Eastern Express Pty Ltd v General Newspapers Pty Ltd

Re: EASTERN EXPRESS PTY LIMITED
And: GENERAL NEWSPAPERS PTY LIMITED; DOUBLE BAY NEWSPAPERS PTY LIMITED;
BREHMER FAIRFAX PTY LIMITED; JOHN B. FAIRFAX; JOHN HANNAN; FRANK HANNAN;
NICKELBY PTY LIMITED; EASTERN EXPRESS PTY LIMITED and OTHERS
No. G489 of 1990
FED No. 413
Trade Practices
(1991) 13 ATPR 41-128
103 ALR 41
30 FCR 385

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Wilcox J.(1)

CATCHWORDS

Trade Practices - Rival suburban newspapers having as a major source of revenue display real estate advertisements - Competition for advertising services - Price cutting of advertising rates - Claim by new newspaper that established newspaper is engaging in predatory pricing in order to damage or eliminate it - Claim by established newspaper that provision of articles of association of new entrant requiring shareholder real estate agents to lodge a particular quantity of advertisements contravenes Trade Practices Act.

Trade Practices Act 1974, ss.4D, 45 and 46.

HEARING

SYDNEY

#DATE 23:7:1991

Counsel for the Applicant B.C. Oslington, QC and
and Cross-respondents: D.K. Catterns

Solicitors for the Applicant: Solomon Partners

Counsel for the Respondents R.J. Ellicott, QC and
and Cross-claimants: D.M. Yates

Solicitors for the Respondent
and Cross-claimants: Phillips Fox

ORDER

In relation to the Application:

1. The claims made by the applicant in paragraphs 4 to 13 inclusive of its Amended Statement of Claim be dismissed by consent.

2. The claims made by the applicant in its Amended Statement of Claim against the seventh respondent be dismissed by consent.

3. The Application be dismissed.

4. The applicant pay to each of the respondents their costs of the proceeding, except in relation to the claims referred to in orders 1 and 2.

In relation to the Cross-claim:

5. The claim made by the cross-claimants in paragraphs 46-53 inclusive of their Cross-claim be dismissed by consent.

6. It be declared that the making by the first cross-respondent and such of the remaining cross-respondents as are shareholders of the first cross-respondent of the provision contained in article 4A(2)(e) of the articles of association of the first cross-respondent was an act infringing s.45(2)(a)(ii) of the Trade Practices Act 1974.

7. Within a period of sixty days from today, or such further time as a Judge may allow, the cross-respondents and each of them take all such steps as may be necessary and open to them to delete article 4A(2)(e) from the articles of association of the first cross-respondent.

8. The cross-claimants claim for damages be reserved with liberty to apply to the Court for directions in relation thereto on three days notice to the cross-respondents.

9. The cross-respondents pay to the cross-claimants their costs to date in respect of the Cross-claim except paragraphs 46-53.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. (See also Order 37 rule 2(3)).

JUDGE1

This litigation started life as a complaint under s.52 of the Trade Practices Act 1974 by the publisher of a newspaper circulating in the eastern suburbs of Sydney about the accuracy of statements made by its competitor as to its advertising rates. The respondents retaliated by claiming that the applicant had itself made misleading statements about advertising costs and circulation rates. These complaints were susceptible of easy assessment. The facts were checked. Some corrections were published and the s.52 claims have now disappeared from the case. I am asked to make consent orders disposing of these claims. I will do so.

In the meantime, battle has broken out over a wider front. Both publishers claim that the other has contravened Part IV of the Trade Practices Act. The applicant relies on s.46 of the Act, the respondents on ss.45, 45D and 47.
The applicant, Eastern Express Pty Limited, publishes a newspaper called "Eastern Express". The circumstances surrounding the establishment of the company and the publication of the newspaper are important to an understanding of the case. So I will refer to those circumstances in setting out the facts behind the dispute. It is sufficient at this stage to say that about 24 eastern suburbs real estate agents, or persons associated with them, are shareholders of Eastern Express. Many of those people or companies have been named as cross-respondents, as have three other shareholders, John Spira, Gregory Solomon and Andrew Orum.
The first three respondents, General Newspapers Pty Limited, Double Bay Newspapers Pty Limited and Brehmer Fairfax Pty Limited, trade as Eastern Suburbs Newspapers ("ESN"). General Newspapers and Double Bay Newspapers are subsidiaries of F. Hannan Pty Limited. The fifth and sixth respondents, John Hannan and Frank Hannan, are associated with that company. John Fairfax, the fourth respondent, is associated with Brehmer Fairfax. The remaining respondent, Nickelby Pty Limited, is a company connected with William Bridges, a principal of W.J. Bridges Real Estate. Nickelby has no connection with ESN. The applicant made a separate claim against Nickelby, alleging exclusive dealing in contravention of s.47 of the Act. But there is no evidence to support that claim and it is agreed between the parties that it should be dismissed.
The background facts
The present ESN partnership has existed only since 1988. In that year Brehmer Fairfax acquired the 50% interest in ESN previously held by John Fairfax and Sons Limited and, before that, by Australian Consolidated Press Pty Limited. At the present time the partnership publishes three newspapers: "Wentworth Courier" (distributed in the Municipalities of Woollahra and Waverley), "Weekly Southern Courier" (distributed in the Municipalities of Randwick and Botany) and "Western Suburbs Courier" (distributed in the inner western suburbs of Sydney). Each of the three newspapers is delivered to householders and other persons within its area of distribution. The newspapers are provided free of charge, the only source of revenue being advertising. Each of the newspapers is printed for ESN by Hannanprint, a division of the ESN partnership. Hannanprint is the second largest newspaper printer in Australia. It prints not only ESN's newspapers, but also publications put out by publishers in which its partners have no proprietary interest. Hannanprint charges ESN for printing its newspapers at the same rates as it charges strangers. These charges involve a measure of profit so that, as the parties have agreed, in assessing the profitability of "Wentworth Courier" to its proprietors (an issue arising out of the applicant's claim that ESN has engaged in "predatory pricing"), it is necessary to consider the printing profit earned by Hannanprint.
"Wentworth Courier" has been published since 1961. It was described by Mr Michael Hannan, Chief Executive of Hannanprint, in one memorandum as "the flagship of the group". No doubt Mr Hannan chose this term because, although its circulation (approximately 50,000) is about the same as that of "Weekly Southern Courier" and well below that of "Western Suburbs Courier", "Wentworth Courier" traditionally earned the lion's share of ESN's advertising revenue. In recent times, ESN has made an effort to build up the newspaper's classified advertising, with some success. But its strength has always lain in its display advertisements, the bulk of which have been those relating to the sale of real estate. As might be supposed, having regard to the quality and value of much of the housing in the Woollahra and Waverley municipalities, the local estate agents frequently advise clients to offer their properties for sale by auction. Concentrated display advertising over a relatively short period, typically about three weeks, is often employed as a means of stimulating purchaser interest.
From the time of its establishment until February 1990, "Wentworth Courier" enjoyed a dominant position in relation to the advertising of real estate situated within its distribution area. Such properties were often advertised in national newspapers: notably "The Sydney Morning Herald" but sometimes also in "The Australian Financial Review", "The Australian" or "The Daily Telegraph". But the evidence suggests that, whether or not this was done, vendors generally thought it necessary also to advertise in a local newspaper. And, for most of its history, "Wentworth Courier" had enjoyed a virtual monopoly of local newspaper advertising. Some challengers had come and gone. But, for some years before February 1990, the only local competitors had been two small-circulation, paid newspapers: "Australian Jewish Times" and "Australian Spectator". It was generally thought important to advertise a local property of any significant worth in "Wentworth Courier".
Until 1987, "Wentworth Courier" was printed entirely in black and white. In that year, ESN commenced to insert colour pages in some issues. Very often there would be only four colour pages: the front and back cover and the inside pages of those covers. The front cover did not carry display advertising; so this arrangement permitted only three pages of colour display advertisements. If three pages were insufficient, in any particular issue, the colour segment might be inserted inside the newspaper so as to give four pages of colour advertisements or, more rarely, there might be eight colour pages. (For technical reasons the colour component had to be a multiple of four pages.) At this time, colour advertisements were extremely expensive. The price was $4,000 for a full page, this price being calculated on the basis that only three revenue pages would normally be available to cover the cost of the colour section.
Mr Solomon, a marketing consultant who resided in the area, perceived an opportunity of competing with "Wentworth Courier". He discussed the matter with Mr Spira, a business associate and friend. The initial idea was to publish a colour magazine devoted entirely to the advertising and promotion of eastern suburbs real estate. Mr Spira had an association with a printer called Diamond Press.
Commencing in mid-June 1988, the two men had conversations about this possibility with at least 11 local real estate agents, each of whom was required to enter into a secrecy agreement with Mr Solomon. The discussions confirmed Mr Solomon's perception that "Wentworth Courier" was vulnerable to competition in respect of its real estate advertising. In particular, he felt that a rival publication ought to be able to provide more colour advertisements than "Wentworth Courier" but at a cheaper cost. Mr Solomon and Mr Spira decided to proceed with the venture; it being a fundamental element of their proposal that a number of the major local real estate agents should hold shares in the company publishing the new publication and be contractually bound to advertise in it.
During the course of these initial discussions, an alternative proposal was made to the agents by two gentlemen named Blackshaw. Their proposal was for the publication of a newspaper akin to "Wentworth Courier", rather than the magazine which Mr Solomon and Mr Spira were contemplating. Some of the agents convened a meeting at which both proposals were discussed. The suggestion made by Messrs Blackshaw seems to have had a lasting influence. But the agents did not then adopt it. They preferred to continue to deal with Mr Solomon and Mr Spira. The agents appointed three of their number, Ron Pillinger, William Bridges and Bart Doff, to serve as a liaison committee assisting Mr Solomon and Mr Spira in the development of their ideas.
Over the ensuing four months, there were numerous discussions about the proposed new publication. These discussions were referred to extensively in the affidavit evidence, as were later conversations going right up to the launch of "Eastern Express" in February 1990. News of the proposal quickly spread around the eastern suburbs real estate community. Many agents adopted positions on the matter, supporting one publication or the other. There were some acrimonious exchanges, protagonists of each publication predicting the early demise of the other. The affidavits contain conflicting accounts of some of these exchanges. I rejected most of the conversation evidence as irrelevant. Some survived, but counsel did not cross-examine on the conflicts. They agreed that the resolution of those differences would not assist the determination of any pleaded issue in the case. Accordingly, that evidence may be ignored. The only evidence of conversations which, as it seems to me, is relevant is evidence of some statements made by executives of ESN. That evidence may cast light on the purpose of ESN in engaging in price competition with "Eastern Express", the alleged breach of s.46 of the Trade Practices Act.
The management of ESN became aware of the proposed new publication not later than early August 1988. In a memorandum sent to some ESN sales staff on 5 August 1988, Mr Michael Hannan expressed concern about Diamond Press "coercing" real estate agents to leave "Wentworth Courier" and to join the new paper "by offering 'shares' in the paper". He went on:

"Well gentlemen, it is not on. They are attempting to attack the flagship of the group and I am not prepared to even see the 'flagship' dented."

The memorandum went on to speak of retaliative measures:

"I am sick and tired of Diamond Press. If they want to persist in pinching our staff, undercutting our prices and generally lowering the market prices and now the final straw, the attack on the 'Wentworth Courier' - it is now time we reacted.

Here is where you come into the picture.

Up until now as you well know, I have resisted a price cutting war with Diamond Press. Well gentlemen, it is 'no holds barred' now. You are to identify their clients, you have my authority to quote work that they are doing and win it for this group, always of course at the maximum price you can achieve."

The price cutting mentioned in this memorandum related to printing costs. Mr Hannan was ordering a price cutting war by Hannanprint, as a printer, against Diamond Press, as a printer. The memorandum has nothing to do with price cutting for advertising in "Wentworth Courier". But counsel for the applicant say that it demonstrates Mr Michael Hannan's willingness to use Hannanprint's strength to damage Diamond Press and, therefore, prevent the birth of the prospective rival. This willingness, they say, lends support to the suggestion that ESN was actuated by a similar purpose, at a later stage, in reducing the advertising charges of "Wentworth Courier".
ESN were not content to undermine Diamond Press, if they could. They sought also to break the link between the involved real estate agents and Messrs Solomon and Spira, and to dissuade others from joining them. Late in August 1988, ESN management gave a dinner for about 100 real estate agents at their premises at Alexandria. They touted the virtues of "Wentworth Courier", and its history of service to the eastern suburbs; especially to real estate agents. But the dinner seems to have had no influence on those who were involved in the discussions with Mr Solomon and Mr Spira.
Sometime during the period July-November 1988, a fundamental change was made to the concept contemplated by Mr Solomon and Mr Spira. Apparently at the urging of the agents' committee, they adopted the suggestion made by Messrs Blackshaw and decided that the new publication should be a full local newspaper, rather than a magazine relating only to property. It was to be modelled upon "Wentworth Courier", but with a greater editorial content. Like "Wentworth Courier", it would be distributed free of charge once each week.
In November 1988, the applicant was incorporated. At that stage, the new publication was intended to be called "Eastern Weekly". A decision was subsequently made to adopt the name "Eastern Express" and in mid-1989 the company's name was changed to Eastern Express Pty Limited. At about the same time, the company's articles were amended so as to provide for the issue of 175,000 "A" class shares, 75,000 "B" class shares and 9,750,000 unclassified shares. All shares were to have a nominal value of one dollar. The intention was that the initial issued share capital be $250,000. The 175,000 "A" class shares were all to be held by real estate agents, or persons associated with agents. The 75,000 "B" class shares were to be held by interests associated with Mr Solomon, Mr Spira and Mr Orum. This would mean that real estate agents would hold 70% of the issued share capital. But both classes of shareholders would appoint three directors, thus ensuring equality of representation between the two groups on the company's board of directors. These intentions came to fruition when share allotments were made in September 1989.
The amendments to the articles of association made in 1989 also included the addition of a "quota" provision. That provision is the subject of the respondents' cross-claim. To put it into context, I should say that article 4A(2)(a) specifies a minimum "A" class parcel of 2,500 shares. Paragraphs (b), (c) and (d) of that article give "A" class members voting, winding up and dividend rights equal to that proportion of 70% which the total of the members' shares bears to the total number of "A" class shares. Paragraph (e) provides:

"(e) Each Class A Member shall cause to be lodged with the company for publication in each addition (sic) of the Newspaper advertisements in any one year (the first of such years to be computed from the date of publication of the first edition), to a value to be determined at the rate of Thirty three thousand three hundred and thirty three dollars ($33,333.00) for each and every Parcel held or if the number of the Class A Shares held is in excess of a Parcel or a multiple thereof then proportionately as to such excess (herein called the 'Quota'), provided that on the first and each subsequent anniversary of the date of the first publication of the Newspaper the Quota shall be increased by a figure which bears the same proportion to the Quota as the then cost for a full page black and white advertisement in the Newspaper bears to the sum of One thousand one hundred and ninety dollars ($1,190.00) per full page."

The word "Newspaper" is defined by article 2(1) as "the newspaper published by the company in the Region". The "Region" is "the Municipalities of Randwick, Waverley and Woollahra".
Paragraph (f) of article 4A(2) defines "Quota" as including any increase thereof from time to time as provided in the articles. Paragraph (g) requires "A" class members to pay for advertisements "placed or deemed to have been placed" pursuant to article 4A(2) within 30 days. Otherwise, interest is payable at a rate 2% above the company's overdraft rate. Paragraph (h) provides for the debiting to an "A" class member at the end of each year "for the unused portion of his Quota" as if he had lodged advertisements to the full extent thereof. Paragraph (i) provides for a bonus. If an "A" class member exceeds his or her Quota, "the directors shall be at liberty in their absolute discretion to reward such Class A member with a bonus, rebate or other benefit ... not exceeding 5% of the value of such yearly excess".
Although the matter was initially a subject of dispute between the parties, it became clear during the hearing that decisions about the number of parcels of shares to be held by each "A" class shareholder, and therefore the extent of that shareholder's quota obligation, were related directly to the amount of advertising which that shareholder had customarily placed with "Wentworth Courier". The idea was that the agent's quota would be the figure required to purchase an equivalent number of pages of "Eastern Express" display advertising. According to Mr Bridges, when these arrangements were discussed "we all agreed ... that that was going to be the end of the Wentworth Courier once we started with the `Eastern Express'".

A shareholders' meeting was held on 28 September 1989 at which three directors were appointed to represent the "A" class shareholders. Thereafter, arrangements for the new publication proceeded apace. The company entered into a printing agreement with Spika Trading Pty Limited (Diamond Press) and a consultancy agreement with a company associated with Mr Solomon. Premises at Double Bay were leased. Staff were recruited.
Not surprisingly, the senior management of ESN took a close interest in the preparations being made for the new newspaper. Having failed to influence the key real estate agents, ESN decided to take the contest to "Wentworth Courier" readers. In August 1989, for the first time, the newspaper was issued in a waterproof wrapping. In a letter to readers of 16 August, ESN boasted that "Wentworth Courier" was the only home delivered flat waterproof-wrapped newspaper in Australia. Shortly afterwards, Mr John Hannan, Managing Director of ESN, issued a circular letter to "Wentworth Courier" readers headed "Important Notice to Real Estate Vendors" and "Beware of Imitations". The letter read:

"Some real estate agents are getting together shortly to produce a new local newspaper in which they will be shareholders. These real estate agents will use your advertising money to help finance their newspaper venture. They are not satisfied to earn a profit from selling your home but seek to make further profits by directing your advertising into their newspaper. They have set themselves up to make a profit out of your advertising money regardless of whether they sell your house.

One of the most important financial and personal decisions you will make is the sale of your own home.

You can maximise the price you get for your property by choosing the right real estate agent and the best possible advertising medium to promote your property.

There is no doubt the 'Wentworth Courier' has been and continues to be without equal in delivering readership and buyers for quality real estate in the Eastern Suburbs and beyond.

There is no other newspaper like the 'Wentworth Courier'. It has been judged the best suburban newspaper in Australia in 1987 and 1989. Potential buyers of real estate seek out the 'Wentworth' from all parts of Sydney and interstate.

If the real estate agent you have chosen to sell your property in the Eastern Suburbs is encouraging you to support 'his' newspaper as a substitute for the 'Wentworth Courier' you could run a grave risk of not achieving the maximum return on the sale of your property. You only get one go, do it right with the proven performer. Support the real estate agents that support the 'Wentworth Courier'. Insist that your real estate agent advertises your property in the 'Wentworth Courier' - you pay the bill - see that your money is spent wisely."

