity of the EVC Group (including its Italian plants) was 1.2 million mts per annum, that the EVC Group was committed to purchase 90% of its raw material requirements from EniChem and ICI, and that this 90% requirement - the so-called "Primary Requirement" - was to be sold at prevailing North West European prices, subject to quarterly variation, and with EniChem and ICI each providing 50% of that requirement. The EVC Group's remaining 10% requirement - the so-called "Secondary Requirement" - was subject to arrangements whereby each parent had first option to supply half of the 10% on arms-length terms to be agreed with the Group. This meant in practice that prior to 1991 nearly all of the Group's raw material requirements were supplied by the two parents.
- The memorandum then went on to explain that discussions between DGIV, EVC and the two parent companies led to an agreement in October 1991 limiting the Primary Requirement to the raw materials needed to manufacture 1.08 million mts of VCM "with the remainder being potentially free for the EVC Group to purchase in the market". The expectation was that "with steadily rising market demand forecast for PVC at that time … this would mean that the tonnage of the EVC Group's requirements for raw material to be supplied by EniChem and ICI would be likely to erode steadily as a percentage of the EVC Group's total raw material requirements".
- In fact, according to the memorandum, for reasons connected with a reduction in the market demand for PVC, the EVC Group's VCM requirement fell below 1.02 million mts per annum such that "from early 1991 it became hard for the EVC Group to achieve a Primary Requirement…". This appears to have led to the two parent companies relaxing the terms of supply of the Primary Requirement. The Secondary Requirement had been abandoned a little time before that although in practice the Group continued to purchase that part of its raw materials from the two parents.
- Having explained this background and having explained that the prevailing arrangements would be inappropriate once the EVC Group had been floated to become an independent customer, the memorandum stated that new post-flotation supply arrangements were needed which achieved three aims. The first was to secure for the EVC Group the long-term supply of raw materials on terms which reflected the Group's need to be internationally competitive. The second was to recognise (a) the interdependence of the EVC Group, EniChem and ICI in the logistics of supplying hazardous raw materials, (b) the dependence of the suppliers on the EVC Group's continued raw materials purchased from them and (c) the massive investment by the parents in the manufacture of the raw materials and the integrated nature of the overall operation. The third aim was to pay "full regard to current EU competition law regarding long-term major industrial supply contracts". The arrangements proposed to meet those aims, the memorandum continued, involved (a) separate contracts for the supply to the EVC Group of its raw material requirements (one between EniChem and members of the EVC Group and the other between ICI and members of the Group - the likely origin of the separate raw material supply agreements for the "North" and the "South") and (b) supply agreements lasting a minimum of ten years but subject to four years' written notice to terminate (not to be given before the end of the sixth year). This was to "allow the EVC Group the necessary assurance of a secure supply of raw materials over a long period" and to assure to EniChem and ICI "the continuation in the long term of a critical load on its upstream raw materials plant investments arising from the supply to the EVC Group".
- So far as the volume aspect of the proposed new supply arrangements was concerned, the memorandum said this:
"The basic principle agreed between EVC, EniChem and ICI is that during the currency of the raw materials contracts the EVC Group would purchase from each of EniChem and ICI volumes of raw materials (ethylene, chlorine, EDC and HCl) equivalent to
- a minimum of 450 ktpa VCM manufacture; and
- a maximum of 550 ktpa VCM manufacture.
This range is to allow for varying marketing and operational conditions; procedures for EVC to nominate its raw materials requirements within this range and in accordance with forward business forecasts will be included in the contracts. The top end of the range is almost identical to the Primary Requirement limitation of raw materials contained in the Commission's letter of October 1991. The choice of tonnage within the range will be EVC's and not EniChem's or ICI's and it would therefore be possible for the EVC Group to purchase from either EniChem or ICI any tonnage of raw materials within the Range and depending on its objectives, the EVC Group could seek to purchase from third parties any tonnage above 2 x 450 ktpa. Above the range the EVC Group would also be free to purchase from third parties or to seek to purchase from either EniChem or ICI if tonnages were available but there would be no commitment on EVC to purchase or on EniChem or ICI to supply, above the range." (emphasis added)
The memorandum went on to deal with price. Under the topic "use of system arrangements", it said this:
"To enable the EVC Group to exercise its capability to purchase ethylene from third parties in line with the volume flexibility described above both ICI and EniChem have established the contractual basis on which the EVC Group would be accorded defined rights to use parental ethylene and EDC logistics facilities (principally import terminals and pipeline infrastructure) for such purchases at typical arms-length commercial fees."
- In a section headed "Parties' Assessment of the Proposed Transaction Under EU Competition Law" the memorandum expressed the view that the proposed transaction, being a flotation, did not require the Commission's approval (under what is now article 81 of the EC Treaty) but recognised that the proposed raw material supply arrangements might raise issues for consideration under that article, particularly having regard to the Commission's comfort letter of October 1991. It stated that the parties were anxious to obtain the views of DGIV on the proposals and receive an assurance that under EU competition law the new contracts would be acceptable. It then expressed the parties' opinion that article 85 (as it was then numbered) would not apply to the proposed supply arrangements. It said that "the essential question would … appear to be whether the duration of the agreement in question, coupled with the proportion of the EVC Group's requirements involved, would be such as to raise the question of an unacceptable foreclosure of the market…".
- After having listed various points, the memorandum made the following among other points:
"The raw materials supply contracts do not cover a stated percentage of EVC Group requirements. A range of tonnages of raw materials is proposed with the lower end of the range 450 ktpa x 2 = 900 ktpa of VCM) being well below the 1.08 million ktpa referred to in Commission's October 1991 letter. The top end of the range is very close to that latter figure. EVC will have freedom to elect what tonnage to purchase within the range subject only to availability of alternative supplies and logistics of supply considerations. Indeed, it would be possible for EVC to elect to purchase raw materials equivalent to 450 ktpa of VCM manufacture from either or both EniChem or ICI and to purchase the balance up to 550 ktpa from third parties. There would be also nothing to prevent EVC from purchasing at the rate of 450 ktpa VCM manufacture from one parent and at the rate of 550 ktpa from the other, or any variation between the maximum and minimum in the range. Also EniChem and ICI have agreed in any event to assist the EVC Group to import ethylene and EDC from third parties by granting defined use of system rights on arms-length commercial terms." (emphasis added)
- Towards the end of the memorandum the following appeared:
"In conclusion …it should be emphasised that, post flotation, the raw materials supply contracts would progressively diverge in their implementation so that, in effect, EniChem and ICI would become competitors in the supply of raw materials to the EVC Group. Also, the EVC Group would in general term become independent of the influence of its present parents immediately on flotation becoming effective.
The result of this freedom would be to enable the EVC Group to have much greater control of its costs, inter alia through the terms and conditions of the raw materials and services supply contract, and markedly greater real freedom to purchase raw materials from third parties in the best market. The effect of this should enable the EVC Group to become more efficient and competitive for the benefit of consumers. The flotation transaction, if implemented and including the proposed new raw materials and services supply contracts, should be regarded as pro-competitive and the opposite of preventing, restricting or distorting competition in the Common Market, thus justifying negative clearance under Article 85(1)."
- It would appear, although as I have mentioned the relevant documentation is missing, that the desired negative clearance (or something equivalent) was obtained, albeit in respect of supply arrangements different in some respects from those referred to in the memorandum. For example, the length of the ORMA was for a minimum of eight years, rather than ten, and the notice period was three years rather than four.
- The significance of the memorandum is that, recognising the unwillingness of DGIV to allow a total requirements arrangement, the parties commended to DGIV supply arrangements put forward on the basis that EVC would be entitled to purchase raw materials from third parties once raw materials had been purchased from EniChem and/or ICI sufficient in quantity to enable the minimum tonnage of VCM within the Range to be manufactured. This joint approach, predicated on such a basis, does not of course determine the correct interpretation of article 3.2(A). That said, it would be very odd if, given that background, ICI and the EVC Group had nevertheless entered into a raw materials supply agreement which, on the true construction of article 3.2(A) (a provision that has been in the supply agreement since the ORMA was entered into), only allows EVC to purchase third party ethylene (or, for that matter, other third party raw materials) if the nominated VCM tonnage exceeds the top of the Range. Other evidence before me made clear that the parties were very alive to DGIV's concern to ensure that there was a competitive element within the market.
Article 3.2(A): Huntsman's counterclaim
- It follows from my conclusion on the issue of construction that, subject to the two points referred at paragraph 116 above, Huntsman's counterclaim for damages for breach of the article, measured by the shortfall in ethylene purchase by the claimants going back to 2001, does not arise and must therefore be dismissed.
Article 3.11(A) of the ARMA
- The essential questions here are whether the second sentence of this provision is intended to have contractual effect in the sense that it requires the parties to deal with the supply of raw materials in a particular way and, if it is, what precisely it requires the parties to do.
- I heard much evidence from both sides about the circumstances in which article 3.11 was introduced into their raw material supply arrangements in 1996 when the NRMA was entered into. (Article 3.11 was further altered when the NRMA was amended in July 2003 to become the ARMA, by the introduction of article 3.11(E) along with amendments which appear generally throughout the Agreement to distinguish between Huntsman as the supplier of ethylene on the one hand and C&P and, as appropriate, ICI-W (as they then were) as suppliers of the other raw materials on the other.) Much of the evidence concerned the negotiation of what I have earlier referred to as Project Victor and what each side was hoping to achieve and why. Beyond understanding what Project Victor was about, most of what I heard was either inadmissible as being evidence of the parties' intentions or aims in the matter or, if admissible, of no or minimal assistance. (The fourth of the five well-known principles of construction set out in the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912-923, prohibits reference to the previous negotiations of the parties and their declarations of subjective intent.) By contrast, the parties' background knowledge - the relevant factual matrix - concerning the aims and objectives of Project Victor, which is admissible, did not seem to me to throw any light on whether, in using the language to be found in the third sentence of article 3.11(A) demonstrating a shared concern (to use a neutral expression) that, following modification, raw materials should be "primarily" supplied by C&P, and now Ineos Chlor, (in the case of raw materials other than ethylene) and Huntsman (in the case of ethylene) to EVC-UK for VC3, the parties were thereby intending to enter into a binding commitment and, if so, precisely what that commitment was.
- I have already, so far as necessary, summarised at paragraphs 57 to 64 above the background to and outcome of Project Victor and the further agreements to which it gave rise. It is obvious that this involved much further investment by both EVC and ICI (and, as regards its share of the Project Victor payments following its acquisition of C&P's petrochemical division, by Huntsman). It is obvious that, having invested the monies and wanting in any event to ensure local (UK) outlets for its chlorine and ethylene, C&P would be anxious for VCM production to be continued at VC3 and, following modification when the top of the narrowed Range would be considerably reduced (from a maximum of 550,000 mts of VCM to a maximum of 320,000 mts), would want such production to be concentrated, or at the very least not diminished, at VC3.
- But I am quite unable to see how, with one exception to which I will come shortly, an understanding of the parties' aims and thought processes at the time sheds any admissible light on why they should have chosen to express themselves in the second sentence of article 3.11(A) in non-binding terms (if they did) rather than in binding terms and, if in binding terms, what precisely the rights and obligations were that they were thereby entering into.
- The question to my mind is purely one of construing the language used set against the other provisions of the ARMA and the various background matters to which I have referred. With that introduction I come to counsels' submissions.
- Mr Kosmin advanced the following submissions in support of the conclusion that the second sentence is no more than an expression of intent or, as he described it, a "soft, non-binding obligation".
(1) The parties have expressed themselves in terms of intention rather than of agreement or obligation and have done so in conjunction with a further word which, in context, is imprecise, namely "primarily". This loose statement of intention is clearly deliberate. Had they intended language having the force of a contractual provision they would surely have wanted to identify precisely the circumstances in which ethylene could be required to be delivered to a destination other than VC3 and the amounts which could be so delivered. Instead, by referring simply to what is "primarily intended" the parties have left the matter vague and uncertain.
(2) The ARMA contains a number of provisions which are "soft" obligations, amounting to "comfort" provisions, and which at the end of the day are no more than agreements to agree: see, for example, articles 3.8, 3.10, 3.11(E) and 14. Closest to the second sentence of article 3.11(A) and, like that sentence, no more than an unenforceable statement of intention is article 4.6(A) stating that "…that it is intended that, subject to article 3.9 [concerned with the "primary" role of ICI-W to sell chlorine made at its plant in Wilhelmshaven to EVC-D], C&P shall predominantly supply Raw Material other than Ethylene hereunder…to the United Kingdom sites of EVC-UK and ICI-W shall predominantly supply Raw Material other than Ethylene hereunder … to the Wilhelmshaven site of EVC-D …" (emphasis added). By contrast, where the parties have intended detailed and precise obligations, they have been able to say so, for example in the estimating and ordering procedures set out in article 4.
(3) A variation in the place for delivery under a supply contract, such as this, is of enormous significance. If the parties had intended to terminate or overwhelmingly restrict supplies of ethylene to Wilhelmshaven after modification, clear language could and should have been used, as, to have done so, would have amounted to a fundamental alteration of the existing pattern of business and the commercial relationships between the parties. VC6 was and remained an existing site, expressly listed in schedule 5.
(4) Article 22.3 and the first sentence of article 3.11(A) make clear that, on modification, the sale and purchase and other obligations of the parties continue in full force apart from the changes introduced on modification by articles 4.5(H) and 4.5(I). The same point is again emphasised in article 3.11(F). Bearing in mind those clear statements, it is to be noted that there is no modification of EVC's right under article 2.2 to nominate other purchasing subsidiaries which, on becoming purchasing subsidiaries, would be entitled to require the delivery of ethylene to their sites. The ARMA continues to incorporate, unamended, the five schedules to what was the NRMA. Schedule 1 deals, inter alia, with the delivery points for ethylene. Article 1.2 expressly provides that, to the extent that there is a conflict or ambiguity relating to any schedule and the remainder of the agreement, the wording of the schedule in question is to prevail. The effect of article 3.4(B) and schedule 2 (the actual reference is to schedule 4 but this is clearly erroneous) is that EVC-D can be required, as much after rampdown as before, to take very large deliveries of chlorine. It is difficult to see what sense there is in this if the impact of rampdown is to prevent, or largely to prevent, VC6 from obtaining ethylene supplies under the ARMA and to require EVC-UK to take all or very nearly all of the ethylene for consumption at VC3.
(5) The delivered price for ethylene under the ARMA is blended, meaning that it is the same no matter to which destination it is sent. There is no change to this after modification. If the effect of article 3.11(A) is virtually to eliminate Wilhelmshaven as a destination for ethylene under the ARMA, with a consequential saving to Huntsman (at the very least, the Wilhelmshaven terminal delivery fee of €45 per tonne and also the liquefaction and shipping costs) it is to be expected that, following modification, there would have been a reduction in the price to EVC of the ethylene, but there is none.
(6) Although Huntsman maintains that its construction of article 3.11(A) would not prevent ethylene from being delivered to VC6 under the ARMA it is difficult to see under what circumstances this would occur if, as Huntsman contends, VC3, with its nameplate capacity of 300,000 mts per annum of VCM, is capable and is therefore obliged to take delivery of at least 132,160 mts of ethylene (which is the equivalent of the minimum VCM tonnage under the modified range). The strict estimating and ordering regime for which article 4 provides (now very much insisted upon by Huntsman, including the spreading of orders evenly over the year) would make VC6's position even more problematical. Reference by Huntsman to an "order of precedence or hierarchy" does not assist. Rather it obscures the difficulties. The effect of Huntsman's construction is in practice to cut out VC6 as a place of ethylene delivery under the ARMA (and, for that matter, any other site) which can make no commercial sense.
- Mr Kosmin went on to submit in the alternative that if, notwithstanding the foregoing submissions, the second sentence is intended to give rise to enforceable delivery obligations, the question which inevitably arises is how much ethylene Huntsman can insist should be delivered to VC3. The provision, if it is to be enforceable, must have certainty. To achieve this the word "primarily" should be understood as meaning "mostly". This would enable Huntsman to insist on just under half of the ethylene nominated for a quantity of VCM within the modified Range to be delivered to VC3 and would allow the claimant to require that the remainder of the ethylene (ie just under half) be delivered to VC6 (or to some other site). No other construction of "primarily", if it is to have contractual force, leads to a workable result.
- I come now to Mr Temple's submissions. He submitted that the second sentence falls to be understood in the way it was expressed when it was first introduced (in the NRMA) and before it was amended (in the ARMA) to distinguish between C&P (later Ineos Chlor) as the supplier of raw materials other than ethylene and Huntsman as the supplier of ethylene. As drafted when first introduced into the NRMA the second sentence of article 3.11(A) read:
"For clarification, such Raw Materials [ie chlorine, HCl, EDC and ethylene] are primarily intended to be supplied by C&P to EVC-UK for VC3."
- Against that background Mr Temple's submissions were as follows.
(1) All the words in article 3.11(A) have to be given their full effect.
(2) When the ramp-down provisions were introduced it was envisaged, with no contrary suggestion or evidence, that VC3 and VC6 would continue to manufacture VCM at full capacity (VC3's revamped nameplate capacity being 300,000 mts per annum and VC6's 340,000 mts per annum) but in circumstances where, following ramp-down, the quantity of raw materials to be supplied (ie for a range of VCM not exceeding 320,000 mts per annum) would not be sufficient to service both plants at those capacities or at anything approaching those capacities. The parties obviously needed to identify the destination of the ramp-down volume of raw materials to enable them to plan their respective businesses and enter into any third party supply contracts to ensure that their raw material needs were met.
(3) The second sentence of article 3.11(A) addresses this need by identifying which entity was to supply the raw materials within the reduced Range and where and to whom the raw materials were to be supplied. It does so, and did so in the form it took in the NRMA, in respect of all the raw materials. Ethylene cannot be considered in isolation.
(4) It is to be expected that, having identified these matters, the parties would want their agreement to reflect a commitment in this regard. Put another way, having identified VC3 as the primary place of delivery for the raw materials under the modified Range, there can be no good reason why the parties should have left it open to EVC to require that all of the raw materials under the NRMA should be supplied to VC6. That is the consequence of the claimants' construction.
(5) Ignoring the word "primarily" and also the word "intended", the second sentence of article 3.11(A) cannot seriously be understood as other than imposing an unqualified obligation on C&P to supply and on EVC-UK to take delivery of all of the raw materials at VC3. The inclusion of the word "intended" does not negative what would otherwise be a clear contractual obligation. Nor does the inclusion of the word "primarily" qualify what would otherwise be an unqualified obligation. If a non-enforceable statement of further intention was all that was intended by the second sentence, the parties could easily have said so. The words "are … intended" are simply another way of saying "will" and do not therefore deprive the sentence of contractual force.
(6) "Primarily" means, inter alia, "in the first place" or "chiefly" or "principally". In the context of article 3.11(A) it sets out an order or hierarchy of supply as between possible destinations. The second sentence directs that VC3 is the destination to which the raw materials will be first supplied.
(7) The only question is as to the circumstances in which the raw materials may be supplied other than to VC3. The boundary between what is to be supplied to VC3 and what may be supplied elsewhere is set by the available VCM production capacity at VC3 which must first be exhausted so that, even if the nameplate capacity of 300,000 mts per annum is achieved, raw materials sufficient to make a further 20,000 mts, the top of the modified range, can be supplied to VC6 assuming that the EVC Group's overall VCM tonnage nomination made under article 4 has been set at that level. Raw materials would have to be supplied in any event to VC6 to the extent that the VCM production capacity at VC3 in any given year is below the bottom of the modified range.
(8) It makes good commercial sense for VC3 to be the primary place of supply of raw materials under the modified range when consideration is given to (a) the logistics of C&P's (and later Ineos Chlor's) land-locked chlorine and HCl production and distribution facilities at the Runcorn chlorine plant, (b) the logistics of C&P's (and later Huntsman's) ethylene production constrained by its limited liquefaction capacity (as regards ethylene exports) and its expensive ethylene pipeline infrastructure, (c) the need for C&P (and later Ineos Chlor and Huntsman) to secure a guaranteed customer for its UK raw materials, (d) the chemistry involved in EDC and VCM manufacture, (e) the huge sums paid by C&P (and later Huntsman) - the Project Victor payments - to secure the continued operation of VC3, and (f) the need for VC3 to be run continuously to depreciate the costs of its revamping and expansion under Project Victor.
(9) The claimants' primary submission - that the second sentence is not intended to impose any enforceable obligation - begs the question why the second sentence was included at all in that, if the parties had not wanted to make any change other than to reduce the Range, the second sentence could easily have been omitted altogether. Its inclusion in a commercial contract indicates, at the very least, that it was intended to have legal effect. The introductory words "for clarification" show that the draftsman wanted to put beyond doubt the words that followed. What was being clarified was the first sentence which on any view is of legal effect.
(10) As regards the claimants' alternative case, "primarily" is not a synonym for "majority". If the parties had intended that at least 51% of raw materials ordered by EVC under the NRMA were to be supplied to VC3 and that EVC was only entitled to acquire up to 49% to be delivered to VC6, the article could easily have said so. Moreover no good commercial reasons have been advanced as to why the parties should have agreed such a split of the delivery for raw materials on ramp-down.
- In agreement with Mr Kosmin, I am of the view that the second sentence of article 3.11(A) is no more than an expression of intention and is not intended to commit the parties to the supply of any particular quantity of raw materials to EVC-UK at VC3 whether that quantity is all of VC3's raw material needs (for a VCM tonnage within the modified Range) or, as the claimants' alternative construction suggested, a bare majority of those needs. In this respect the provision is no different from, and no more enforceable than, article 4.6(A) in which, having regard to the logistics of raw materials supply, the parties state that it is "intended" that C&P (now Ineos Chlor) shall "predominantly supply raw materials other than ethylene" to EVC-UK's sites in this country, with an identical statement of intention regarding ICI-W supplies to VC6.
- Similarly, article 3.9 states that ICI-W's "primary" role is "to sell to EVC-D chlorine manufactured at the ICI-W Atlantik plant" (ie at Wilhelmshaven). The use of the word "primary" does not bring with it any particular contractual obligation. Like the second sentence of article 3.11(A), it is no more than an aid to understanding how the parties envisage the operation of their relationship; such statements no more require them to pursue any particular course of action than does, for example, recital (E) stating that the purpose of the agreement is to supply the EVC Group with ethylene at prices which are fully competitive with those of other West European PVC producers not back-integrated into ethylene. They are on a par with other terms of the supply agreement, for example, articles 3.10 and 3.11(E), in which, in the circumstances to which they refer, the parties are exhorted to meet and discuss variations to their terms of trading. These provisions, beyond imposing obligations to act in good faith in the matters to which they relate, are no more than agreements to agree. They cannot be enforced so as to lead to any particular result.
- No material significance is to be attached to the use of the introductory words "for clarification" save as a means of drawing attention to what follows. In themselves, the words add nothing. They are rather like the use of the expression "for the avoidance of doubt", of which there are several instances in the ARMA. See, for example, article 23.6(A) and 23.6(B).
- As with article 3.2(A) I draw a measure of support for this conclusion from the concern expressed by ICI and EVC at the time that the modification provisions were being negotiated not to effect any major changes in the supply arrangements such as to warrant formal notification to DGIV. A note from Mr Tane (then in the employment of C&P) sent on 2 October 1995 referred to a concern over DGIV's attitude to any change: "…they [DGIV] will almost certainly have a say on what stipulations we and EVC are allowed to make…". Mr Haresign, who at the time was concerned on behalf of ICI Chlorchemicals with the supply of raw materials to EVC, referred in a note dated 21 November 1995 to the need to "proceed in a way which minimises the changes required to the Raw Materials Agreement, in order to make getting DGIV support as easy as possible." In fact, the NRMA, in which the modification provisions first appear, was not notified to the Commission.
- Mr Kosmin and Mr Brealey both submitted that the parties were anxious to avoid making any changes to the supply agreements which would require formal notification to the Commission. They submitted that it is therefore most unlikely that the parties would have agreed provisions for the modification of the Range which were tantamount to the imposition of exclusivity on EVC-UK in respect of its raw materials requirements since such a change would have required them to make formal notification. Or to put the same point another way, it is most unlikely, they submitted, that, as responsible business people (as, having seen some of them give evidence, for example Mr Haresign, Mr Tane and Mr Bartsch, I accept they were) the persons who negotiated the modification terms, if they had considered them to have the effect for which Huntsman now contends, would not have sought clearance from the Commission. As I have mentioned, no notification was made.
- Mr Brealey submitted that the need to avoid having to notify the Commission, coupled with the aspiration shared on both sides that, after ramp-down, the reduced volume of raw materials for supply under the ARMA should nevertheless be delivered to VC3, explains why the language used in article 3.11(A) is so loose. He submitted that it was deliberately left loose and non-binding precisely to avoid the need to notify the Commission.
- These considerations do not of course determine how article 3.11(A) is to be construed but they seem to me to have considerable force.
The invoice disputes
- I can take these issues together. They are summarised at paragraphs 123 to 125 above.
- Mr Temple submitted, and I agree, that once a firm order for the supply of ethylene has been placed with Huntsman under article 4.5(B)(ii) of the ARMA by one of the purchasing subsidiaries or under clause 3.5(a)(ii) of the EDC for EVC Agreement by Ineos Chlor there is a binding contractual obligation on the part of the purchaser in question to take and pay for the tonnage so ordered. Mr Temple also submitted, and I agree, that there is nothing in the ARMA or the EDC for EVC Agreement which entitles the purchasing subsidiary or Ineos Chlor to net off as between themselves any shortfall in tonnage (below the amount ordered) by the one against any excess tonnage drawn (above the amount ordered) by the other.
- Having said that, however, it does not follow that Huntsman is entitled to recover compensation for the amount by which tonnages drawn fall short of tonnages ordered, looking at each month's firm order in isolation from the amounts ordered in any other month. Nor does it follow that, merely because Ineos Chlor (it has nearly always been Ineos Chlor) has drawn ethylene in excess of the quantity ordered for that month, Huntsman has a claim for that excess without regard to shortfalls in drawing between itself and EVC.
- The matter to my mind is purely one of loss. What loss has Huntsman actually sustained by the shortfall or, as the case may be, by the overdrawing of the tonnages in question?
- As far as Huntsman is concerned, all ethylene tonnages purchased by EVC-UK and by Ineos Chlor pass through valve 19A and the adjacent flow meters (FQ 103/104). The evidence established that it is only because EVC/Ineos Chlor make returns to Huntsman of the amounts which each has drawn that Huntsman has any idea how the overall amount drawn is broken down as between the two purchasers. The price per tonne charged for the tonnages ordered in any given month under the ARMA (in the case of EVC-UK) and under the EDC for EVC Agreement (in the case of Ineos Chlor) is the same: the price formula in each is identical. To illustrate the consequences of Huntsman's approach to it is sufficient take a simple example: if in a particular month EVC-UK and Ineos Chlor had each ordered 5000 mts of ethylene, but EVC-UK drew nothing whereas Ineos Chlor drew 10,000 mts, it would be absurd if Huntsman could recover from EVC-UK the price for the undrawn 5000 mts and, at the same time, was entitled to be paid by Ineos Chlor for the 10,000 mts. In such event, Huntsman would be receiving payment for 15,000 mts when only 10,000 mts had been supplied.
- The reason why, in my judgment, Huntsman is obliged, when computing its losses, to set off the excess against the shortfall is because by article 16.5(B) of the ARMA (and correspondingly by clause 13.5(b) of the EDC for EVC Agreement) Huntsman is obliged to "use all reasonable endeavours to mitigate the loss or damage (if any) incurred by it as a result of the material breach by EVC-UK of its purchasing obligation under the ARMA" (or in the case of Ineos Chlor, of its purchasing obligation under the EDC for EVC Agreement). Using reasonable endeavours to mitigate its loss requires Huntsman to take into account the netting-off as between EVC-UK and Ineos Chlor of the tonnages that each has drawn (the one in respect of excess over the amount ordered, the other in respect of the shortfall in the amount ordered). That in my view is the true measure of Huntsman's loss in respect of any given month.
- The position in the case of an overall shortfall in the tonnage drawn in, say, month A followed by an overall excess in the tonnage drawn in month B is, subject to two points, likewise straightforward. Provided that the undrawn shortfall at the end of month A continues to be available to be drawn down during the course of month B (and implicit in Huntsman's claim for storage charges is that the undrawn shortfall was always available to be taken), Huntsman's duty to use all reasonable endeavours to mitigate its loss arising out of any breach by EVC-UK or Ineos Chlor requires it to treat the amount of the excess tonnage drawn in month B as counting against the earlier month's shortfall. In my view, it would not matter for this purpose if the shortfall in month A was that of EVC-UK and the excess in month B had been taken by Ineos Chlor.
- The first point of qualification is that the price of ethylene under the ARMA and EDC for EVC Agreement may have changed between month A and month B. If, for example, it had decreased by month B it would not be right to regard the excess tonnage drawn in month B as having been drawn at the price applicable to ethylene for that month in satisfaction of the undrawn shortfall in month A when the price per tonne that should have been paid for the tonnage ordered in that month was higher. The need to adjust for differences in price per tonne as between one month and another will need to be factored into the overall calculation. The principle must be that the shortfall in month A is made good by an excess drawn in month B at the price per tonne applicable to the shortfall.
- The second point of qualification is that if at any time the overall cumulative difference in drawing indicated that between them EVC and Ineos Chlor had drawn more than they had ordered (I understand that this was the position in March and April 2005) it would be open to Huntsman to show that it was deprived of the opportunity of selling some or all of the excess tonnage on the spot market for a higher price to their customers, including one or other of the claimants.
- The precise working out of these figures is not something which I am concerned to undertake on this trial. The point having been argued, my concern is merely to set out the correct approach as one of principle that should be taken.
- Before leaving this topic, I should note that Mr Temple submitted that the tenor of the ARMA and the EDC for EVC Agreement was to preclude set-off. He referred me to article 10.2(B) of the ARMA and clause 9.2.1(b) of the EDC for EVC Agreement. These provisions, which I do not need to set out, are concerned to prevent the setting-off against sums owed by EVC (or, as the case may be, by Ineos Chlor), of amounts owed by Huntsman to any other member of the EVC Group (or, as the case may be, of the Ineos Chlor group). They throw no light on the matter.
- This brings me to the question of storage charges. As Mr Kosmin pointed out, there is no provision in either the ARMA or the EDC for EVC Agreement entitling Huntsman to charge for storing ethylene, ie ethylene which has been ordered but not taken, much less any provision entitling it to charge at the rate of £10 per tonne per month as I understand Huntsman to have done.
- That being said, I cannot see why, as a matter of principle and notwithstanding the absence of any express contractual right to do so, Huntsman should not be entitled to a reasonable charge for the storage of undrawn ethylene provided it can show, first, that the tonnage was available to be drawn (there is no suggestion that it was not) and, second, that it was indeed stored and not simply sold to another. The fact that, because the tonnage in question was not taken, title in it did not pass to EVC-UK or to Ineos Chlor (as the case may be) - a point urged by Mr Kosmin, does not seem to me to be a reason for denying the claim. See in this connection Benjamin's Sale of Goods, 6th edition, at paragraph 9-009.
- What a reasonable charge is for having stored the undrawn ethylene (after taking into account the netting-off as between Ineos Chlor and EVC in any given month and as between one month and a later month) is a matter to be determined, in default of agreement, at the quantum hearing.
