Canada: Court Of Appeal Tells Fuel Hauler To Hit The Road In Dismissing Competition Act Claim

On June 14, 2013, the Alberta Court of Appeal dismissed a civil claim in 321665 Alberta Ltd. v. Husky Oil Operations Ltd. arising from an alleged breach of the pre-2010 section 45 of the Competition Act (Act), which required proof that competition was lessened or prevented "unduly". The judgment endorses the principle that joint purchasing agreements are highly unlikely to give rise to competition law concerns and that criminalization of competitor collaborations designed to "increase efficiencies and reduce unnecessary costs ... cannot have been the intent of the Act". The decision also recognizes that co-operation is an important aspect of oil and gas development in Alberta and, as such, legitimate joint venture activity by oil and gas industry participants will not be treated under the criminal provisions of the Act when the activity is directed toward a legitimate business purpose.

Facts of the Case and Trial Court Decision

Husky Oil Operations Ltd. (Husky) and ExxonMobil Canada Ltd. (Mobil), which owned oil and gas properties in northern Alberta, contacted the two local fuel haulers operating in the area, Kolt and Cardusty, with a view to reducing their fuel hauling service costs. Husky and Mobil determined that a sole-source agreement would provide the most efficient method of procuring this service and evaluated the two suppliers based on a number of criteria, including but not limited to price. Because Cardusty received a more favourable rating, Husky and Mobil awarded that company the contract to provide fuel hauling services to both jointly and independently owned properties.

Kolt did not sustain sufficient volumes to remain profitable and subsequently ceased operations in May 1997. Kolt sued Husky and Mobil for damages alleging that the sole-sourcing agreement was a violation of section 45 of the Act. The trial judge determined that the agreement between Husky and Mobil breached section 45 and ordered the parties to pay damages "at large" in the amount of C$5-million plus punitive damages of C$500,000 for each defendant and interest. The trial judge also awarded Kolt C$75,000 for "investigative costs" pursuant to section 36 of the Act.

The Appellate DecisionLiability

The Court determined that the trial judge erred by holding that the sole-source agreement unduly lessened competition by causing Kolt to cease operations. The Court concluded that the trial judge overlooked the opportunity provided to Kolt to become the sole service provider for Husky and Mobil's fluid hauling needs. The Court also noted that the plaintiffs did not present any evidence to establish that Husky and Mobil attempted to reduce the suppliers' profit margins, the prices they charged or the volume of work they would provide. Indeed, the Court concluded that the joint purchasing arrangement was intended to generate efficiencies and the result would have been no different had Husky or Mobil decided to outfit their own facilities or self-supply fuel hauling services. (The Court also acknowledged that Husky and Mobil had identified other errors in the trial judgment including insufficient proof of mens rea (intent) and a focus on the wrong side of the market (i.e., purchase as opposed to sale of fluid hauling). The Court did not address these issues as its finding of no undue lessening of competition was sufficient to dispose of the appeal, but the Court agreed that the trial judge's treatment of these issues was problematic, and advised that its silence on these issues should not be construed as agreement with the trial decision.)

Damages

The Court also overturned the trial judge's award of C$5-million in damages "at large" (calculated from November 1996 to the date of trial without any negative contingencies), which was the highest damages "at large" award in Canadian jurisprudence. The Court held that while the trial judge was entitled to award damages "at large", such an award is "not a broad discretionary substitute for a proper assessment of damages flowing from the tortfeasor's conduct." Regardless of the damages being claimed, a plaintiff still must prove damages, unless a reverse onus arises. As such, an award of damages "at large" must reasonably approximate actual or foreseeable loss. In the circumstances, the trial judge's award of damages for 14.5 years had the effect of overcompensating Kolt.

The Court also overturned the trial judge's award of C$1-million in punitive damages, finding that such an award was "unnecessary and unwarranted" based upon the facts in the case. The Court confirmed that awards of punitive damages are confined to exceptional cases in order to punish conduct that is reprehensible and malicious in nature. Even when punitive damages are awarded, they must be subject to the principle of restraint. The Court found that "by no stretch of the imagination" could the conduct of Mobil and Husky be considered vindictive or reprehensible. The Court noted that the conduct of Mobil and Husky was open and transparent and was reflective of "normal corporate practice."

Key Takeaways

There are three takeaways from the decision worth keeping in mind:

  • Minimal competition risk associated with joint purchasing agreements. The Court's conclusions effectively endorse the position taken in the Competition Bureau's Competitor Collaboration Guidelines which providesthat joint purchasing agreements do not contravene section 45.
  • Joint venture conduct, though typically not criminal, can still be prohibited. The judgment endorses the principle that the criminalization of competitor collaborations designed to increase efficiencies and reduce unnecessary costs cannot have been the intent of the Act. That said, the Commissioner can still seek to prohibit such conduct under section 79 (abuse of dominance) or 90.1 (civil collaborations) if the parties have substantial market power and their conduct is like to result in anti-competitive effects. Therefore, parties should be vigilant when proposing and implementing joint ventures, including giving consideration to whether a joint or single firm structure is appropriate and avoiding using language in their business documents to suggest an ulterior purpose that could otherwise be found to be offside the Act.
  • Civil plaintiffs are creative. Despite the Court's acknowledgment that legitimate co-operation or joint venture activity is beyond the scope of section 45, civil plaintiffs may nevertheless attempt to characterize collaborative or joint conduct as a section 45 violation and pursue claims in any event. Indeed, the Court cautioned that joint ownership by itself does not insulate operators from the conspiracy provisions of section 45, especially absent legally binding language or facts which establish that the parties are operating as a single entity regarding the joint assets or business. Prudent planning and document management can go a long way to reducing the risk of a prolonged proceeding or liability.

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