At about this time, late in 1989, ESN expanded the distribution area of "Wentworth Courier" so as to take in the whole of the municipality of Waverley, instead of only the northern half of that municipality as before. Circulation increased to about 50,000 copies per week. For a period in November-December 1989 the newspaper was published twice a week, instead of weekly. But this innovation was not well received by the local real estate agents. It was abandoned after only six weeks, when weekly publication was resumed.
Also at about this time, Mr Bridges decided not to purchase shares in Eastern Express. He communicated his decision at a meeting attended by the other two members of the agents' liaison committee, Mr Pillinger and Mr Doff, and also by Michael Dunn, another local real estate agent. Mr Bridges gave as his reason his desire to maintain his vendors' freedom of choice as to the paper in which they advertised. He said that he was worried about the conflict of interest that would arise "between being shareholders in the newspaper and taking profits from that shareholding on top of commissions" and that "we will all become newspaper salesmen rather than real estate agents".
In December 1989, ESN decided to offer a concession to real estate advertisers. In a circular letter to real estate agents dated 8 December 1989, Mr John Hannan referred to the existing black and white full page rate of $1,330 and announced that, from 1 January 1990 and until further notice, for each two pages placed and paid for in the same issue, valued at $2,660, ESN would allow a third page free in the same issue; thus reducing the cost to advertisers who placed at least three pages to $887 per page. ESN also offered a concession for repeats of the same advertisement in the following week's issue of "Weekly Southern Courier".
However, ESN soon considered that this would not be enough. With the first issue of "Eastern Express" obviously imminent, it was decided to reduce the black and white rate generally. In view of the importance to the applicant's case of ESN's price cutting, it is desirable to set out the circumstances of this decision as deposed to by Mr Michael Hannan. Subject to one possible qualification, this version was not challenged in cross-examination.

"2. In January 1990 I convened a meeting of various executives of ESN to consider our response to the new competitor, the Eastern Express ...

3. From enquiries I had caused to be made throughout the real estate and advertising industry I was informed and I then believed that:-

(a) The Wentworth Courier would have a competitor which would produce a competing product to the Wentworth Courier on a superior quality paper with more extensive use of colour throughout the paper;

(b) The circulation of the new competitor would be 60,000 copies;

(c) The black and white advertising rate would be approximately $1,190 per page;

(d) There would be extensive use of editorial colour throughout the publication;

(e) A high quality editorial staff would be employed.

4. At that time the contract advertising rate for a full black and white page in the Wentworth Courier was $1,340. We regarded that price as not competitive with the price which we believed the competitor was to introduce namely, $1,190 contract rate for a full page black and white advertisement with a circulation of approximately 60,000 because the competitor would be using superior quality paper and with higher profile editorial and with extensive use of colour throughout the magazine.

5. After some discussion a suggestion was made that we strike a contract rate for black and white advertisements of $1,000 for a full page. After further discussion it was agreed that for better marketing a rate of $995 would be preferable and the meeting generally agreed with that figure. I had earlier made some very rough costing calculations based upon my knowledge of the production costs of the Wentworth Courier and the fixed and variable costs of the ESN newspapers and determined that if we were able to achieve similar volumes of advertising pages to those previously enjoyed the paper would still make a profit of approximately $200 per page at the rate of $995.

6. I understood that some of the real estate agents who had advertised in the Wentworth Courier would be shareholders in the Eastern Express and would probably be committed to it in some way, however at that time, I was not aware of and I did not appreciate the effect of the quota system in the articles in relation to the required level of advertising to be placed with the Eastern Express in any one year. I believed that there would remain a substantial degree of vendor choice and loyalty to the Wentworth Courier as a newspaper established in the area for over 30 years. My costings previously referred to in ascertaining the profit the Wentworth Courier would make on a rate of $995 per black and white page assumed we would maintain comparable volume of advertisements to allow the economies of scale that had always applied to the Wentworth Courier to be maintained.

7. At the meeting in January 1990 I was aware of comparable contract rates for full page black and white advertisements in other newspapers. In particular I was aware that the Eastern Herald published by John Fairfax and Sons Limited charged approximately $700 contract rate for a full page black and white advertisement and claimed a circulation in excess of 50,000 copies per week. I regarded it as necessary to lower our rate closer to the Eastern Herald because my view at that time was that that paper was likely to benefit from the competition between the Wentworth Courier and the Eastern Express."

"The Eastern Herald" is a free newspaper inserted into those copies of "The Sydney Morning Herald" which are distributed in Sydney's eastern suburbs.

The possible qualification to which I referred arises out of the circumstance that it was put to Mr Michael Hannan that the lower rate was struck with the purpose of discouraging advertisers from using "Eastern Express" and instead advertising with "Wentworth Courier". Mr Hannan replied:

"We struck a rate which reflected the difference in the two products. The perceived difference in the two products, from readers and advertisers. You can't expect to get a rate in a newsprint publication that is higher than the rate in a gloss publication."

Following the meeting referred to by Mr Hannan, on 19 January 1990, ESN announced its revised display advertising rates, effective from 31 January 1990:

"Full Page ... $995 was $1,330

Half Page ... $500 was $665

Quarter Page ... $300

Colour Page ... $2,500"

Although these new rates did not affect the existing colour rate, Mr Michael Hannan had that rate under review. His affidavit proceeded:

"8. Later in January 1990 I was informed by sources within the industry and believed that the Eastern Express planned to introduce a full page contract colour rate of $2,000. I also believed that the Eastern Express intended to use colour extensively for editorial purposes. I decided that it might become necessary for the Wentworth Courier to reduce its colour rate from an average of $2,500 a page inclusive of costs to approximately $1,600 a page including costs. At an informal management meeting held a short time later it was decided that if it did the full colour page contract rate should be $1,565 including processing costs. It was my belief that the competitor would have a circulation in excess of the Wentworth Courier and therefore, in accordance with standard industry practice, it would be able to charge higher colour advertising rates per page to reflect the higher circulation. I also believed from the information I had received that the competitor would be able to place colour full page advertisements at random throughout its publication. The Wentworth Courier was limited to placing such colour advertisements in eight page blocks either around the cover or in the centre of the paper. The rate of $1,565 was not adopted for actual colour advertisements until June 1990 ie $1,295 plus $270 for processing costs."

In its preparations for the imminent warfare, ESN did not confine itself to revising its advertising rates. It decided directly to attack the new newspaper's main bastion of support: the real estate agents. In successive issues, on 10 and 17 January 1990, ESN inserted full page notices in "Wentworth Courier" relating to the relationship between a property vendor and his or her retained real estate agent. The first notice, entitled "Important Notice to Vendors", asked the question "Is your Real Estate Agent breaching his Code of Ethics?" An extract from the code of ethics of the Real Estate Institute of New South Wales was printed. This extract states that "a member must not have any interest in any transaction in which he acts as agent otherwise than in his capacity as agent, unless his principal has given prior written consent". The notice ended with this exhortation:

"As a vendor, you are the principal. You pay the advertising bill. Make sure that your money is spent in a paper with audited circulation and guaranteed readership, so that you will achieve maximum awareness. If your Real Estate Agent places your ad in a paper in which HE HAS SHARES, he is obliged by his Code of Ethics to obtain your prior written consent to do so. Don't give it lightly.

Instruct him to consider the Courier."

The second notice was even more hard-hitting. It replayed the same theme but contained a reference to the possibility that a failure by an agent to disclose a shareholding in a recommended newspaper might constitute an offence under the Crimes (Secret Commissions) Amendment Act 1987 (NSW).
During January 1990 Mr John Hannan gave an interview to Mr Tony Burrett, a journalist preparing an article for a publication called "Ad-News". In his article, Mr Burrett attributed the following statements to Mr Hannan:

"Managing director John Hannan said the paper had already taken steps to make it more difficult for the newcomer to succeed, including wrapping the Courier in clear plastic, giving readers free cookbooks and offering deals to real estate agents.

Hannan said the Courier has weathered competition before and indicated the winner of the battle would be the surviver (sic) of extended advertising rate-cutting.

He also said the attitude of real estate vendors would be a key factor in the war.

'If you're selling your house in Point Piper you are going to say to your estate agent 'why isn't my ad in the Wentworth Courier'' As well, he said some vendors might question the idea of paying for ads in a newspaper partly owned by their estate agents."

Mr Hannan disputed some elements of this attribution. In answers to interrogatories, he agreed that he referred to "Wentworth Courier" being wrapped in clear plastic and to free cook books and deals with real estate agents. But he denied that he stated that these steps had been taken to make it more difficult for the newcomer to succeed. Similarly, he conceded the reference to the Courier having weathered competition before, but he denied saying that the winner of the battle would be the survivor of extended rate-cutting. Mr Burrett was called to the witness box by counsel for the applicant to say that his story was correct, as printed, and that he had checked it in draft form against his notes of the interview, which he had since destroyed. I have no reason to doubt this evidence; but I do not think that it much matters whether or not Mr Hannan made the disputed statements. Whether or not he admitted them, the disputed elements of the interview were obviously correct in point of fact.
On 31 January 1990, the day before the launch of "Eastern Express", ESN offered a further concession in relation to real estate black and white advertising. Under this concession, agents would be entitled in each month to January 1991 to take at the concession rate of $695 per page the number of pages of advertising taken in the month of February 1990. Excess pages would be at $995 per page.
The advertising charges made by "Eastern Express" in respect of its first issue on 1 February 1990 were:

Black and white - full page $1,295

- half page $745

- quarter page $397

Colour - full page $2,390

- half page $1,750

These rates have remained unchanged since that date.