- Finally, on this topic, I should refer to four matters. First, under article 16.5(B) of the ARMA EVC-UK's liability for any loss or damage sustained by Huntsman by reason of EVC-UK's failure to take delivery of what it has ordered is limited to 80% of the invoice value of the undrawn tonnage. There is a similar limitation in the EDC for EVC Agreement. On any view, therefore, EVC-UK's liability for what it should have, but has not, taken (including any storage charges) is subject to that ceiling. Second, on 17 March 2006, the claimants offered by their solicitors to take delivery of what they calculated was the overall shortfall in tonnage taken (as against the overall amount ordered) calculated up to the end of October 2005, namely 756 mts in the UK. They offered to pay €787.9 per mt for that tonnage "in full and final settlement of all outstanding invoices up to and including October 2005 for ethylene, storage and interest", a total of €595,652.40. The offer was rejected. Whether as at 17 March 2006 that figure equalled (or exceeded) Huntsman's loss in respect of that part of its counterclaim and what the consequences are if it did not are matters which have yet to be determined. I was not asked to rule on them. Third, I heard much oral evidence on whether (and in what circumstances and where) undrawn ethylene is stored, how it can be drawn out and why it was that Huntsman had departed from the course of dealing which had existed between the parties prior to 2005 when, whatever the amount ordered, it had been content simply to invoice for the amount taken. None of this seemed to me to be of any relevance to the issues I have been asked to determine in relation to the invoicing for amounts ordered, and for storage claims in respect of shortfalls as against amounts ordered, in respect of the period subsequent to 2004. It was not, for example, suggested that, whatever the past course of dealing, Huntsman was not entitled from 2005 to insist upon the strict terms of the ARMA and EDC for EVC Agreement. Fourth, Mr Tane in particular was cross-examined about the claimants' delays in effecting prompt payment of invoices for ethylene ordered and taken. This related mainly to 2004. I did not understand Mr Temple to be pressing for any relief in respect of these delays. The matter did not feature in his closing submissions or in the form of order that he was inviting me to make.
Article 4 of the ARMA and clause 3 of the EDC for EVC Agreement
- So far as material these provisions, in the case of the ARMA, are concerned with the obligation of the agent, acting as co-ordinator of the requirements of the purchasing subsidiaries for raw materials (see article 13), to supply Huntsman in accordance with a set timetable with annual, revised annual, quarterly and monthly estimates of the purchasing subsidiaries' ethylene requirements. Clause 3 of the EDC for EVC Agreement contains corresponding provisions in respect of Ineos Chlor's ethylene requirements.
- At one stage Huntsman was seeking orders with a view to the claimants retrospectively fulfilling those requirements going back to 2004 (and possibly earlier) notwithstanding that no useful purpose could now be served by such out-of-date information. In its most recent formulation of the relief sought Huntsman now confines what it is seeking to the period from 1 January 2006 onwards until, as will happen, the ARMA and EDC for EVC Agreements expire on 31 December 2008.
- There is no doubt that until well into 2005 the claimants failed to provide much, indeed most, of the information required by these provisions. Until December 2004 this was because they and Huntsman were content to deal with each other without regard to what precisely they required. Indeed, up to and including January 2005, Huntsman was content, in the case of EVC-UK, to invoice for the ethylene taken and not by reference to the amount ordered. This practice continued until December 2005 in the case of ethylene supplied to EVC-D at VC6. The elaborate provision of annual, revised annual, quarterly and monthly estimates (together with the firm monthly orders) by the stipulated deadlines, for which articles 4.2 to 4.5 of the ARMA and clause 3 of the EDC for EVC Agreement provide, was largely ignored. I have little doubt that one at least of the reasons for this was that, as I accept, it was well nigh impossible for EVC-UK to forecast precisely what quantity of ethylene would be consumed in its VCM production process (such being the variables involved) and EVC-UK does not possess any storage capacity for unused ethylene.
- For reasons which it is not profitable to explore, although the matter was investigated in the evidence, Huntsman decided towards the end of 2004, as the claimants accept that it was entitled to do, that this informal course of dealing should cease and that there should instead be a strict adherence to the terms of the two agreements. There was for a period some uncertainty as to exactly what the information was that should be provided. This uncertainty arose not least because, as it emerged in the evidence, it is questionable how many of the persons in responsible positions within Huntsman in connection with this matter had troubled to read the two supply agreements with any particular care or in some cases at all. For their part, the claimants were puzzled as to why all of a sudden Huntsman should be insisting on strict observance of these provisions and, in some respects, puzzled over why Huntsman should want all of the information to which it was claiming to be entitled. The fact that Huntsman is not now pressing for compliance with these provisions for any periods prior to 2006 relieves me from having to consider whether, in respect of the period prior to 2005, Huntsman was estopped by its previous course of dealing with the claimants from insisting on such strict compliance.
- That said, having made abundantly clear that it insists on strict compliance with the notification requirements, Huntsman is entitled under the two agreements to be supplied with the various annual, revised annual, quarterly and monthly estimates and to insist on the firm monthly orders for which the relevant provisions of article 4 and clause 3 respectively provide. As I have mentioned, the claimants accept this position. In particular, the claimants accept that the information supplied must include, in the case of the ARMA, estimates of VCM tonnages which the EVC Group "requires for consumption and sale" in each relevant quarter of the year, ie the VCM tonnage which the Group intends to manufacture in each such quarter, whether for its own consumption or for onward sale. I mention this because at one stage at least Mr Carmichael, in charge of raw materials purchasing at both Ineos Chlor and the EVC Group, was not supplying those figures but merely a notional amount based on the quantity of ethylene which between them Ineos Chlor and the EVC Group intended purchasing from Huntsman (being an amount within the applicable Range) in order to manufacture the notional amount.
- The only question is whether, as Huntsman seeks, I should order the relevant claimants to provide this information. I ignore the fact, since the point was not taken, that, strictly, the obligation to provide the information required by article 4 of the ARMA is that of the Agent, which is not a defendant to the counterclaim, rather than any of the claimants.
- I am of the view that an order is unnecessary. Once Huntsman made clear that it was insisting on strict adherence to the notification provisions and the claimants grasped what was required of them, there has been no question of the claimants intending to do other than comply with the relevant provisions.
The competition law claims
(a) Introduction
- In view of my conclusions on the construction of articles 3.2(A) and 3.11(A) and in the light of a concession made by the claimants in regard to one of the claims, I can take these fairly shortly.
- The claims are essentially three in number. Common (although not strictly necessary to all three) is the allegation, see paragraph 10.1 of the claimants' amended particulars of claim, that Huntsman has at all material times held a dominant position in relation to (1) the supply of ethylene in the so-called UK merchant market (ie ethylene available for purchase in the UK on the open market, excluding quantities consumed by entities in the same ownership or under the same control as the ethylene producer) (2) Huntsman's TPEP and WGEP pipelines and the Runcorn metering and let-down facilities and (3) more generally, the UK ethylene pipeline and supply network.
- The complaints are of abuse of Huntsman's dominant position in respect of (1) the amounts - said to be excessive - charged by it under the ARMA to EVC-UK and, under the EDC for EVC Agreement to Ineos Chlor, for ethylene supplied in the UK, (2) the amounts - again said to be excessive - charged by it to EVC-UK under the ICI Systems Agreement and to Ineos Chlor under the UK Ethylene System Distribution Agreement for use of the TPEP and WGEP and, in particular, the metering and let-down facilities at Runcorn and (3) Huntsman's limiting of the market in the UK for the supply of ethylene by foreclosing competitors from supplying ethylene to EVC-UK and Ineos Chlor as a result of (a) the requirement that EVC-UK and Ineos Chlor purchase the large majority of their ethylene needs from Huntsman, (b) the limited quantities of third party ethylene that EVC-UK is permitted to purchase from third parties using the UK System and (c) the charges made for the use of the metering and let-down facilities. I do no more than summarise the pleaded allegations contained in paragraph 10.3 to 10.5 of the amended particulars of claim.
- The claimants allege that these matters give rise to infringements of article 82 of the EC Treaty, alternatively section 18 of the Competition Act 1988 ("the 1988 Act"), as regards the complaints of abuse of dominant position and of article 81 of the EC Treaty, alternatively section 2 of the 1988 Act, insofar as the agreements in question operate anti-competitively in the respects complained of and have as their object or effect the prevention, restriction or distortion of competition.
- The relief sought is (1) a declaration that articles 3.11(A) and 10 of the ARMA, clauses 2.3(b) and 2.8 of the EDC for EVC Agreement, and clause 4.1 of the ICI Systems Agreement and clauses 4.1(c), 4.9 and 5.1 of the UK Ethylene Distribution System Agreement are void and unenforceable, (2) a declaration that Huntsman has anti-competitively restricted access to the UK System and that EVC-UK and Ineos Chlor are entitled to fair rights of access to that system and (3) damages for losses sustained by the claimants as a result of overpayments for (a) ethylene by virtue of the excessive prices paid for it, (b) access to the metering and let-down facility and (c) access to the TPEP and WGEP. In particular, the claimants seek to be paid a sum equal to the cost incurred or to be incurred by them, estimated at £2.75 million, to enable them to take deliveries of ethylene (by means of the RSEP) without having to use Huntsman's metering and let-down facility at Runcorn (or the wider TPEP/WGEP system).
- These allegations first surfaced in the claimants' reply and defence to counterclaim and were later added, in early February 2006, to their particulars of claim thus leading to the relief summarised above. The amended particulars of claim made no complaint in respect of article 3.2(A). On 26 January 2006, in advance of service of their amended particulars of claim setting out these claims, the claimants sought, but Evans-Lombe J refused, permission to include in the amended particulars of claim an attack on article 3.2(A) so as to add it to the other attacks on the ARMA and related agreements brought on competition law grounds. At the start of the trial a question arose whether this precluded the claimants from relying of competition law as a defence to Huntsman's construction of article 3.2(A). On the fourth day of the trial, after having heard argument, I permitted the claimants to mount such a defence (and, in effect, seek a declaration that, if Huntsman's construction of the article should be correct, it violated competition law) but did so on terms, which the claimants accepted, that, if successful, they would not be entitled to a remedy in damages for that violation.
(b) The relevant legislation
- Article 81(1) of the EC Treaty prohibits agreements that distort competition in the Common Market and affect trade between Member States. It provides, so far as material, as follows:
"The following shall be prohibited as incompatible with the common mark: all agreements between undertaking …which may affect trade between Member States and have as their object or effect the prevention, restriction or distortion of competition within the common market."
Article 82 prohibits abuse by a dominant undertaking. It provides that
"Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States."
- As Mr Brealey observed, the categories of distortions of competition and abuse are not closed. Both articles give examples of prohibited agreements and abusive conduct. Thus, article 81 refers to agreements which "limit or control…markets". Article 82 instances an abuse consisting in "directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions".
- In contrast to article 81 which, by article 81(2), states that the prohibited agreement is to be "automatically void" article 82 does not spell out the consequence of the abuse. There can be little doubt, however, that the agreement, insofar as it is abusive within the meaning of the article, is unenforceable.
- Section 2 of the 1988 Act mirrors article 81 by prohibiting agreements that distort competition in the United Kingdom and may affect trade in the United Kingdom. Likewise, section 18 of the 1988 Act mirrors article 82 by prohibiting an abuse by a dominant undertaking which may affect trade in the United Kingdom. Both the EC Commission and the OFT have power to impose penalties for infringement of these prohibitions. The consequences of a finding of infringement, even where, as here, neither the Commission nor the OFT has taken any part in the proceedings, are potentially serious.
(c) The burden and standard of proof
- One further observation before embarking upon an examination of the particular complaints. This concerns the burden and standard of proof. The burden of proof lies on the claimants, alleging infringements of the prohibition, to prove their case. As to the standard of proof, in Napp Pharmaceutical Holdings Ltd v Director General of Fair Trading [2002] CAP ? 1001/1/01 (15 January 2002) the Competition Appeal Tribunal stated (at 109) that
"…The standard of proof in proceedings under the [1988] Act involving penalties is the civil standard of proof, but that standard is to be applied bearing in mind that infringements of the Act are serious matters attracting severe financial penalties. It is for the Director to satisfy us in each case, on the basis of strong and compelling evidence, taking account of the seriousness of what is alleged, that the infringement is duly proved, the undertaking being entitled to the presumption of innocence, and to any reasonable doubt there may be."
- Mr Sharpe submitted, and Mr Brealey did not dispute, that the necessity for strong and compelling evidence of infringement of the prohibition in question extends to the civil courts when addressing the same subject matter. I agree.
- With that brief introduction I come to the three areas of complaint. I will deal with them in the order in which they are pleaded.
(d) The complaint of unfair ethylene prices
- The complaint here is of an abuse by Huntsman of its dominant position (if such it is) by charging prices for the ethylene supplied by it under the ARMA which are unfair within the meaning of article 82 and section 18. Mr Brealey's closing written submissions made no reference to the price for ethylene under the EDC for EVC Agreement but I assume that the complaint extends equally to the prices charged under that agreement.
- The foundation of the complaint is the ethylene price mechanism under the first schedule to the ARMA (and under the EDC for EVC Agreement). Although complex in its definition, the mechanism is essentially this: that, in default of the parties reaching some other agreement, 90% of the price is to be 6% below the North West European Quarterly Contract Price ("the NWEQCP") for ethylene and the remaining 10% is to be the monthly spot price for cargoes of ethylene cif North West European Port for the relevant month of the relevant quarter. The NWEQCP is fixed for the whole of the relevant quarter. The spot price may change from month to month within the quarter.
- The allegation is that, although competitive when the raw materials agreement was originally drawn up, the price under the ARMA has since become uncompetitive and third party ethylene suppliers are now offering the claimants ethylene at "double digit discounts". The particulars of claim (at paragraph 10.3.1) allege that "the market for ethylene in the UK is NWEQCP discounted by at least 10%".
- In United Brands Company & anr v Commission of the European Community Case 27/76 [1978] ECR 207, the Court of Justice, when considering whether the selling price imposed by an undertaking in a dominant position amounts to an abuse and, in particular, whether, in imposing that price, the dominant undertaking has made use of the opportunities arising out of its dominant position in such a way as to reap trading benefits which it would not have reaped if there had been what is referred to (at paragraph 249) as "normal and sufficiently effective competition", stated (at paragraphs 250 to 253) as follows:
"250. …charging a price which is excessive because it has no reasonable relation to the economic value of the products supplied would be such an abuse.
251. This excess could, inter alia, be determined objectively if it were possible for it to be calculated by making a comparison between the selling price of the product in question and its cost of production, which would disclose the amount of the profit margin, …
252. The questions therefore to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products.
253. Other ways may be devised - and economic theorists have not failed to think up several - of selecting the tools for determining whether the price of a product is unfair."
(The sense of the last part of paragraph 252 suggests that the word "either" should follow rather than precede the word "unfair".)
- What therefore is required is (a) an analysis of the costs incurred in producing the product (b) a comparison of those costs with the price charged and (c) an evaluation of whether the resulting difference - the profit - is such that the price charged is unfair - and abusive- either because it is so plainly excessive that no comparison is needed or because it is unfair when compared with competing products.
- Another way of proving that the price charged is unfair, taking up the possibility suggested by paragraph 253 of the citation from United Brands, is by reference to what is charged for the product in question in a suitably comparable competitive market, as suggested by the Court of Justice in Bodson v Pompes Funebres, Case 30/87 [1988] ECR 2479.
- The claimants, in asserting that Huntsman's price for ethylene was and is excessive so as to amount to an abuse, have not sought to follow any of those courses in endeavouring to establish their claim. In his written closing submissions, Mr Brealey did not even attempt to make good the pleaded allegation that the market for ethylene in the UK is NWEQCP discounted by at least 10%. Even if he had, I do not see how that would have proved that the amount charged by Huntsman for its ethylene was an abuse of its dominant position (assuming that it is in a dominant position).
- The evidence, notably that of Mr Bartsch, a witness called by the claimants, and of Dr Duffy of Huntsman, made abundantly clear that it is misleading to look simply at the headline price. Rather, it is necessary to analyse just what it is that the purchaser is obtaining, and therefore what the seller is offering, for the price charged. In the case of the ARMA these factors include the high volume to be supplied when balanced against the flexibility provided to the purchaser by the Range of the ethylene tonnage which the seller is required to have available for supply (before ramp-down, between 224,200 mts and 259,600 mts to enable a range of VCM of between 475,000 mts and 550,000 mts to be made and, following ramp-down, between 132,160 mts and 151,040 mts to enable a range of VCM of between 280,000 mts and 320,000 mts to be made), the duration of the supply agreement with the guarantee of supply thereby provided (a minimum of three years following ramp-down), the fact that the price is a blended price such that it is the same whether the ethylene is delivered to VC3 in the UK, to VC6 in Germany or, for that matter, to Porto Marghera in Italy and the fact that the price is a delivered price so that all transportation costs and all storage and let-down charges are absorbed in the price.
- Instead, in Mr Brealey's closing submissions the claimants pointed to one, and only one, factor as justifying the conclusion that the price charged is unfair, namely the claim by Huntsman that, over and above the discount per tonne of ethylene below NWEQCP enjoyed by the claimants under the terms of the ARMA (and EDC for EVC Agreement), the claimants enjoyed what was referred to in evidence as the benefit of Huntsman's share of the Project Victor payments, namely an annual £1.5 million reducing, following ramp-down, to an annual £949,000. It is Huntsman's contention that these payments represent an additional discount on the price of ethylene sold by it over and above the discount provided by the ARMA (and EDC for EVC Agreement). Initially, in his third witness statement, Dr Duffy apportioned these annual payments across the totality of the ethylene supplied to EVC (whether in the UK or in Germany, there having been no deliveries to Italy). Subsequently, in his fourth witness statement and in his oral evidence, Dr Duffy altered that stance and said that the payments should be treated as a discount on the price of ethylene supplied in the UK alone. The result of this is that, in Huntsman's view, the true discount, as regards the price of ethylene supplied in the UK, averaged out between 1999 and 2005 at 10.3% below NWEQCP or, averaging out the prices charged between 2002 and 2005, at 9.1% below NWEQCP. (The calculation takes into account other so-called Cantello payments made to the claimants between 1999 and the first quarter of 2001, as well as the varying tonnages supplied during the years in question and the effect of the spot price on the overall effective discount below NWEQCP.)
- The claimants' contention was that, properly understood, the Project Victor payments are not to be viewed as discounts on price but as a subsidy or contribution towards the capital cost of improving and expanding VC3. This is a reference to EVC's decision, made following negotiations which took place in 1995, continued into 1996 and which led to the NRMA of July 1996 and the other agreements entered into at that time, to acquire the plant and other assets at VC3 and concentrate its UK VCM production at that plant, and not to concentrate VCM production at VC4 or abandon VCM production in the UK altogether.
- There are indications in the evidence which point both ways. That said, I regard the debate over how the Project Victor payments are to be characterised as entirely arid. For what the point is worth, however, I consider that the payments are more properly to be treated as discounts on price than as a subsidy towards the costs of upgrading and operating VC3. This is simply because the payments continue for so long as the supply agreement, originally the NRMA and now the ARMA, continues. In effect, the payments are tied to Huntsman's continued supply of ethylene.
- I regard the point as arid because even if the payments are not properly to be treated as a discount on price it does not follow that the price Huntsman charges the claimants for its ethylene is to be described as unfair and abusive. In his written closing submissions Mr Brealey stated that "If they [the Project Victor payments] are not properly to be taken into account [in the pricing of the ethylene], it must follow that Huntsman's assessment of the competitive price is unfair and would have to concede that the price to the Claimants would have to increase". That seems to me, with all due respect to him, to be a non-sequitur. Even if, as he submitted, the payments "are properly 'discounts' which … justify the non-movement of the 6%" this does not mean that the price charged is to be regarded as excessive, let alone that the price charged by Huntsman is excessive to such an extent as to be unfair and abusive.
- In my judgment, the claimants wholly fail to establish this core feature of their complaint and it is not therefore necessary to consider other necessary ingredients such as dominance.
(e) The complaint of unfair delivery charges
- The claimants complain that the charges levied by Huntsman for their use of Huntsman's pipeline system for the delivery of ethylene to them at Runcorn (both for Ineos Chlor and for EVC-UK) are unfair within the meaning of article 82 and section 18. In reliance on the expert evidence of Dr Veljanovski, they identify the relevant markets as two in number: the UK ethylene pipeline and supply network generally (ie the whole of the triangular system of pipes and related facilities described in paragraphs 20 to 24 above), alternatively Huntsman's metering and letdown facility at Runcorn.
- As a matter of pleading, the claimants assert the first of those as a relevant market but not the second. At paragraph 10.1 of their amended particulars of claim they assert, as an alternative to the first of those markets, Huntsman's TPEP and WGEP pipelines together with the Runcorn metering and letdown facility, ie the whole of Huntsman's system. They do not rely on the metering and letdown facility at Runcorn alone as a relevant market. Nevertheless I shall consider the latter, not least because Huntsman was willing to respond to this altered way in which the claimants advanced their complaint.
- I also note that in his closing submissions Mr Brealey did not advance any case based upon any charge other than that made by Huntsman for use of its system for the delivery of third party ethylene from valve 25 (the point at which the Shell-owned systems connect with the TPEP) to the Runcorn site beyond valve 19A, including Huntsman's metering and letdown facility at that point. The evidence and Mr Brealey's submissions focused upon the (current) £12.98 charge per tonne levied by Huntsman for that service. They did not focus, to any material degree, on the wider charges levied by Huntsman for the use of the pipeline system under its control.
