Background

The case concerned a contract between EWS, a dominant provider of rail freight services in the UK, and E.ON, an energy company. E.ON required to move large quantities of coal to its power stations and entered into a coal transportation contract with EWS for that purpose. The contract contained a number of exclusionary clauses essentially designed to discourage E.ON from obtaining the contract services from anyone other than EWS. Following a complaint from two of EWS's smaller rivals, the Office of Rail Regulation (ORR) found that the inclusion of these exclusionary clauses in the contract amounted to abuse by EWS of its dominant position contrary to the Chapter II prohibition of the Competition Act 1998.

ORR imposed a financial penalty on EWS of just over £4 million and also issued directions requiring EWS to agree modifications to the contract with E.ON so as to remove the abusive terms. The scope and content of these directions is currently the subject of an appeal by E.ON to the Competition Appeal Tribunal (CAT).

The High Court ruling

In light of the ORR decision, EWS wrote to E.ON asserting that the effect of the directions was to render their coal transportation contract void – on the basis that, shorn of its restrictive provisions, it would be so changed in character that it would not be the sort of contract that the parties intended to enter into at all. EWS did offer to enter into a new contract with E.ON but at a price some £7 million higher than under the original deal. However, the parties could not reach agreement on its terms. EWS sought to bring matters to a head by seeking a declaration that the contract was void and unenforceable from the High Court and, following an unsuccessful attempt by E.ON to have this action stayed pending the outcome of its appeal to the CAT, judgment was issued in EWS's favour on 23 March.

E.ON submitted, amongst other things, that the illegality of the abusive provisions of the contract should not be a bar to it enforcing the contract. The Chapter II Prohibition and its EC equivalent were silent as to the civil rights of innocent counterparties and, it was submitted, the court should ask itself whether such parties should be prevented from relying on an agreement containing abusive terms. Similarly, it was argued, there was no room for the doctrine of frustration where its application would allow a party (in this case EWS) to rely on self-induced frustration directly resulting from its own illegal misconduct.

In giving judgment for EWS, the court chose to apply the English common law rules on severability and ruled that, in the context of this case, it was not possible for the contract to continue in force absent the illegal provisions. The whole contract was accordingly void and unenforceable.

Comment

In making its argument to override or qualify common law principles, it is possible that E.ON found inspiration in the European Court of Justice's seminal Crehan ruling. In that case, the ECJ held that the full effectiveness and deterrent effect of Article 81 EC (the equivalent of the UK Chapter I prohibition) required the English courts to set aside the normal English common law rules which prevented a party to an illegal (and anti-competitive) contract from suing its counterparty for damages. One can infer, perhaps, a similar policy imperative in relation to the deterrent effect of Article 82 (and Chapter II).

However, there will be a further opportunity for this argument to be considered as E.ON has appealed to the Court of Appeal against the High Court's ruling. It will therefore be interesting to see whether the appeal court judges show greater interest in E.ON's arguments and, for instance, ask the European Court of Justice to provide a preliminary ruling on the matter.