As at the date of the first issue, the new publication claimed a circulation greater than that of "Wentworth Courier"; 55,000 as against 50,000. But the circulation of "Eastern Express" dropped to 41,500 in May 1990. At that time, the distribution area of the new publication was reduced by deleting deliveries to properties in a number of areas which had yielded little revenue: Woolloomooloo, Darlinghurst and parts of Kings Cross and Surry Hills. (I interpolate that some persons associated with the applicant were slow to inform potential advertisers of this reduction in circulation. Some blatantly incorrect statements were made. But I need not pursue the matter; these misrepresentations have nothing to do with the issues now requiring resolution. And it is only fair to add that fault was not all on one side. Although the inaccuracies were less serious, some ESN personnel gave incorrect "Wentworth Courier" figures.)
According to Mr Solomon, the present circulation of "Eastern Express" is about 43,000.
On 1 February 1990, Mr John Hannan sent a circular letter to local real estate agents in which he commented on the cost of the new publication. In particular, he noted that the newcomer used glossy paper which cost almost twice as much as the newsprint used by "Wentworth Courier". He posed a series of questions about the likely cost of, and profits derived by Diamond Press from, the printing of the paper. It is not necessary to refer to Mr Hannan's letter in any detail. The letter was obviously designed to make real estate agents cautious about committing themselves to "Eastern Express", especially as shareholders.
On 5 February 1990, there was a meeting of the board of direction of ESN. This entity is, apparently, the partnership's equivalent of a company's board of directors. The minutes of that meeting contain an entry relied upon by the applicant. Against the side-note "Opposition Paper", the minute says:

"A long discussion took place re the first issue of Eastern Express

(Feb.4th)(sic). Over twenty of the shareholders are real estate agents who used to support Wentworth Courier. All possible steps are being taken and will be taken to restrict its share of the market."

The next few issues of "Wentworth Courier" all carried notices, in the form of advertisements, concerning "Eastern Express". It is not necessary to go to the detail. It is enough to say that the notices criticised the distribution of the "Express", many copies of early issues being said to have gone astray in the delivery process or to have been spoilt by rain, and the paper's higher advertising rates. Some of the notices contained endorsements of "Wentworth Courier" by advertisers and well-known personalities. During this early period, "Wentworth Courier" ran a series of notices listing the names of the local agents who were currently advertising in that newspaper and those who were not. According to these notices, there was a rapid decline in the number of agents in the latter category; that category being entirely eliminated by the end of February 1990. Of course, that fact said nothing about the volume of advertising from the agents who also used "Eastern Express". "Eastern Express" continued to carry a considerable volume of real estate advertising; most of which, the management of ESN believed, would otherwise have come to "Wentworth Courier". So Mr John Hannan continued to lobby the agents. On 26 February 1990, he wrote a lengthy circular letter in which he emphasised the merits of his firm's newspaper, especially its distribution efficiency, lower printing costs and lower advertising rates. In that letter, he announced that the reduced black and white full page rate of $995 would be held firm until 30 June 1991.

According to the evidence, it was not until May 1990 that the ESN management learned of the quota provisions in the articles of association of Eastern Express. ESN executives had been aware that many real estate agents had taken shares in the company. But they had not previously realised that this step involved any commitment to advertise in "Eastern Express", as distinct from an obvious financial interest in doing so. When he learned of the position, Mr John Hannan wrote to the shareholder-agents a letter dated 4 May 1990 in which he said that ESN had legal advice that the quota did not prevent the agents advertising in "Wentworth Courier". He suggested that the only risk they would run would be forfeiture of their Eastern Express shares but that, at current rates of advertising, an agent would quickly make up any loss sustained as a result of forfeiting those shares. (This last suggestion assumes that agents themselves bear the cost of advertising. The evidence suggests that this is rarely so, at least in respect of display advertisements. If the vendor is bearing the cost of advertising, the agent has no direct incentive to economise; and, if he or she holds shares in the advertising medium, an interest in not doing so.)
On 1 June 1990, Mr Hannan sent a further letter to shareholder-agents withdrawing his suggestion that shares might be forfeited. He did not deal with the possibility of an agent being sued for a short-fall in his or her placed advertising, under para (h) of article 4A(2).
The information which they had obtained about the quota system caused concern to ESN executives. The minutes of the board of direction meeting of 8 June 1990 record a "lengthy discussion" about "Eastern Express" with the note:

"It was acknowledged that because of the 12 month period contracted by the real estate shareholders it would be very difficult for any of these agents to return their advertising to Wentworth."

Shortly after this meeting, ESN decided to reduce its colour advertising rate to $1,295 per page. If an advertisement was booked for three weeks or more, no production cost was added; if for a lesser run, a production charge of $270 was payable.
On 13 July 1990, a magazine named "B and T" published what purported to be the text of an interview given by Mr John Fairfax of ESN. The interview touched on many subjects, including the battle between "Wentworth Courier" and "Eastern Express". In answers to interrogatories tendered in this case, Mr Fairfax conceded that, in the course of the interview, he made statements to the effect of each of the following:

"It's been a very vigorous fight. Some real estate agents have been offended by the aggressive nature of the Wentworth Courier over this which is unfortunate because in the past they have also been advertisers. In competition we are used to fighting vigorously, and that's certainly the attitude of the Hannan family." "The Hannans are good publishers, and the competitor is getting itself into a bind by being almost too good, producing on high quality paper. The Wentworth Courier is produced on newsprint, on fully depreciated presses and charging advertising rates which we really can't afford. But we will charge those rates simply because it's a bigger company which has a printing, magazine and distribution side. Therefore we can afford to take it on the nose."

"Q: 'What you are saying is that there's a discount war going on out in Sydney's eastern suburbs and you can last longer.' A: 'That's right.'"

In July 1990, "Wentworth Courier" commenced its campaign of comparative advertising, no doubt to publicise its new full page colour rate. Unfortunately, the initial advertisements overstated some of the rates charged by "Eastern Express". Those errors led directly to the institution of this litigation on 23 August. Almost immediately, ESN accepted its errors and published a correction. But it continued its comparative advertising. For example, on 3 October 1990, "Wentworth Courier" ran a full page notice setting out the following colour rates, which were apparently accurately stated:

"Wentworth Courier": week 1 $1,295, week 2 $1,295, week 3 $1,295 - a total of $3,885 including production costs.

"Eastern Express": week 1 $2,390, week 2 $1,795, week 3 $1,795 - a total of $5,980 not including production costs."

In its cross-claim filed on 5 October 1990, and no doubt by way of reprisal for the correction they had been forced to make, the three respondents who were partners in ESN made allegations of misrepresentations by the applicant concerning both its circulation rate and its advertising charges. As indicated, these are no longer live issues.
The colour advertising rates published by "Wentworth Courier" on 3 October 1990 enure to the present time. As might be expected, those agents who are shareholders in Eastern Express direct most of their advertising to that company's publication. The figures are summarised in a report prepared for the respondents by John Banks, a partner in the Corporate Advisory Services Division of KPMG Peat Marwick, accountants. They come from pre-trial information provided by the applicant. In the period 1 February 1990 to 29 January 1991, Eastern Express shareholder-agents placed advertising worth $676,670 with "Wentworth Courier". In the period 1 February 1990 to 10 January 1991, (or, on one view, 31 December 1990 - the January data are confused and incomplete) those same agents placed $3,941,454 worth of advertising with "Eastern Express". In other words, over 85% of all expenditure by or through these agents was directed towards the paper in which they held shares. As might be expected, this direction has been substantially at the expense of "Wentworth Courier". An analysis made by David Breden, ESN Group Business Manager, shows that, in the twelve months from 1 February 1988 to 31 January 1989, 23 listed agents who are now Eastern Express shareholders lodged with "Wentworth Courier" advertisements worth $3,606,264, at an average cost of $4.30 per column centimetre. In the following twelve months, to 31 January 1990, their expenditure rose to $4,400,193, at $4.90 per column centimetre. But in the first year of "Eastern Express", to 31 January 1991, they inserted advertisements worth only $676,676, even though the cost was down to $3.98 per column centimetre.
The shareholder-agents' preference for "Eastern Express" caused tension with some of their vendors. The evidence contains accounts of occasions upon which vendors requested that their properties be advertised in "Wentworth Courier", but found that they were advertised in "Eastern Express" instead. There are examples of agents making up an advertising program for clients in which they included recommendations for advertisements in "Eastern Express", but without making any disclosure of their interest in that newspaper or advising the vendor that there was an alternative. Hopefully, incidents such as these have not often occurred. The number of incidents disclosed by the evidence is small; although others might have occurred without ESN or its solicitors becoming aware of the fact. Whatever the true number of incidents and the significance of the conflict of interests for real estate regulatory bodies, the evidence is of little significance in this case. It merely points up what ought to be obvious to anybody considering the matter: it is unrealistic to expect that, in practice, shareholder-agents will always be scrupulous, and careful, enough to ensure that their clients are made aware of their financial interest in placing advertisements with "Eastern Express" and of the fact that those clients have an alternative.
The applicant's s.46 claim
As I have indicated, the only live claim made by the applicant is that made against the first six respondents: the three companies which constitute ESN and three men associated with those companies, Messrs John Fairfax, John Hannan and Frank Hannan. That claim is brought under s.46 of the Trade Practices Act which relevantly reads:

"46.(1) A corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of -

(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;

(b) preventing the entry of a person into that or any other market; or

(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.

(2) ...

(3) In determining for the purposes of this section the degree of power that a body corporate or bodies corporate has or have in a market, the Court shall have regard to the extent to which the conduct of the body corporate or of any of those bodies corporate in that market is constrained by the conduct of -

(a) competitors, or potential competitors, of the body corporate or of any of those bodies corporate in that market; or

(b) persons to whom or from whom the body corporate or any of those bodies corporate supplies or acquires goods or services in that market.

(4) In this section -

(a) a reference to power is a reference to market power;

(b) a reference to a market is a reference to a market for goods or services; and

(c) a reference to power in relation to, or to conduct in, a market is a reference to power, or to conduct, in that market either as a supplier or as an acquirer of goods or services in that market.

(5) ...

(6) ...

(7) Without in any way limiting the manner in which the purpose of a person may be established for the purposes of any other provision of this Act, a corporation may be taken to have taken advantage of its power for a purpose referred to in sub-section (1) notwithstanding that after all the evidence has been considered the existence of that purpose is ascertainable only by inference from the conduct of the corporation or of any other person or from other relevant circumstances."