- As to whether Huntsman holds a dominant position in the relevant market for the delivery of ethylene through its pipeline system (however that system is defined) proof of which is a necessary ingredient of a complaint, such as this, of a breach of article 82/section 18, the nub of the matter is the fact, which, subject to one important point, Huntsman does not deny, that to obtain the delivery of any ethylene to their Runcorn plants Ineos Chlor and EVC-UK have no practical choice but to use Huntsman's metering and letdown facility at Runcorn. This gives rise to what was described in the evidence as a "bottleneck" or "bottleneck monopoly". Such a state of affairs presently exists no matter from what point the ethylene destined for the Runcorn site enters into the wider UK ethylene pipeline and supply network.
- It appears from the evidence, however, that it is open to the claimants, and they are in the process of bringing this about, to bypass the bottleneck and avoid altogether any reliance on Huntsman's pipeline network, including its metering and letdown facility at Runcorn, by constructing their own separate metering and letdown facility and connecting to the Shell pipeline system. According to Mr Carmichael's evidence, the construction of this bypass is in two parts. The first, which is underway, is expected to be completed by the end of this coming September and is costed at £1.75 million. It will connect the Shell system to a new metering system and then to Ineos Chlor's existing letdown station. The second, which is not yet underway, will not be completed before 2007/2008 and is estimated to cost £1 million. This will connect Ineos Chlor's new metering station to a new pipeline and letdown station to serve VC3. The two-phase scheme was shown on plans which were in evidence before me. Mr Carmichael's estimate was that the overall cost of £2.75 million would be recovered within 18 months given Huntsman's delivery, metering and letdown charge which the claimants are currently having to pay, when multiplied by the third party ethylene tonnage for which they have access rights through Huntsman's system.
- One of Huntsman's defences to this claim is that since the claimants are able to bypass the bottleneck and since Ineos Chlor will have achieved this within a matter of months (with EVC-UK following, under the separate second phase of work, in a year or two) and since the cost can be quite rapidly recovered, there is no relevant ethylene delivery market in which Huntsman can be described as dominant.
- Mr Sharpe referred me in this connection to Oscar Bronner v Mediaprint, Case C7/97 [1998] ECR1 1365 in which (at paragraphs 65 to 66) Advocate-General Jacobs said that:
"65. …intervention of that kind [ie by requiring a dominant undertaking to supply the product or service or allow access to the facility in question], whether understood as an application of the essential facilities doctrine or, more traditionally, as a response to a refusal to supply goods or services, can be justified in terms of competition policy only in cases in which the dominant undertaking has a genuine stranglehold on the related market. That might be the case for example where duplication of the facility is impossible or extremely difficult owing to physical, geographical or legal constraints or is highly undesirable for reasons of public policy. It is not sufficient that the undertaking's control over a facility should give it a competitive advantage.
66. I do not rule out the possibility that the cost of duplicating a facility might alone constitute an insuperable barrier to entry. That might be so particularly in cases in which the creation of the facility took place under non-competitive conditions, for example, partly through public funding. However, the test in my view must be an objective one: in other words, in order for refusal of access to amount to an abuse, it must be extremely difficult not merely for the undertaking demanding access but for any other undertaking to compete. Thus, if the cost of duplicating the facility alone is the barrier to entry, it must be such as to deter any prudent undertaking from entering the market. In that regard it seems to me that it will be necessary to consider all the circumstances, including the extent to which the dominant undertaking, having regard to the degree of amortisation of its investment and the cost of upkeep, must pass on investment or maintenance costs in the prices charged on the related market (bearing in mind that the competitor, who having duplicated the facility must compete on the related market, will have high initial amortisation costs but possibly low maintenance costs)."
- Mr Sharpe submitted that whether or not a bottleneck exists and therefore whether there is a relevant market does not depend on the existence of the impediment, the bottleneck, but on whether the claimant can avoid it at a reasonable cost in terms of recoverability of the cost and within a reasonable time-span. He submitted that, on the claimants' own evidence, they can and therefore that there is no relevant market and therefore no issue of dominance or abuse for the court to have to determine.
- Mr Brealey submitted that the decision by the claimants to build their own metering, letdown and connected system does not alter the fact that Huntsman has been in and still has a dominant position over the supply to them of ethylene at Runcorn. He pointed to the fact that this has been so for many years. He submitted even under the new system the claimants, and particular EVC-UK, will be dependent, to some extent, on Huntsman for the delivery of third party ethylene. He submitted, in reliance on a remark contained in the witness statement of a Dr Harrison, one of Huntsman's witnesses, that completion of the first phase (enabling Ineos Chlor to bypass the TPEP and related Huntsman facilities) will take more than 12 months, that 12 months is the OFT rule of thumb for determining substitutionability, that EVC-UK's separate facility will not be ready until 2007/2008 and that such a period "is a perfectly possible timeframe in which to measure dominance".
- Despite Mr Brealey's attempts to counter them I see very considerable force in Mr Sharpe's submissions. Once the new metering and letdown facility is available it is very difficult if not impossible to say that the bottleneck monopoly will continue to exist and therefore that Huntsman's metering and letdown facility constitutes a relevant market. Moreover, Mr Carmichael's own evidence was that Ineos Chlor's independence of the bottleneck will be achieved within a matter of months (the reference to Dr Harrison's evidence that it would take longer than 12 months being, properly understood, a reference to both phases, not just the first).
- Quite how long the first phase has taken, whether it could have been initiated at an earlier date and why it was not were not matters that were explored before me. I am reluctant therefore to come to any final conclusion on the point. Instead I will proceed on the assumption that Huntsman's metering and letdown facility at Runcorn does constitute (whether on its own or as part of a wider system) a relevant ethylene delivery market and that, as Mr Brealey submitted, Huntsman is dominant in that market in view of the need for all third party ethylene delivered to the Runcorn site (and whether to Ineos Chlor or to EVC-UK) to pass through it.
- On that assumption, the substantive question is whether, by charging £12.38 per tonne for use of its system to enable the claimants to obtain delivery of third party ethylene from valve 25 (connecting with the Shell pipeline system) to their own plants at Runcorn via Huntsman's metering and letdown facility at valve 19A, Huntsman is abusing its dominant position by imposing an unfair price.
- The claimants' attack, as elaborated in Mr Brealey's closing submissions, focused upon what were asserted to be the costs to Huntsman of providing this service to Ineos Chlor and EVC-UK. As I have mentioned, the charge Huntsman currently levies is £12.38 per tonne delivered. The claimants' contend that this charge bears no reasonable relation to the service provided.
- Underlying the claimants' approach to this issue is that the distance travelled by the ethylene in question is no more than a few metres (ie, the distance between valve 25 to the exit point of Huntsman's metering and letdown facility just to the Runcorn-side of valve 19A) and that this very short segment of the TPEP together with the metering and letdown facility can be operated and therefore costed quite independently of all or any part of the remainder of the TPEP. When properly costed the resulting cost per delivered tonne, according to the claimants, is very substantially less than the current £12.38. Relying on Mr Carmichael's calculations, although these varied over the course of his evidence, Mr Brealey submitted that the appropriate cost was no more than €5.7 per tonne.
- Huntsman's answer (among others) is that the service it provides is of a more extensive nature and that the claimants are therefore approaching the matter on an incorrect basis.
- Thus, in an e-mail to Mr Carmichael of 3 November 2003, sent in the course of communications passing between them over the charge that Huntsman could properly make for providing this service and in which Mr Carmichael was contending that only the few metres between valves 25 and 19A, together with Huntsman's metering and letdown facility, were involved, Dr Duffy explained what the service was. He said this:
"As…ethylene is commingled, controlled, absorbed, transported and re-delivered via exactly the same mechanism as the rest of the ethylene delivered to you either directly from Wilton via the TPEP or indirectly from Wilton via the Holford storage cavities, it is appropriate to consider the costs of the total system rather than any intermediate (and notional) section. Such a view is further supported by the fact that at the re-delivery point, your plants do not distinguish between molecules originating from Wilton and those supplied by a 3rd party. Therefore, we must consider the whole ethylene distribution system.
The system comprises …the 140 mile long TPEP and the intermediate storage at Holford. The system manages all the pressure variations, the flow rate variations and the swings required to match the changes in demand made upon it by VC3 and Per-tri [ie that part of Ineos Chlor's Runcorn chlorine plant which consumes ethylene]. As the demand from your plants change[s], the system provides both the stock buffering to deal with off-take reductions and the infinite ethylene supply to deal with off-take increases. Therefore we would contend that the value of the system which you are entering goes way beyond simply the means to transport and re-deliver ethylene."
The e-mail then went on to suggest that if the claimants wanted the burden of managing third party ethylene flows or would be prepared to arrange for that responsibility to be undertaken by the third party suppliers and establish their own storage facilities, a system might be devised. It concluded that, as currently configured, there was "one ethylene distribution system managing the flow into the Runcorn site and not a system of individual and isolated sections".
- Dr Mark Harrison also gave evidence on the point. Dr Harrison is Huntsman's Polyethylene Technology Manager and between April 1995 and January 2006 was Olefins Storage and Distribution Operations Manager, initially for ICI Petrochemicals and, after June 1999, for Huntsman and, as such, responsible for the petrochemical ethylene distribution system and the operational management on behalf of Huntsman of the TPEP as WGEP. As his oral evidence amply demonstrated, he had a thorough understanding of what was involved. Dr Harrison said this of the service which Huntsman provides when ethylene is imported at valve 25 for delivery to the Runcorn site:
"17. The Claimants refer to the Runcorn metering and letdown facilities as if they were separate from the TPEP system. They are not. They are part of the infrastructure associated with the pipeline, and cannot operate without their connection to the whole system. The Claimants' usage of the TPEP requires them to use far more of the pipeline than simply the let-down station and metering at the end. I could understand the Claimants' concerns if all that happened was that their imports passed through the pipeline, and they derived no benefit from the rest of the system, but in reality this is not the way in which the system or the Claimants operate. It is simplest to illustrate this by reference to what actually happens when the Claimants wish to import ethylene.
Importing third party ethylene
18. In advance of importing third party ethylene, the Claimants have to give notice to Huntsman of the date, time and intended flow rate in order to permit access. This information will be passed to the WEC. Generally, the Claimants will have notified a start time for the import of ethylene through the RSEP by Shell and into valve VR25. The flow rate in the rest of the TPEP may have to be reset to facilitate the ethylene entering the system, and this will typically require pressure adjustments at the North-Western end of the pipeline.
19. There is no reason why the consumption of the Claimants' Runcorn plants will necessarily be set at the same rate as the flow of third party import: typically the demand will fluctuate hour by hour. The Claimants simply draw down ethylene when they require it. Their hourly and daily consumption of ethylene is erratic, and can vary considerably against declared plans, with Huntsman's pipeline system providing the Claimants with a huge buffer for their operations. For example, while the Claimants may say they have a requirement for 10 ktes in a month, they do not draw this down at a pro-rata daily rate, on some occasions preferring to take out far more product in one part of the month than the other. Equally, there are regular occasions where they fail to take out of the system the amount they order, or else take out more than they have ordered.
20. If for any reason there is a problem with the import of ethylene from valve VR25, Huntsman has to inform the Claimants that the third party supply is off line, as the instruments monitoring the pressure and flow in the pipeline give Huntsman notice of the position, while the Claimants will be none the wiser. In the meantime, it is Huntsman's system which supplies the back-up ethylene, and it will or may be Huntsman's ethylene that is supplied.
21. On other occasions, it can happen that the Claimants' plants `trip', going out of operation. If this happens at the same time as they are importing third party ethylene, this ethylene needs to be stored in Huntsman's system. These swings in volume cause substantial difficulties for Huntsman's operations. If the trip lasts, for example, 12 hours, this can create an excess of 240 tes of ethylene in Huntsman's system. The Second and Fourth Claimants again expect the TPEP system to manage such an excess, and then return rapidly to a Runcorn supply mode as soon as they are ready to resume ethylene consumption. This can only be achieved by careful inventory management at the North-Western end of the pipeline. If it is not carefully and closely managed, ethylene stock in the TPEP can be affected to the point where supplies to customers or the balance with cavity stock at Wilton or Holford is compromised. In extremis the production rate of the cracker may have to be adjusted to prevent overloading the system. Although this has not happened in recent history, it is the ultimate consequence.
22. Due to all these variables, Huntsman personnel at WEC have to monitor imports closely to ensure that they occur without creating difficulties for the operation of the rest of the TPEP system.
23. On a number of occasions, I have had difficulty in agreeing with the Claimants' operational staff at Runcorn that shutdowns for maintenance on the TPEP should take place. They are extremely nervous when such operations occur, since they have told me that they place a very high value on the security of `three-legged' supply to the Runcorn Site, minimising as it does the risk of their Runcorn plants having to shut down. They regard the three legs as being the supply via the TPEP from Wilton, the supply via the TPEP from Holford cavity and the supply via Shell...
25. What the Claimants receive for their pipeline charge to introduce third party ethylene into the TPEP and then to the Runcorn plants is the inherent flexibility which Huntsman's system offers them (of which they take advantage) in managing their supplies: in reality they can run their plant at any level and be sure they will have access to sufficient ethylene to enable them to do so. In effect, the Claimants are connected to a large reservoir of ethylene from which they can and do draw supplies as and when they need to suit their purposes. Such flexibility derives from the availability of the system as a whole and gives the Claimants a considerable commercial advantage in their operations.
26. The Claimants' usage of the system to import involves far more than simply 250m of pipeline and a metering and let-down facility. From my personal experience of their operations they could not keep their Runcorn plants operating without access to Huntsman's wider system. I understand that access to pipelines such as the ARG in Europe is much more restricted, and that it is necessary to book in advance and adhere to import slots on a take or pay basis. They would certainly find that this would be much more restrictive on their operations, and would offer much less flexibility to them in their operations."
- Dr Harrison then explained that the costs involved in the ownership, operation and management of the system as so described, alongside the necessary plant and staff, are significant. He went on to state that, in addition to annual costs, the pipeline system is the subject of a strict maintenance and inspection regime to comply with regulatory guidelines. He gave details of this. He then referred to the claimants' project to build their own ethylene supply pipeline, metering and letdown facility at Runcorn with a view to bypassing the Huntsman system. He voiced concerns about the project and expressed the view that, even when complete, its operation will impact upon the operation of the TPEP and mentioned that, as a result, modifications to the existing Huntsman system will be necessary to maintain its integrity.
- It is clear from this evidence, and I heard nothing to undermine it, that the service which Huntsman provides to the claimants in enabling third party ethylene to enter at valve 25, be transported to valve 19A and then be delivered via its metering and letdown facility into the Runcorn site extends beyond the physical confines of that segment of the system and includes the various matter which Dr Duffy summarised in his e-mail and which Dr Harrison explained in much more detail in the course of his evidence.
- In order therefore to cost the service which Huntsman provides to the claimants when third party ethylene is so delivered it is necessary to go beyond items of cost associated with that very limited part of the pipeline system and consider the wider costs of operating the system. The claimants have not attempted this analysis. Their efforts have been concentrated on trying to isolate and identify the costs associated with that very limited part of the system.
- In paragraphs 69 to 73 of his third witness statement, Dr Duffy explained how Huntsman has approached the task of fixing a charge for the service provided and how, therefore, the current charge of £12.38 per tonne is reached:
"69. The charges applied by Huntsman for the use of its distribution system were devised by my predecessor Dr Cooper when it became necessary to agree fees for use of the TPEP at the time of its acquisition by Huntsman as part of the Petrochemicals business. He and I discussed how he had arrived at these before he died. Starting with a clean sheet of paper, Dr Cooper concluded that the only fair way to approach the calculation was by reference to a model adopted and accepted by the industry so he used the commercial ARG pipeline system across Europe as a benchmark. Dr Cooper preferred to do it this way because he recognised that calculating usage by reference to Huntsman's direct and indirect costs of operation of the Huntsman system would produce a figure which was significantly higher than the ARG. Mr Ronald Grant, Huntsman's chief financial officer can describe the total costs to Huntsman of running the system.
70. Access to the ARG for transportation of ethylene is achieved by agreement of a "transportation contract." This consists of an entry (or reservation) fee and a transportation fee. The entry fee is based on the route chosen, and is on a take or pay basis. The transportation fee element is based on a charge for the distance of pipeline used. Discounts from standard entry fees are available, but require significant forward planning of the kind that the Claimants maintain they cannot achieve as evidenced by their irregular ordering and consumption patterns with Huntsman. For example, movements booked 30 days in advance secure an entry fee discount of 15%; long-term contracts for use secure discounts of between 1-21%. There are also discounts of 0.5% for every 10 ktes moved per annum. In calculating the charges under the TPEP, Dr Cooper assumed that all of the discounts available under the ARG would be applicable, but without imposing the restrictions on usage which this would entail.
71. Having worked out the initial prices to include in the `Agreement relating to the use of the UK Ethylene Distribution System' dated 9 January 2001, the Agreement expressly provided escalation terms which increased the charges year on year in line with the ARG prices. Every year I send EVC a letter setting out the increased rates, based on the percentage increase in ARG prices. Huntsman charges in £ sterling but to make the comparison easily between the two I set them below in Euros as well.
72. For 2006, Huntsman charges for transportation from Grangemouth to Runcorn using the WGEP and TPEP a fee of £31.97 or €47 per tonne, which is much cheaper than the ARG. The exact equivalent in distance for the use of the ARG would be €78 (£53.6) per tonne, even though the ARG has many more users and a far greater volume of ethylene passing through it. At best, the ARG fee would be discounted to €50 (£34.0) per tonne provided there was a guaranteed 10 ktes per annum volume for six years and at least 30 days notice of imports on a take or pay basis: these considerations do not apply to EVC-UK and Ineos Chlor when using Huntsman's system: so they have a much better deal.
73. Where Ineos Chlor and EVC-UK imports from the Shell-owned NWEP, using Huntsman's system from Runcorn from Valve 25 to Runcorn, Huntsman charges £12.38 (€18.1) per tonne. This charge is based on the distance from Valve 25 to the Holford storage cavities and back, rather than the whole 155 mile distance of the pipeline. This equates to a distance of approximately 30 miles, which for an equivalent distance on the ARG (without the discounts available which limit flexibility) would cost £19.60 (€28.5) per tonne. This is principally because whenever the Claimants import third party ethylene Huntsman has to manage the whole system including storage maintaining the pressure variations, flow rate variations and swings required to meet the changes in demand upon it from the Claimants' plants. Thus, as the Claimants demand fluctuates, the system provides the stock-buffering to deal with the offtake reductions, and the infinite ethylene supply the Claimants take advantage of when they draw off more than they have ordered."
- Although it may be said that calculating the charge by including the distance to and from the Holford cavities is a somewhat rough and ready means of approaching the matter, the method used does attempt, as Dr Duffy stated, to provide for the stock buffering that may be needed and the other consequences to the wider Huntsman pipeline system of the introduction of third party ethylene at valve 25 with a view to its delivery to the Runcorn site. To suggest that, by analogy with the ARG system which operates on the continent, the relevant distance should be measured simply by reference to the distance between valves 25 and 19A overlooks these factors and the very different circumstances in play in connection with the Huntsman system. Not the least of these is that the Runcorn site is practically the only, if not the only, delivery point at the southwest end of the TPEP.
- In these circumstances, I am wholly unwilling to conclude that Huntsman's method of charging, and the figures that result from it, for the claimants' use of the system for delivery to it of third party ethylene from valve 25 to their Runcorn site are unreasonable and unfair to any significant degree, let alone to the degree necessary to constitute an abuse of Huntsman's dominant position, if such it is, as owner/controller of the TPEP system in general and the metering and letdown facility at valve 19A in particular. I do not therefore find it necessary to go on to consider what costs are involved, so far as they can be separately identified, in managing that part of the system lying between valve 25 and the exit point into the Runcorn site beyond Huntsman's metering and letdown station at valve 19A. This exercise, which Mr Carmichael and Mr Grant, Huntsman's finance director, attempted (Mr Grant, it has to be said, with some reluctance) and on which both were cross-examined, was to my mind entirely theoretical and, in the absence of much underlying financial material, somewhat haphazard. I see no value in seeking to arrive at figures for capital replacement and depreciation, returns on capital employed, estimating precisely what tonnages pass through the system, determining whether any part of the cost of running Wilton Ethylene Control centre should be included and how other factors should be assessed which enter into the equation and which were debated before me in an attempt to identify the costs of operating that very small segment of the system. So far as the exercise went, although there were elements of Mr Grant's approach which were open to criticism, I do not consider that, if this is the relevant approach, the claimants have demonstrated to the appropriate standard ("clear and compelling evidence") that Huntsman's basis of charging has been unfair.
