INST Committee Report

       The Committee listened with concern to the testimony of the Association Québécoise des Indépendants du Pétrole (AQUIP) as it described the experience of some of their members in the Quebec petroleum market. At the outset, it is important to understand the industry is unique in that it is comprised of a handful of large companies engaged in exploration, manufacturing, wholesaling and retailing. These vertically integrated companies compete at the retail level with many small independents. This unique market structure obliges independent retailers to negotiate directly with their competitors for the supply of their main product. The Competition Act must, therefore, consider this state of affairs, which is peculiar to the oil sector and ensure that all companies have access to supply without discrimination.

       The facts presented to the Committee at its Bill C-23 hearings, if true, suggest that AQUIP might have been the victim of an anticompetitive refusal to deal.³⁴ Of more immediate concern to the Committee, however, was the suggestion that section 75 would not apply to prohibit this manner of conduct. AQUIP suggested that a supplier could rely on the fact that “trade terms” (market conditions) were not “usual” and the section would not apply. The Tribunal would not be able to make an order, since it could only make an order for supply on “usual” trade terms.       

       The Committee has carefully considered this analysis of section 75 and, with all due respect, we cannot agree with the interpretation. Reading the section as a whole, it is clear that the section was enacted not to provide a defence to unscrupulous suppliers, but rather to enable a customer to get necessary supply on the same terms as a supplier’s other customers. Moreover, for reasons set out below, we would suggest that “rationing” imposed by the supplier in response to supply shortages would fall within the definition of “terms of trade” in subsection 75(3). For that reasons, section 75 would appear to apply to ensure that a customer can get supply on the same terms as other customers, even in limited supply market conditions.

       The fundamental difficulty with the AQUIP analysis is that it appears to treat the ideas “trade terms” and “market conditions” as synonyms. But as subsection 75(3) makes clear, the two ideas are quite distinct. It is a condition of the market that petroleum is in short supply, or that demand is unusually high. The terms of trade are the conditions of the transaction. The “terms of trade” in a transaction (such as a supply contract) may change in response to changing market conditions, that is, prices may go up or the quantities that suppliers are able to deliver might have to be reduced. Trade terms may be affected by market conditions, which necessarily implies that they are distinct concepts. AQUIP suggests that a supplier could plead “unusual market conditions” as a defence to section 75. But if we accept this interpretation, we would have to accept that section 75 would be of no effect in abnormal market conditions. This conclusion leads us to think that the interpretation may be incorrect.

       By contrast, the Committee’s interpretation finds strong support in subsection 75(3). That subsection defines “trade terms” as “terms in respect of payment, unit of purchase and reasonable technical and servicing requirements.” The effect of subsection 75(3) is twofold. First, it limits the trade terms that the supplier may impose on the transaction. This ensures that suppliers cannot impose “unusual” trade terms (for example, rationing) as a pretext to withhold supply. Secondly, the section ensures that the customer is able to receive supply on the same terms as the suppliers’ other customers, without being subject to any “unusual trade terms.” So if other customers are receiving 100% of their orders, then all customers would be so entitled. Imposing a 20% cut on one customer, while not doing so to others would clearly be imposing an “unusual” term of trade on that customer, as the term is contemplated in subsection 75(3). As a result, section 75 would apply and allow the Tribunal to order the resumption of supply on the same terms enjoyed by other customers.

       AQUIP suggested that the phrase “usual trade terms” be deleted from section 75. This would presumably “untie the hands” of the Tribunal and give it flexibility to order supply on terms other than “usual” trade terms, i.e., order the supplier to accept a customer on unusual trade terms, e.g., pro rata shares of available supply. But again, the distinction betweens market conditions and terms of trade must be kept in mind. What AQUIP is really asking for is that the Tribunal order the supplier to continue to supply during unusual market conditions (e.g., supply shortages) but on the same trade terms (80% of usual supply using the previous example) as other customers, without discrimination.

       Although the Committee does not concur that the phrase “usual trade terms” in section 75 undermines the effectiveness of the section, we do recognize that there exists another plausible interpretation of section 75, one that would lead us to the opposite conclusion, meaning that the section would not apply to prohibit discriminatory rationing of the type described by the AQUIP (the integrated producers supply its own retail outlets on terms more favourable than independent retailers).

       Paragraph 75(1)(d) requires that, for the section to apply, the product must be in “ample supply.” On a plain reading, this would suggest that the section is meant to apply only in market conditions where supply is “ample,” that is at least sufficient to satisfy current demand. If this interpretation is correct, the section would not apply during periods of limited supply, and a supplier could choose to fill one customer’s order in full, while refusing another customer wholly or in part, using discriminatory rationing as a means of disciplining a non-integrated independent retailer.

       This second interpretation is also consistent with the wording of subsection 75(3). To an ordinary observer, the term “units of purchase” might describe the manner in which the product is packaged for sale and delivery, such as in litre units, or in shipping container units, etc. In fact, this interpretation might be more plausible than the other. Had Parliament, in drafting the legislation, wished to specify that “quantity” be included among the “terms of trade” set out in subsection 75(3), it could have drafted the legislation to that effect. Instead, Parliament used the phrase “units of purchase,” a phrase that does not clearly mean the same thing as “quantity.”

       If this interpretation is correct, we would have to accept that section 75 was not meant to, and would not, apply in a market characterized by supply shortages. As such, an unscrupulous and dominant supplier could profit by the shortage to promote his own retail network and discipline independent retailers by selectively rationing their supply in a discriminatory manner. The current wording of the section might suggest that Parliament simply did not anticipate selective rationing being used in this way; or perhaps it was aware that such a practice might occur, but that it could be better addressed under the abuse of dominance provisions in section 79.

       The Committee is aware that the ambiguity could be resolved by simply deleting paragraph 75(1)(d). However, no witness raised this point and we have had no debate or analysis concerning the economic and legal implications of implementing such a change. For that reason, the Committee is reluctant to make such a recommendation. For the reasons we have set out, we believe that the more reasonable interpretation is that the section would apply in all market conditions, including markets characterized by supply shortages. Ultimately, however, the uncertainty can only be resolved in one of three ways: (1) a government amendment to clarify the application of the section; (2) the Tribunal’s judicial interpretation in the context of an application on these, or similar facts; or (3) an interpretation guideline from the Bureau.

       Clearly, the preferred option is to be proactive now to clarify the application of section 75. Moreover, it is neither fair nor just that we should ask the AQUIP, or anyone else for that matter, to bear the brunt of what might turn out to be protracted and expensive litigation simply in order to clarify the law, when such a clarification is clearly for the benefit of all. The Committee commends the AQUIP for bringing this important issue to our attention and recommends: