The English law of causation and the passing-on defence

One of the big questions of English competition law is whether there is such a thing as a “passing-on defence” – – i.e. whether the damages suffered by a purchaser of a cartelized product are reduced or mitigated if he “passes on” some of the overcharge to his own customers. Two follow-on damages actions were due to be heard this term, arising out of the synthetic rubber cartel and the gas insulated switchgear cartel, both of which raised the question of passing-on but both of which have now settled.

I should perhaps declare an interest: I was junior counsel in the rubber case (Cooper Tire v Dow). Whilst preparing for that case, I was struck by the fact that, whilst there is a mass of published material discussing the policy considerations for and against the passing-on defence, there is very little published analysis of what the English law of damages has to say about the issue. The existence of a passing-on defence has on several occasions been conceded, assumed or endorsed in obiter comments (see, for example, Emerald, Newson and Devenish). But it has never been fully argued.

After some initial skirmishing, the parties in Cooper Tire (which had a few weeks in court before settling) agreed that the availability of the defence should depend on normal English principles of causation and mitigation. It is worth pausing to emphasize the significance of that agreement. If correct, as I explain below, it means that the question of whether damages should be reduced to reflect passing-on depends on the facts of the case. No party was arguing that passing-on is always or never a valid defence.

The question is therefore: in what circumstances do steps taken after the infliction of damage serve to reduce the damage? As it happens, that question was explored in great detail in a shipping case handed down shortly after Cooper Tire settled, namely Fulton Shipping Inc v Globalia Business Travel SAU [2014] EWHC 1547 (Comm). Mr Justice Popplewell noted the uncontroversial starting point that damages are intended to place the innocent party in the same financial position as if the breach had not occurred. But he said at paragraph 17:

“The principle does not, however, mean that a claimant always recovers for the amount of the losses which arise from the breach. Principles of causation mean that his losses may be factually too remote from the breach to be recoverable despite the fact that they would not have been suffered but for the breach. His losses may be too remote in law. Conversely, he may end up better off as a result of the breach than he would otherwise have been, without having to give credit for such benefit against his recoverable loss.”

Popplewell J’s judgment is something of a tour de force, and it repays close reading. He reaches the conclusion, which will surprise no-one who has ever had to consider this issue, that there is no single general rule to determine whether a wrongdoer obtains credit for a benefit received following his breach of duty. However, there are certain general principles.

Of most relevance, the Judge explained that:

“In order for a benefit to be taken into account in reducing the loss recoverable by the innocent party for a breach of contract, it is generally speaking a necessary condition that the benefit is caused by the breach […] The test is whether the breach has caused the benefit; it is not sufficient if the breach has merely provided the occasion or context for the innocent party to obtain the benefit, or merely triggered his doing so […] Nor is it sufficient merely that the benefit would not have been obtained but for the breach.”

Applying that test to passing on, the question would be whether the increase in the direct purchaser’s own prices was caused by the cartel. It would not be sufficient for the cartelist to show that the cartel “provided the occasion or context” for the direct purchaser to increase its prices, or that those prices would not have been increased but for the cartel.

There is no obvious dividing line between causing an increase in prices and providing the occasion or context for such an increase. It follows that, if those are the principles applicable to passing-on, cartel damages claims are likely to require a close factual analysis of how the claimant’s prices were affected by the cartel. It would also follow that, unless and until there is EU intervention, these cases will remain highly uncertain: there will be no judgment deciding once and for all that damages “should” or “should not” be reduced due to passing-on. Instead, all will depend on the judge’s view of the facts of the particular case.

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