Crehan v Inntrepreneur Damages for Article 81 infringement

31 August 2004

Chris Waugh

Background

Mr Crehan took out leases on two pubs in 1991 on Inntrepreneur’s standard terms, which obliged him to buy most of his beer from Courage (a “beer tie”). Neither pub proved profitable and he surrendered the leases in 1993. Inntrepreneur and Courage then brought High Court actions against Mr Crehan for unpaid debts. His defence and counterclaim rested on the allegation that the beer tie infringed Article 81 of the EC Treaty and that he had suffered loss as a result of the infringement.

Mr Crehan’s was one of a number of similar cases and litigation was stayed pending the outcome of a European Commission investigation into pub leases and associated pricing systems. During this period, Inntrepreneur updated its leasing arrangements and the Commission issued a comfort letter (dated 24 January 2000 and relating to the period from 1 January 1997) and gave negative clearance (dated 29 June 2000), in favour of two new Inntrepreneur schemes. However, no substantive findings were made in relation to the earlier form of standard lease entered into by Mr Crehan.

He therefore recommenced High Court proceedings in October 1997, following which a reference was made to the European Court of Justice (“ECJ”) as to the interpretation of Article 81. The High Court trial proper began in February 2003, with the judge finding in favour of Inntrepreneur. This decision has recently been successfully appealed: the Court of Appeal handed down judgment on 21 May 2004, finding that the beer tie infringed Article 81 and that Mr Crehan was entitled to damages for his resulting loss.

ECJ Reference

Following the reference from the High Court, the ECJ held (Case C-453/99 Courage v Crehan, judgment of 20 September 2001) that a rule of national law may not bar a claim for damages against a co-contractor under a contract infringing Article 81 solely because the claimant is a party to that contract. However, a claim against a co-contractor under an infringing contract may be barred under national law where the claimant bears significant responsibility for the infringement.

In deciding whether to award damages, national courts must take into account the economic and legal context of the agreement and the respective bargaining power and conduct of the parties.

High Court Judgment

Mr Justice Park applied the conditions set down by the ECJ for a network of beer supply arrangements to infringe Article 81 in Case C-233/89 Delimitis v Henninger Brau [1991] ECR I-935 (the Delimitis conditions). The conditions are that:

  1. in their economic and legal context, the agreements must have the cumulative effect of denying access to new national and foreign competitors
  2. it is necessary to assess the extent to which the relevant agreement contributed to the cumulative effect of the totality of similar contracts on the market

Park J chose not to follow the European Commission’s findings that similar beer ties imposed by Whitbread satisfied the first Delimitis condition and that the tied estates of Whitbread, Bass, and Scottish & Newcastle – all smaller than the tied estate of Inntrepreneur – had infringed the second Delimitis condition. Instead, he held that the Delimitis conditions had not been satisfied and that there had been no infringement of Article 81. Consequently, under the first instance judgment, Mr Crehan was not entitled to claim any damages, even though he had suffered loss under the contract. Conscious of the likelihood that his decision would be appealed, Park J also made findings on the hypothetical basis that he had found an infringement of Article 81.

Court of Appeal Judgment

The Court of Appeal largely overturned the substantive sections of Park J’s judgment and responded to his hypothetical analysis, making the following findings:

1. The Delimitis Conditions

The first Delimitis condition was satisfied by the beer tie. Under the principle of co-operation with the Commission, Park J ought not to have reached a decision that contradicted the earlier Commission investigation (Commission Notice on co-operation between national courts and the Commission (OJ 1993 C39/6)).

The second Delimitis condition was also satisfied. Park J had not shown due deference to the Commission’s findings in relation to the Whitbread, Bass and Scottich & Newcastle tied estates. In addition, in the relevant period, Inntrepreneur had a market share of 5-7% of the market for beer sold through tied outlets in the UK, which was at or above the threshold recommended by the Commission in its September 1986 de minimis notice.

The beer tie agreements therefore infringed Article 81(1).

2. Block Exemption

Park J had been correct in finding that the exclusive purchasing block exemption, Regulation 1984/83 (the block exemption) did not apply to the Inntrepreneur agreements, because:

  • the block exemption related to ties specified by beer brand, as opposed to the Inntrepreneur agreements, which were specified by beer type
  • the block exemption did not apply where the brewer could extend the exclusive purchasing obligations unilaterally
  • the Inntrepreneur agreements were tripartite in structure and gave the tenants no special commercial or financial advantages, whereas the block exemption could only apply if there were only two parties

3. Abuse of Process

Upholding Park J’s finding, the Court held that there had been no abuse of process in Inntrepreneur reopening the issue of the legality of the beer tie; the parties had agreed to a pause in the English litigation while Inntrepreneur pursued its case before the Commission.

4. “Significant Responsibility”

Park J had been correct in finding that Mr Crehan bore no significant responsibility for the infringement of Article 81. There was no equality of bargaining power and the beer tie had effectively been imposed on him. He was therefore entitled to seek damages, following the principle set down in the earlier reference to the ECJ (see ECJ Reference above).

5. Statutory Duty

A duty imposed by Article 81 would be categorised under English law as a statutory duty. A claim for breach of statutory duty could only succeed if the claimant showed not only that a duty was owed to him, but also that it was a duty in respect of the kind of loss he had suffered. Mr Crehan claimed that the beer tie distorted competition between himself and other pubs in the market which were free of the tie, and he therefore suffered loss. However, under the statutory duty principle, it would be necessary to show that Mr Crehan suffered loss of a kind that Article 81(1) was intended to prevent, i.e. that the beer ties distorted competition between incumbents and new entrants to the market. Therefore, on a strict application of this principle, Mr Crehan could not succeed in his claim. However, his claim was still valid under the principle of effectiveness: a rule of English law could not operate to “render practically impossible” the exercise of a right to damages conferred by EC law.

6. Causation

Park J had been correct in finding that the terms of the lease and the beer tie were the main cause of the failure of Mr Crehan’s business.

7. Quantum

The court overturned Park J’s suggested calculation of quantum. He had departed from the general rule that damages are assessed at the date of loss, and had assessed lost future profits at the date of judgment as £1,311,500, which represented an estimate of the profits from 10 years’ trading as a free of tie tenant, less 15% to allow for unidentified contingencies. The court felt that this approach was unduly speculative because it involved calculating the hypothetical profits of a hypothetical business over a long period of time.

Instead, quantum was defined as actual lost profits between 1991 and 1993 (£57,121), plus the notional premium on the resale value of the leases in 1993. On the basis of expert testimony, this was valued as 2.5 times the projected “free of tie” net profit for the year to 1993 (£62,965 for the two pubs combined), plus a further premium to represent the “marriage value” of selling the two pubs together (£11,250). Thus the total quantum of damages awarded to Mr Crehan was £131,336 plus interest.

Conclusion

The judgment of the Court of Appeal appears to open the door for a large number of Inntrepreneur tenants to bring claims for infringement of Article 81. However, the uncertainty as to Inntrepreneur’s potential liability has been limited to some extent by the Court of Appeal’s quantification of damages, which was more conservative than that of Park J at first instance.

The decision also brings the English courts back into line with the principles of consistency with and superiority of, the EC institutions’ determinations, following Park J’s departure from these established requirements of EC law.