In the application of s.46 to the facts of a particular case, an essential task is the determination of the relevant market; although, as Mason C.J. and Wilson J pointed out in Queensland Wire Industries Proprietary Limited v The Broken Hill Proprietary Company Limited (1989) 167 CLR 177 at p 187 "(d)efining the market and evaluating the degree of power in that market are part of the same process, and it is for the sake of simplicity of analysis that the two are separated". In the present case, little turns on market definition. Counsel for the applicant say that the relevant market "is a market in which real estate agents, predominantly in the eastern suburbs, acquire services from local newspapers circulating in the eastern suburbs, such services being the publication of display advertisements for real estate". For their part, respondents' counsel say that the market is a Sydney market for advertising of real estate located in the eastern suburbs. The difference, of course, is that the applicant's proffered definition would exclude from the market national newspapers; the respondents' definition would include them. Having regard to the unchallenged evidence of numerous agents as to the importance of locally advertising properties intended to be presented at auction, using display advertisements, I prefer the applicant's definition. There is, of course, some overlap. But, generally speaking, display advertisements in the eastern suburbs are directed to a different audience than advertisements - generally classified advertisements - in national newspapers. However, I think that it would make no difference to the outcome of this case if one selected the respondents' definition. On any view, provided that the definition of the market refers to real estate within the eastern suburbs of Sydney, as distinct from real estate in Sydney generally or in some wider geographical area, ESN has a substantial market share. Market share is, of course, different from market power; the concept critical to s.46. It follows that, under whichever definition is adopted, it will be necessary to enquire whether ESN has, or has had, a substantial degree of power in that market; but I think that the answer is likely to be the same under either definition.
Although market share is conceptually different to market power, there is often an evidentiary relationship between the two: see Queensland Wire at p 189. So it is worth saying something about market share. In this connection, it is noteworthy that ESN not only publishes "Wentworth Courier". It also publishes newspapers in two adjoining districts, one of them in the eastern suburbs. Until the commencement of "Eastern Express", "Wentworth Courier" enjoyed a virtual monopoly, on the applicant's definition of the market. On the respondents' definition, it shared the market with some national newspapers. Nonetheless, given the widespread perception of agents that it was desirable also to advertise in a local newspaper, it enjoyed a dominant position even in that market. Since the advent of the applicant, the ESN market share has diminished. As they were supplied on a confidential basis and it is not necessary to do so, I will not reveal the actual figures. However, even now, the annual revenue earned by ESN from display advertising carried by "Wentworth Courier" runs into several million dollars. A comparison between an analysis of ESN revenue compiled by Mr Breden, and an analysis of "Eastern Express" income prepared by Charlotte Gee, Accounts Manager of the applicant, reveals that "Wentworth Courier" has always received, and still receives, more income from display advertising than "Eastern Express".
The figures in these analyses relate to total display advertising. Not all display advertisements are for real estate. But most are. The evidence shows that the percentage of its total revenue which was earned by "Wentworth Courier" from display real estate advertisements was: for the year 1988, 75.3%; for the year 1989, 79.2%; and for the year 1990, 55.4%. It is not clear whether the stated years are calendar years or financial years ending on 30 June. But this does not matter; the percentages establish that real estate advertisements brought in the majority of all revenue, from all sources, during those years. They must have constituted even higher majorities of the revenue from display advertisements. Given the connection between "Eastern Express" and real estate agents, it is likely that "Wentworth Courier" carries a higher proportion of non-real estate display advertising than "Eastern Express". Nonetheless, having regard to its significantly greater total display advertisement income and its lower display advertising charges, it is extremely likely that "Wentworth Courier" continues to carry more than half of all local newspaper real estate display advertising. On any view, that newspaper continues to enjoy a substantial share of the market, however that market may be defined.
However, in Queensland Wire at p 189, Mason C.J. and Wilson J pointed out that "a large market share does not necessarily mean that there is a substantial degree of market power". At p 188, their Honours described market power as "the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product." See also the discussion by Dawson J at p 200 about the manifestation of market power "by practices directed at excluding competition such as exclusive dealing, tying arrangements, predatory pricing or refusal to deal". Dawson J quoted with approval a definition by Kaysen and Turner, in Antitrust Policy (1959) at p 75:

"A firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions."

There is no doubt that before the advent of "Eastern Express", ESN had a high degree of market power. It possessed a virtual monopoly of a desired form of advertising. Although it was not wholly unconstrained in its pricing policy, it could raise its display advertising charges up to the point where vendors would decide to dispense altogether with local advertising. There is no evidence what that level would have been. But it was probably a high one, given the value of the relevant real estate. In his "flagship" memorandum of 5 August 1988, Mr Michael Hannan himself referred to "Wentworth Courier's" strong competitive position:

"... we have seen numerous opposition suburban newspapers come and go, Murdoch spent $4,000,000 on his last attempt and gave up, Fairfax and their pathetic attempt with the 'Eastern Herald' have spent $3,000,000 and are about to give up and at present are losing $15,000 per week despite their vast resources."

In the period before February 1990, "Wentworth Courier" enjoyed a substantial reputation within the eastern suburbs community, significant reader loyalty and strong support from advertisers, especially local real estate agents. The newspaper was published by a partnership which commanded substantial resources deployed in a vertically-integrated operation (publishing, printing and distribution) achieving economies of scale. These factors constituted formidable barriers to entry, the presence of which are a key component of market power: see Queensland Wire at p 189. It is significant that, despite their expertise and connections, Mr Solomon and Mr Spira were prepared to challenge "Wentworth Courier" only after obtaining from that newspaper's leading real estate advertisers a legally-enforceable commitment to place advertising in the new paper at a level roughly commensurate with their past advertising in "Wentworth Courier". They were prepared to enter the market only after tapping the life-blood of its major participant. Even today, it seems to me, given the advantages of reputation, reader loyalty, resources, vertical integration and economies of scale referred to above, ESN has a degree of market power, however the relevant market be defined. But is today's power "substantial", within the meaning of that word in s.46(1)? This raises a question of construction upon which there was debate between counsel.
When the meaning of "substantial" arises for consideration in a trade practices context, it is customary to refer to the words of Deane J in Tillmanns Butcheries Pty Limited v Australasian Meat Industry Employees' Union (1979) 42 FLR 331 at p 348. Deane J accepted that "substantial loss or damage", in s.45D of the Trade Practices Act, includes "loss or damage that is, in the circumstances, real or of substance and not insubstantial or nominal". That collocation has been applied to other provisions of the Act. I applied it to s.46(1) in both Mark Lyons Pty Limited v Bursill Sportsgear Pty Limited (1987) 75 ALR 581 at pp 591-592 and Pont Data Australia Pty Limited v ASX Operations Pty Limited (1990) 21 FCR 385 at p 412. Counsel for the present applicant invite me to repeat that course and to hold that ESN still has a degree of power in the subject market "which is more than trivial or minimal, which is real and of substance". On the other hand, counsel for the respondents submit that it is necessary, at least in this case, to take the analysis further. They point out that Deane J remarked on the imprecision of the word "substantial" and the fact that it is used in s.45D in a relative sense. Counsel say that the same comment applies to its use in s.46(1); "substantial" power is power which is capable of being used for one or more of the purposes proscribed by paras. (a), (b) and (c) of the subsection. Counsel point out that, prior to 1986, s.46(1) dealt with monopolisation. At that time, the opening words of the subsection referred to a corporation "that is in a position substantially to control a market for goods or services". Whilst they accept that the 1986 amendment was intended to widen the application of the subsection, they say that the amendment did not alter the notion which lay behind the earlier form of the subsection "namely that it was concerned with power which enabled a corporation to act independently of competition and of the competitive forces in a relevant market."