(f) The foreclosure and exclusivity complaint
- This concerns the claimants' complaint that EVC-UK's purchase obligations under the ARMA are restrictive of and distort competition and, as such, infringe article 81(1) and section 2 of the 1988 Act and, insofar as Huntsman is in a position of dominance in the supply of ethylene in the UK merchant market, are an abuse of that position and therefore contrary to article 82 and section 18 of the 1988 Act as well. As was made clear in Mr Brealey's written closing submissions, an essential premise is that EVC-UK is obliged under the ARMA following ramp-down to purchase at least 80% of its ethylene requirement from Huntsman. That is the percentage which, in accordance with current EC Commission policy as set out in its Guidelines on Vertical Restraints (OJ C291/1 of 13.10.2000) ("the Guidelines"), and in particular its definition of "non-compete obligation", triggers the enquiry whether the obligation so to purchase does or does not infringe article 81. The complaint is confined to EVC-UK because central to it is that the relevant geographical market is the UK. For this reason, it is contended, the court is required to examine the impact of exclusivity on EVC-UK alone and should not take into account, except possibly in relation to the need to show an effect on trade as between Member States, whether it has any wider impact.
- Given the relevant geographical market, the complaint only therefore arises if Huntsman is correct in its interpretation of article 3.11(A) since even if it is correct in its interpretation of article 3.2(A) but is incorrect in its interpretation of article 3.11(A) the EVC Group cannot be required, following ramp-down, to purchase more than 151,040 mts of ethylene from Huntsman (the maximum that the purchasing subsidiaries could be required to purchase under the ARMA in that event), none of which, let alone 80%, would have to be purchased by EVC-UK. In practice, some part of that tonnage would be purchased by EVC-UK but it is difficult to see how, short of VC6 going out of production altogether, EVC-UK could find itself obliged to purchase all or even most of its ethylene requirement from Huntsman. Moreover, 151,040 mts of ethylene is much less than the purchasing subsidiaries' pre ramp-down minimum ethylene purchase requirement of 224,200 mts. It has not been suggested that that figure would have been sufficient to constitute exclusivity. That, after all, is the position that prevailed up to the end of 2005. The position is therefore a fortiori if under article 3.2(A) the ethylene purchase obligation is restricted to the minimum of the Range, ie if Huntsman is incorrect in its interpretation of article 3.2(A).
- Mr Brealey accepted that this complaint is postulated on the footing that, as from ramp-down, EVC-UK is effectively subject to an exclusive purchase obligation, in other words if Huntsman is correct in its interpretation of article 3.11(A) and that it is strengthened if, in addition, Huntsman is correct in its interpretation of article 3.2(A). Since, for the reasons earlier set out, Huntsman is correct on neither, the complaint simply does not now arise. Put another way, the EVC Group in general and EVC-UK in particular are not subject to any greater restriction in relation to raw material purchases now than when the ORMA was entered into in 1994 - when DGIV raised no objection to the terms set out in that agreement. On the contrary, following ramp-down the Range under article 3 has been greatly reduced and, as a result, the freedom of the EVC Group in general and EVC-UK in particular to purchase raw materials from third party sources has greatly increased. Ineos Chlor continues to have the freedom to use the UK System to import up to 120,000 mts of third party ethylene and EVC-UK continues to have the freedom to use the system to acquire up to 15,000 mts of ethylene from third party sources.
- This relieves me of the need to consider whether, if Huntsman had been right on the question of construction, the relevant factors are present which would justify a conclusion that, in respect of the volume of ethylene that EVC-UK is required to purchase from Huntsman, the ARMA infringes article 81 and/or article 82.
- I can nevertheless state my conclusions on the other issues that would otherwise have fallen for decision on this complaint. I do so very briefly.
- I would have accepted Mr Brealey's submission that the relevant product market is confined to the UK merchant market in ethylene. I would have accepted that that market does not include EDC but does include ethylene which is available for export (exclusive of exports for a captive use). In these two respects I would have accepted the conclusions of Dr Cento Veljanovski, the claimants' expert, and would have had regard to the Commission Decision in Case COMP/M.2389 Shell/Dea (of 20 December 2001) and to paragraph 98 of the Guidelines. I would also have accepted Mr Brealey's submission that the relevant geographical market is the UK rather than Europe. In this respect too I would have accepted Dr Veljanovski's conclusion.
- But I would have felt difficulty in going any further and accepting Mr Brealey's submission that the ARMA (and the other matters to which he referred) operate to restrict and distort competition contrary to article 81 (and section 2) and constitute an abuse of dominant position contrary to article 82 (and section 18). The test of a dominant position laid down by the European Court of Justice in United Brands Case 27/76 [1978] ECR 207 at paragraph 65 is that it:
"…relates to a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers."
To determine whether in a relevant market an undertaking is in that position requires a detailed and careful enquiry, not least because the consequences to the undertaking if it is found to be in a position of dominance in the market and if, in addition, there is evidence of abuse of that position are or can be serious. The evidence before me bearing on these matters and on the wider question whether, separately from any question of dominance, the terms of the ARMA (and the other agreements referred to in the claimants' pleading on this point) can be said to have as their object or effect the distortion of competition in the matter of ethylene supply was largely that of Mr Carmichael and Dr Duffy. The economics of ethylene production and supply, including the cost of establishing and operating the necessary manufacturing plant and supply facilities, are of obvious importance in the overall enquiry. These are topics which were only lightly explored. Given that the competition law issues were only raised for the first time in late 2005, a mere four months before the start of the trial, it is not surprising that a wider enquiry was not undertaken. The matters to which Mr Brealey pointed in support of his case that Huntsman was "dominant" in the market and its conduct abusive and that the supply terms under the ARMA and related agreements distorted competition, did not seem to me, with all respect to him, to provide a sufficient basis for the findings which he was inviting me to reach.
- As Mr Sharpe observed, the question is not Huntsman's share in the merchant market for ethylene at any given moment or whether, while the ARMA lasts, the market is foreclosed but whether when the ARMA comes to an end, others can come in and compete with Huntsman. Dominance, he says, is the capacity to act with indifference to one's customers and consumers without losing them. He submitted that there was no evidence to justify the conclusion that Huntsman was in that position. He accepted that in many situations a high market share can often connote the existence of a dominant position in the market and that one can infer the existence of market power by, for example, excessive prices, long and sustained high levels of profitability, and the failure of competitors to survive or to emerge. He submitted that such an analysis was not apt to the structure of ethylene supply where the market it characterised by winning or losing a small number of medium term contracts. He pointed out that, at the expiry of the ARMA, there were likely to be at least three other suppliers of ethylene available to meet the claimants' needs, namely ExxonMobil, Innovene and Shell. (I do no more than summarise some of the matters raised.)
- I see force in these submissions. If therefore I had had to decide whether in the UK merchant market in ethylene Huntsman was dominant and, if dominant, abused that dominance or whether, more widely, an analysis of the factors identified in the Guidelines should lead to the conclusion that the terms of the ARMA (and related agreements) distorted competition, I would have concluded that the claimants had failed to discharge the burden on them of establishing their case.
(g) Further observations on the competition claims
- There are two further matters which I should mention. The first concerns the requirement of any successful claim under articles 81 and 82 to show, by reference to strong and compelling evidence, that the agreement or conduct complained of has or may have an appreciable effect on trade between Member States. The only reference to this in the claimants' pleadings is in paragraph 10.5.2 in relation to the foreclosure claim.
- Mr Sharpe submitted, and I agree, that the claimants should have pleaded and particularised some appreciable impact upon the actual or likely structure or flow of trade in ethylene between Member States and provided evidence in support of the claims under both articles. He submitted, and I agree, that it cannot be inferred that the activities of an undertaking which is in a dominant position must necessarily affect interstate trade. The point has all the more force where, as here, the claimants are contending that there are in any event no ethylene imports into this country and where any diversion of ethylene to VC3 (consequent upon the impact of article 3.11(A) if interpreted in the way for which Huntsman contends) which would otherwise have gone to VC6 at Wilhelmshaven would have a quite minimal effect on the wider structure or flow of ethylene as between this country and Germany, let alone any other Member State, given the vast quantities of ethylene which, according to the evidence, are traded on the European market.
- Insofar as the claimants rely on sections 20 and 2 of the 1988 Act, where the requirement is to show an appreciable effect on trade within the UK, the pleaded claim is entirely silent. Even ignoring the absence of any material plea, the question is whether the claimants can demonstrate some change in the pattern of trade in the UK as a result of the matters complained of. There are arguments both ways on this. My difficulty is that this aspect of the claimants' competition claims was not investigated before me. Rather, it seems to have been assumed.
- The second matter concerns the relief which the claimants were seeking, namely that the court should order the claimants to have "fair access" to Huntsman's pipeline system. At one stage at least, the claimants appeared to be contending that the court should also order a "fair price" to be paid for Huntsman's ethylene (see paragraph 219 of Mr Brealey's written opening submissions). If, as the claimants were seeking, I had made the declarations sought (they are summarised at paragraph 204 above) and if I had agreed with their further contention, referred to at paragraph 205 above, that article 3.2(A) is unlawful and unenforceable on competition grounds, it is difficult to see what would have remained of the supply agreement. Having so declared, I do not see what jurisdiction the court would have had to set out new terms to replace those that it had struck down.
(h) A final observation
- It appears that before these proceedings were launched the claimants approached the Office of Fair Trading to complain that Huntsman held a dominant position in relation to its pipeline system and on the merchant market for ethylene and that there were abuses of that position. It further appears that this led to a meeting on 11 July 2005 between representatives of the OFT and the claimants. So far as Huntsman is aware the OFT has not taken the matter any further. Certainly I was not told of any action by the OFT consequent upon the claimants' approach. In accordance with paragraph 3 of the Practice Direction on Competition Law, copies of the parties' statements of case were served on the OFT. So far as I am aware, the OFT has not sought to involve itself in any way in these proceedings.
- The claimants contended that their communications with the OFT were privileged although I was shown a minute of the meting of 11 July 2005 prepared by the claimants' solicitors. It has not been suggested that that minute had been agreed with the OFT. Beyond the fact that the approach had been made, neither side sought to attach any significance to this episode.
- In the course of his closing submissions, however, Mr Sharpe raised with me whether where, as here, a party to proceedings which raise competition issues in respect of which the court enjoys a parallel jurisdiction with the competition authorities (whether the OFT or the Commission) and one party has made an approach to the competition authority in connection with those issues, there should be a duty on that party, and on its legal advisers once aware of the fact, to disclose to the court the fact of the approach and, if the competition authority has indicated a willingness to proceed to an investigation, to disclose that fact as well.
- In my view there ought to be such a duty. Disclosure to the court will enable the court to consider whether, if there is to be an investigation, the proceedings before it, or that part of the proceedings raising the competition issues, should be stayed in recognition of the particular expertise of the competition authority to deal with competition issues and, ultimately, if the authority decides to proceed, to avoid any conflict between the findings of the court and any decision of the authority. This would seem to be especially desirable, in the case of an appeal against a decision of the Office of Fair Trading, to avoid a conflict between the court's findings and the decision of the Competition Appeal Tribunal.