I do not think that much assistance is to be derived from the earlier form of s.46(1). The obvious intent of the 1986 amendment was to widen the application of the subsection. The extent of that widening depends upon the current words of the subsection, properly construed. Those words should be left to speak for themselves, unconstrained by the language of the original subsection.
Counsel's other proposition has more appeal. There is no doubt that "substantial" has a relative connotation. Superficially, it is attractive to relate that relativity to the function of the subsection. But, upon reflection, I do not think that the submission should be adopted. It is clear that a corporation cannot contravene s.46(1) unless it has a degree of power in a relevant market which warrants the label "substantial". However, the effect of counsel's submission is that power is only "substantial" if it is in fact sufficient to enable the corporation to do one or more of the actions referred to in paras. (a), (b) and (c). Upon this interpretation of "substantial", in a case where a person approaches the Court for an injunction to restrain proposed conduct of a corporation (see s.80(1) of the Act) which was undertaken with one or more of the specified purposes, it would be necessary for that person to demonstrate that the corporation has sufficient market power to achieve its purpose. It would often be impossible to discharge this burden, even in cases where the purpose would in fact be achieved, absent curial intervention. There may be too many unknown factors for the Court to be affirmatively satisfied as to the likely outcome of the conduct.
It seems to me significant that Parliament did not make it an element of conduct contravening s.46(1) that the corporation succeed, or be able to succeed, in eliminating or substantially damaging a competitor etc. Rather, Parliament focussed on the action taken to achieve that result; whether or not that action was successful or likely to be successful. Unless driven to the conclusion that there is no other rational meaning of the word "substantial", judges should not, by a side wind, introduce into the subsection the element of likely success. There is an alternative: the meaning of "substantial" adopted in Tillmanns. Accordingly, notwithstanding the careful argument put in this case by counsel for the respondents, I adhere to the approach I adopted in Mark Lyons and Pont Data.
Adopting that approach, it should be held that, even after 1 February 1990, ESN retained substantial market power, however the market be defined. I have already listed the advantages which the partnership continued to enjoy. Whether or not it has taken advantage of that power since 1 February 1990, ESN retained the ability, by drastically dropping its prices, to damage "Eastern Express". In particular, as Mr Fairfax himself pointed out, ESN continued to operate other newspapers, and other activities, which were unaffected by "Eastern Express" and which could provide funds to offset any losses which ESN might sustain on "Wentworth Courier".
As it seems to me, the real issue on this aspect of the case is whether ESN has taken advantage of its market power for one of the purposes proscribed by s.46(1)(a), (b) or (c). And that issue comes down to para. (a); whatever its hopes may have been, ESN did not succeed in preventing the entry of "Eastern Express" into the market (para.(b)) and the applicant does not suggest that ESN has done anything for the purpose of deterring or preventing the applicant, once it was in the market, from engaging in competitive conduct in that market (para.(c)). But the applicant does say that ESN has taken advantage of its market power for the purpose of eliminating or substantially damaging it, a competitor in the relevant market (para. (a)). The conduct relied upon is the cutting of prices of display advertisements, that conduct being said to have been undertaken without reference to its consequences in terms of ESN's own survival. Counsel say that ESN had the ability to disregard those consequences only because of its market power. Absent its vertical integration, ESN would have been faced with typesetting, printing and delivery charges set by strangers and including profit elements. Absent the other newspapers, "Wentworth Courier" would have lacked the economies of scale and sources of revenue needed to offset any losses sustained by it as a result of the price cuts.
I may dispose of one element in this submission immediately. It is true that there is little evidence of consideration by ESN of the consequences of price cutting. The only such evidence is that contained in para.5 of the affidavit of Mr Michael Hannan, dealing with the January 1990 decision to lower "Wentworth Courier's" black and white advertising rates. It will be recalled that Mr Hannan said that he had earlier calculated that, if the volume of black and white advertising could be maintained, "the paper would still make a profit of approximately $200 per page at the rate of $995". There is no comparable evidence in respect of the June 1990 decision to reduce the full page colour rate from $2,500 to $1,295.
However, I do not think that the apparent paucity of consideration of the effect of the price cuts ought lead me automatically to the conclusion that ESN took advantage of its market power for the purpose of eliminating or damaging "Eastern Express". I appreciate that there is no pejorative connotation in the words "take advantage of". The phrase is morally indifferent; hostile intent is not necessary: see Queensland Wire at pp 191, 194, 202, 213-214. At the last reference, Toohey J suggested that the phrase "take advantage of" meant no more than "use" market strength. I also appreciate that it is not necessary that the purpose of ESN be confined to a proscribed purpose. Section 4F(b) of the Act provides that a person shall be deemed to have engaged in conduct for a particular purpose if that person engaged in the conduct for purposes that included that purpose and that purpose was a substantial purpose. Nonetheless, it is necessary for the applicant to establish that the conduct complained of, the cutting of advertisement prices by ESN with little consideration of the financial effect of those cuts, was conduct undertaken for the purpose of eliminating or substantially damaging "Eastern Express". As a matter of logic, the possibility exists that the prices were cut for other purposes, although the decision was made with less calculation than might otherwise have been the case because ESN management was aware of the partnership's market strength and other resources.
Section 46 seeks to protect traders against damage from their competitors. Yet it is one of a series of provisions designed to foster, not limit, trading competition; and it is axiomatic that effective competitive activity by one market participant inflicts damage upon other participants. The more competitive the market, the more the principles underlying Part IV are applied, the greater the damage likely to be sustained by less efficient participants. The point was made by Mason C.J. and Wilson J in Queensland Wire at p 191:

"But the object of s.46 is to protect the interests of consumers, the operation of the section being predicated on the assumption that competition is a means to that end. Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away. Competitors almost always try to 'injure' each other in this way. This competition has never been a tort ... and these injuries are the inevitable consequence of the competition s.46 is designed to foster."

Having regard to those considerations, it seems evident that something more than competition, something more than even ill-considered competition or aggressive competition, is required before s.46 is offended. To draw again on Mason C.J. and Wilson J, the relevant conduct must be conduct which undermines competition.
I referred earlier to some examples of impermissible practices given by Dawson J in Queensland Wire. Some of those practices are manifestly anti-competitive; for example, exclusive dealing and tying arrangements. Conceptually, predatory pricing - that is the deliberate lowering of prices to levels which will drive competitors out of the market and enable the predator then to raise prices to levels unconstrained by competitive activity - is, equally obviously, anti-competitive conduct. In the short term, the effect of predatory pricing is to boost competition and to benefit purchasers. But, in the long term, competition is reduced, and purchasers disadvantaged, because of a reduction in the number of market participants.
Section 46 makes no reference to predatory pricing. Dawson J did not suggest otherwise. The importance of his Honour's reference was that it indicates a view that, if it be established that a corporation with substantial market power has engaged in predatory pricing, there will be proof of conduct offending s.46. Predatory pricing may be established in one of a number of ways: by express admission; by inference from facts other than the extent of the price cuts themselves; or by analysis of the effect of the price cuts, giving rise to an inference as to the purpose behind their adoption. Perhaps the special difficulty about a case of predatory pricing is that, although this practice is just as anti-competitive as exclusive dealing and tying arrangements, its existence may be more difficult to prove. Once the facts are uncovered, the true nature and purpose of an exclusive dealing or tying arrangement becomes readily apparent. But the outward manifestation of a decision to engage in predatory pricing is a lowering of prices, an action which, on its face, is pro-competitive. The factor which turns mere price cutting into predatory pricing is the purpose for which it is undertaken. That will often be difficult to prove. Traders rarely admit the existence of a proscribed purpose. In the absence of inference from other circumstances, the Court will be faced with the question: what price cut effect is sufficient to warrant the inference that the cuts were undertaken for a proscribed purpose? This is a question to which I will return after examining whether there is material, other than the effect of the price cuts themselves, to support a finding that ESN used its market power for a proscribed purpose.
The evidence does not include any express admission of a proscribed purpose. Mr John Hannan and Mr Michael Hannan both gave evidence. Each was cross-examined as to the purpose of the price cuts. Each maintained that the price cuts were a defensive reaction to what the witness saw as strong competition from "Eastern Express". The flavour of the evidence is conveyed by the following exchanges between cross-examining counsel and Mr John Hannan:

"Are you saying that the decision not to increase the cost of display advertising in the Wentworth Courier had nothing whatsoever to do with the existence of the Eastern Express?---No I'm not saying that at all. That's a case of a competitor who undercut us in price and so we couldn't afford to go above them. They forced our prices down. If you have a competitor producing a magazine on better quality paper than the newspaper on newsprint you would have absolutely no hope of selling an ad if it wasn't cheaper.

So the primary reason I suggest for you in not increasing the cost of display advertising in the Wentworth Courier in the middle of last year was because of the existence of the Eastern Express in the market place? ---Only because their rate was fixed at a certain price. We couldn't charge a higher price than the Eastern Express. I wouldn't have had a customer left. I wouldn't have had a newspaper."

Notwithstanding their claims that the price cuts were a reaction to the competition presented to them by "Eastern Express", both witnesses conceded that they realised that the cuts would adversely affect "Eastern Express". When the question was put directly to Mr John Hannan: "Would you be delighted if the Eastern Express went broke and ceased publication?", he replied: "Absolutely". These responses were not surprising. Most business people would prefer to prevent the emergence of, or to eliminate, competitors. The greater the threat posed by a competitor, the greater the likely reaction. In the present case, ESN was presented with a dire threat. Not only was "Eastern Express" proposed to be, and turned out to be, a publication having a greater circulation and editorial content, published on better quality paper with a higher proportion of colour pages; it was a newspaper in which the local real estate agents held shares. Mr John Hannan expressed his reaction to that situation in this answer:

"I have no fear of any competition, normal competition, nobody in Australia has had to have a paper start in opposition to them with their 25 largest advertisers as shareholders. Mr Murdoch has never had that problem; it had to fall to me, unfortunately."

It must also be remembered that both Mr John Hannan and Mr Michael Hannan believed that the distribution area could support only one free weekly newspaper. In that situation, as counsel for the applicant themselves said in the course of their submissions, defence of "Wentworth Courier" and damage to "Eastern Express" were two sides of the same coin. In a one-to-one contest, he best defends himself who first despatches his opponent. The mere admission by Messrs Hannan of a recognition that the aggressive activity which they thought necessary for the successful defence of "Wentworth Courier" would damage "Eastern Express" is not an admission by them that damage was a purpose of their activity. The statement is equally consistent with a recognition that it would be a result.
Nor is this a case where the actions of the relevant corporation - leaving aside for the moment an analysis of the effect of the price cuts themselves - give rise to an inference that it had an impermissible purpose. Much emphasis was placed upon the vigour of ESN's reaction to the "Eastern Express" challenge. Counsel referred to a number of matters: Mr Michael Hannan's memorandum of 5 August 1988 calling for a printing price war against Diamond Press; the attempts by ESN (the August 1988 dinner and Mr John Hannan's circular letters) to drive wedges between Messrs Solomon and Spira and the local real estate agents and between the agents supporting "Eastern Express" and property vendors; the references by Mr John Hannan in his "Ad-News" interview to "Wentworth Courier" having "weathered competition" (that is, eliminated competitors) before and - if he said this - to "the winner of the battle" being "the survivor of extended advertising rate-cutting"; Mr Fairfax's references to "charging advertising rates which we really can't afford" and to "a discount war"; and the timing and extent of the price cuts themselves.
I do not think that much may be made of these matters. It is likely that ESN would have reacted vigorously to any new competitor. But, in the absence of a link between the new publication and the local estate agents, its reaction may have been less vehement. Certainly, Mr John Hannan would not have needed to issue his circular letters. "Wentworth Courier's" notices would have been different, possibly less aggressive. It is impossible to say whether, without the link, ESN would have reduced its prices as steeply as in January and June 1990. Perhaps not; ESN may have felt that an unsupported publication was not a serious threat. But these circumstances do not mean that the steps taken by ESN were other than a genuine reaction to the predicament in which the partnership found itself, or that the price cuts were dictated by anything other than a perception that they were necessary to defend "Wentworth Courier" and ESN's commercial interests.
There was some discussion whether "Wentworth Courier's" rates would be maintained if "Eastern Express" closed down. Evidence as to likely future prices is important once it appears that a person is deliberately trading at a loss; it goes to the purpose lying behind the decision to take that course. If there is no loss, it would be difficult to infer a proscribed purpose. So what is sometimes called the "sporadic" element would be unimportant. Traders move their prices down and up for all sorts of competitive reasons; to increase turnover, and therefore achieve economies of scale in particular locations or at slack times of the year; to attract particular classes of customer or to establish a new product; and so on. But, for such significance as it may have, I record my view that, in the present case, there is no sporadic element, unless it is to be inferred from a profitability analysis. There is nothing else which suggests that the present advertising rates of "Wentworth Courier" are merely ephemeral. That does not mean that I regard them as immutable. During the course of his cross-examination, Mr John Hannan was asked about this. It was put to him that, if "Eastern Express" were eliminated from the market, "Wentworth Courier's" rates would revert to what they had previously been. He replied: "Not immediately. In due course like everything else they would rise, I imagine, but not immediately. We gave, I think, in some of these sort of circulars (scil. undertakings) that we would maintain our rates for certain periods and we would honour these".
I accept this evidence. Moreover, for commercial reasons, I doubt that, if "Eastern Express" ceased publication, "Wentworth Courier's" advertising rates would rise to the levels which applied immediately before the advent of that newspaper. The rewards of the market having now been demonstrated, I think that ESN would regard that as a short-sighted course, inviting some other challenger. Besides, the colour rate of $4,000 was the product of circumstances pertaining when colour was first introduced. Under present circumstances it would be, and be widely regarded as, indefensible. I think that any reversion to that rate, or anything like it, would be strongly resisted by advertisers. But, having said all that, I do not doubt that one consequence of the demise of "Eastern Express" would be a tendency for advertising rates to rise. Although, as will appear, "Wentworth Courier" is presently not unprofitable, the profit is small relative to the size of the enterprise. Freed of the constraints upon them by competition from "Eastern Express", the management of ESN would be likely to take the view that they were entitled to a more attractive rate of return and that the market would bear a series of gradual rate increases.
I turn to the primary circumstances relied upon by the applicant: the nature, extent and effect of the price cuts themselves. Counsel led off this section of their argument with a bold submission, answering the question posed earlier by saying that price cutting gives rise to an inference of a proscribed purpose whenever prices are fixed with the intention of diverting custom from a competitor to the price cutter. They say that it is enough that the decision to cut the "Wentworth Courier's" rates was made with the intention of encouraging real estate advertisers to prefer "Wentworth Courier" to "Eastern Express". As the new prices were made possible only by ESN's market power, ESN's conduct in setting them contravened s.46(1)(a).
I cannot accept this submission. It is unsupported by authority and it ignores commercial reality. Traders commonly fix prices with the intention of diverting to themselves custom which would otherwise flow to their competitors. In doing so, they realise that, if they are successful, the result will be to damage - in extreme cases, even to eliminate - those competitors. But such conduct is the very stuff of competition, the result which Part IV seeks to achieve. It would be surprising if Parliament intended to proscribe competitive conduct when undertaken by a company with sufficient resources to compete effectively. Something more must be required. In an endeavour to find out what is that "something more", I turn to the authorities.

The second analysis in version 1 deals with the revenue derived from, and the cost of producing, the full page colour advertisements published over the twelve month period. The analysis shows both the total position and the position on a per page basis. It reveals that, on each basis, colour pages were profitable overall and in each month except June, July, August and September 1990 and January 1991. The third analysis relates to full page black and white advertising. It shows a profit in each month and, of course, for the whole year.
As must follow from the way in which the material has been marshalled, as one goes to the consecutive versions the profitability position steadily improves. A comparison between version 1 and version 2 shows that an editorial factor of 20%, rather than 24.6%, makes very little difference to the results. But when one moves to version 3, and takes in Mr Hannan's claimed "hidden profit", the calculated profit improves markedly. On this basis, there were losses in the same months as previously - except that the September full page colour result becomes profitable - but they were much smaller, and the profit in the profitable months becomes greater. Version 4 adopts the same assumptions, except for a reduction in the salaries and overhead factor from 45% to 40%. This makes a significant improvement in overall profitability, although there remain significant December and January losses for the newspaper as a whole and colour page losses in four months. Version 5 takes a 37% salaries and overhead factor This causes a further significant improvement in profitability.
For the reasons already mentioned, I think that it is unnecessary to reach any conclusion about the validity of the assumptions upon which the accountants differed. I see no reason to reject Mr Michael Hannan's evidence about "hidden profit" and there does appear to be merit in the contention that a salaries and overhead factor lower than 45% is applicable; although perhaps not as low as 37%. I have no view about the editorial factor; but, as I have indicated, this element makes little difference to the result. I suspect that the true position is close to that depicted in version 4. That version shows a profit, on an annual basis, some 70% higher than that depicted in version 1; a result which I have already described as being likely to lead to the indefinite continuation of the newspaper. But whether or not the true position is close to version 4, it is clear that "Wentworth Courier" traded profitably in the analysed twelve months. That much follows from version 1, which states the lowest possible profit, adopting figures agreed by both accountants or, where there is a conflict, Mr Vella's preferred assumptions.
The allegations contained in paras. (a) and (b) of para. 3 of the Amended Statement of Claim are not made out. That, I think, is fatal to the applicant's s.46 claim. Because of the applicant's failure to prove that the price cuts have resulted in "Wentworth Courier" being published at a loss, it is not necessary to choose between the various measures of loss bruited in America. The applicant has chosen to carry out an analysis of the newspaper's average total costs, including its share of fixed costs. Exercises based on any of the other cost measures adopted in America would necessarily have resulted even more favourably to ESN. In essence, the applicant has selected the measure most likely to demonstrate unprofitable trading but has succeeded only in showing that, upon the figures accepted by its own accountants, the price cuts did not make "Wentworth Courier" unprofitable. There being nothing else to support a finding that the conduct of ESN was taken for the purpose of damaging or eliminating "Eastern Express" as a competitor, the s.46 claim must fail.
I should say that, when it became apparent from the work being done by the accountants that "Wentworth Courier" was profitable during the relevant period, and although that case was not pleaded, counsel for the applicant focussed attention upon the full page colour advertising in the newspaper. Certainly, on the figures, colour advertising was less profitable than black and white advertising. In versions 1 and 2 the twelve month full page colour profit is very small; although it becomes substantial on the assumptions embraced by versions 3 and 4. But, as a matter of principle, it is inappropriate to dissect the newspaper's income in this way. In some fields, it may be legitimate to say that a company abuses its market power when it drops the cost of a particular product or service below cost, even though it is trading profitably as a whole. But "Wentworth Courier" is a single product, a newspaper, which contains a mixture of features. Evidence was given by Mr Brian Young, a person with 30 years experience in the production of newspapers and magazines, that the success of any newspaper depends on obtaining the correct mixture of items to attract and retain readers. The cost of some items will be greater than the revenue to be gained from them; but they may be justified because of their contribution to the newspaper as a whole. This is true of a free newspaper, whose editorial pages generate costs but no revenue. They are inserted in the belief that they will stimulate reader interest. If they do, they make the newspaper more attractive to advertisers and thereby increase the revenue earned by each of the advertising pages. Similarly, some advertising pages generate reader interest. They may be justified even though they cost more than the revenue they earn. Even if it appeared that, over a period such as twelve months, the full page colour advertisements lost money, that fact alone would not justify the inference that the fixing by ESN of its full page colour advertising rate was conduct undertaken for the purpose of eliminating or damaging its competitor "Eastern Express". The claim under s.46 will be dismissed with costs.
The ESN cross-claim
As I mentioned at the beginning of these reasons, ESN brings a cross-claim against the applicant and 16 other cross-respondents, all of whom are either shareholders in Eastern Express or persons having such an association with corporate shareholders that they may properly be regarded as being knowingly concerned in any breach of Part IV by that shareholder: see s.75B of the Act. That association is not disputed. The cross-claimants put their case in a variety of ways, relying on both aspects of s.45, on s.45D and on s.47.
Section 45 relevantly provides:

"(1) ...

(2) A corporation shall not -

(a) make a contract or arrangement, or arrive at an understanding, if -

(i) the proposed contract, arrangement or understanding contains an exclusionary provision; or

(ii) a provision of the proposed contract, arrangement or understanding has the purpose, or would have or be likely to have the effect, of substantially lessening competition; or

(b) give effect to a provision of a contract, arrangement or understanding, whether the contract or arrangement was made, or the understanding was arrived at, before or after the commencement of this section, if that provision -

(i) is an exclusionary provision; or

(ii) has the purpose, or has or is likely to have the effect, of substantially lessening competition.

(3) For the purposes of this section and section 45A, 'competition', in relation to a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding, means competition in any market in which a corporation that is a party to the contract, arrangement or understanding or would be a party to the proposed contract, arrangement or understanding, or any body corporate related to such a corporation, supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the provision, supply or acquire, or be likely to supply or acquire, goods or services.

(4) For the purposes of the application of this section in relation to a particular corporation, a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding shall be deemed to have or to be likely to have the effect of substantially lessening competition if that provision and any one or more of the following provisions, namely -

(a) the other provisions of that contract, arrangement or understanding or proposed contract, arrangement or understanding; and

(b) the provisions of any other contract, arrangement or understanding or proposed contract, arrangement or understanding to which the corporation or a body corporate related to the corporation is or would be a party,

together have or are likely to have that effect.

(5) ...

(6) ...

(7) ...

(8) ...

(9) ..."

The meaning of the term "exclusionary provision" is explained by s.4D:

"4D.(1) A provision of a contract, arrangement or understanding, or of a proposed contract, arrangement or understanding, shall be taken to be an exclusionary provision for the purposes of this Act if -

(a) the contract or arrangement was made, or the understanding was arrived at, or the proposed contract or arrangement is to be made, or the proposed understanding is to be arrived at, between persons any two or more of whom are competitive with each other; and

(b) the provision has the purpose of preventing, restricting or limiting -

(i) the supply of goods or services to, or the acquisition of goods or services from, particular persons or classes of persons; or

(ii) the supply of goods or services to, or the acquisition of goods or services from, particular persons or classes or persons in particular circumstances or on particular conditions,

by all or any of the parties to the contract, arrangement or understanding or of the proposed parties to the proposed contract, arrangement or understanding or, if a party or proposed party is a body corporate, by a body corporate that is related to the body corporate.

(2) A person shall be deemed to be competitive with another person for the purposes of sub-section (1) if, and only if, the first-mentioned person or a body corporate that is related to that person is, or is likely to be, or, but for the provision of any contract, arrangement or understanding or of any proposed contract, arrangement or understanding, would be, or would be likely to be, in competition with the other person, or with a body corporate that is related to the other person, in relation to the supply or acquisition of all or any of the goods or services to which the relevant provision of the contract, arrangement or understanding or of the proposed contract, arrangement or understanding relates."

The contractual provisions relied upon by the cross-claimants for the purposes of their s.45 arguments are contained in article 4A(2) of the articles of association, quoted above. I accept the submission of counsel for ESN that this article has the following features:

(i) Each "A" class shareholder was bound to insert advertisements in each edition of "Eastern Express";

(ii) In any one year each such shareholder was bound to place advertisements to a value calculated by reference to a quota, the amount of which was fixed by reference to the value of shares held by that person and which could be increased by the board of directors of Eastern Express;

(iii) Any such shareholder who failed to meet his or her quota was liable to be debited for any shortfall as if advertising to the value of the quota had been lodged;

(iv) Any such shareholder who failed to pay for advertisements placed or deemed to have been placed was liable to pay interest on the debt at a penal rate; and

(v) Any such shareholder who placed advertisements above his or her quota had an expectancy of a bonus.

There is no doubt that the articles constitute a contract between the company, Eastern Express, and each of its shareholders and between the shareholders themselves: see Corporations Law s.180 and, in respect of the period before 1 January 1991, s.78(1) of the Companies (New South Wales) Code. The company or another shareholder could take legal action against a defaulting shareholder to enforce the quota provisions: see Grant v John Grant and Sons Pty Ltd (1950) 82 CLR 1 at p 48; Hickman v Kent or Romney Marsh Sheep Breeders Association (1915) 1 Ch 881 at p 902.
None of the above is in issue. But the cross-respondents dispute two elements in ESN's contention that the quota provisions amount to an exclusionary provision within the meaning of s.4D(1); and, therefore, contravene s.45(2)(a)(i) and s.45(2)(b)(i). In the first place, they point out that para. (a) of s.4D(1) applies only where the relevant contract etc. was made, or is to be made, between persons any two or more of whom are competitive with each other. ESN says that this requirement is fulfilled. Its counsel accept that it is not enough that the contract was made, amongst other persons, between shareholders who are real estate agents in competition with each other for the listing and sale of properties. By force of s.4D(2), the relevant competition must relate to the supply or acquisition of goods or services to which the contract relates. However, they say that the agents compete with each other for the acquisition of real estate advertising services. In that connection, they point to evidence that some advertisers prefer certain parts of the newspaper for the placement of their clients' advertisements. Some preferred pages, such as the back of the newspaper and right hand pages, carry an extra loading.
Counsel for the cross-respondents dispute that the agents are in competition with each other, in the relevant sense. They say that the supply of advertising space in local newspapers is, in effect, infinite; any competition for preferred pages in a particular newspaper is de minimis and, in any event, that competition is not affected by the quota provisions.
I think that these submissions are correct. But, as the argument de minimis involves a matter of degree upon which opinions may vary, I prefer to rest my rejection of ESN's case under s.4D(1)(a) on the latter point.
Subsection (2) requires that the relevant competition be "in relation to the supply or acquisition of all or any of the goods or services to which the relevant provision of the contract ... relates". In the present case, ESN argues that there is competition in respect of the acquisition of services. If the word "services" is defined broadly, so as merely to refer to real estate advertising services, it may justly be said that these are services to which the quota provisions relate. But ESN's difficulty is that the agents are not in competition with each other in relation to services generally. Even on the ESN argument, the agents engage in a limited competition for some preferred pages of the newspaper. If the word "services" is defined narrowly, to accommodate the limited nature of the competition, (as, for example, by defining the relevant "services" as advertising on certain preferred pages of either newspaper) these are not services to which the quota provisions relate. The dilemma for ESN is that, on no reading of the word "services", does the area of competition coincide with the area of contractual regulation.
The requirements of paras. (a) and (b) of s.4D(1) are cumulative. Having regard to my opinion about para. (a), it is not necessary for me to reach a conclusion upon the question whether, as ESN asserts but the cross-respondents dispute, the quota provisions have the purpose of preventing, restricting or limiting the acquisition of advertising services from ESN by those real estate agents who are shareholders in Eastern Express.
When I turn to the second limb of s.45(2) - "substantially lessening competition" - the converse situation applies. I have reached the conclusion that the quota provisions have the effect, or the likely effect, of substantially lessening competition: see paras. (a)(ii) and b(ii). So it is unnecessary to address the more complex question whether they also have that purpose.
The Act does not afford much guidance as to the intended meaning of the phrase "substantially lessening competition". The word "competition" is defined for the purposes of ss.45 and 45A by s.45(3) in the manner set out above; and, for more general purposes, by s.4 - as including competition from imported goods or from services rendered by persons not resident or not carrying on business in Australia. Section 4G requires references to the lessening of competition to be read as including references to preventing or hindering competition. But the phrase as a whole is not defined and it has received little judicial expatiation. It was considered by Lockhart J in Radio 2UE Sydney Pty Ltd v Stereo FM Pty Ltd (1982) 44 ALR 557 where, at p 563, his Honour referred to the discussion in Tillmanns Butcheries about the meaning of "substantial" and, at p 564, expressed the view that "the lessening of competition must be at least real or of substance". This approach recognises that every commercial contract lessens competition to some degree. Each party is taken out of the market to the extent of its commitment. The parties, being bound to each other, are unable to buy from, or sell to, others the goods or services the subject of the contract. To that extent, they are inhibited in their ability to compete with others for purchases or sales. But those restrictions are fundamental to contract law; law which the Trade Practices Act was designed to supplement, not to supplant. No doubt this is why the word "substantially" appears in paras. (a)(ii) and (b)(ii). If those paragraphs had referred merely to contracts etc. which lessened competition, they would have achieved too much. The introduction of "substantially", a word of degree, enables the Court to make a judgment about the degree of anti-competitive effect of a particular contract, having regard to its scope and purpose.

One possible legislative approach would have been to restrict proscription of contracts etc. which substantially lessen competition to contracts between parties who are in competition with each other. As we have seen, this was the course adopted in relation to exclusionary provisions. But s.45(3) contains no such limitation. It refers only to "competition in any market in which a corporation that is a party to the contract" etc. "supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the provision, supply or acquire, or be likely to supply or acquire, goods or services". In other words, it is enough that one of the parties to the contract etc, being a corporation, is a participant in a market the competitiveness of which is substantially lessened by the contract etc.
Notwithstanding this omission, in Trade Practices Commission v Nicholas Enterprises Pty Ltd (No.2) (1979) 40 FLR 83, Fisher J was pressed with the argument that the definition of "competition" in s.45(3) imported a requirement that all the parties to the agreement be competitors in the same market. He rejected this argument, saying at p 110:

"The expression 'the corporations' or 'the parties to an understanding' would doubtless have been used, as it is in s.45A, if it was intended to cover all parties. It follows that in my opinion it is not necessary that the market be a market in which all parties to the understanding supply goods. In the present matter, however, as there are only two parties to the understanding, for practical purposes it is doubtless necessary that they supply goods in the same market so as to compete each with the other. But all that the plaintiff is required in my opinion to establish, for the purposes of s.45(3), is a market in which either the Royal Oak or the Morphett Arms is supplying goods."

I confess to some difficulty in understanding this passage. At one point his Honour seems to suggest that there is only competition within the meaning of s.45(3) if at least two parties of the contract compete with each other. But, in the final sentence, it seems to be enough that one party is involved in the market. It seems to me, with respect, that the latter position is correct. If Parliament had wished to limit the operation of s.45(2), in connection with "substantially lessening competition", to cases where the parties to a relevant contract were competitors in the same market, it would have been easy to adopt words such as those found in s.4D(1)(a) and (2).
If that view is correct, the importance of the word "substantially" is underlined. The word enables, and requires, the courts to determine what degree of restriction is compatible with a competitive environment.
In "Trade Practices Law", vol.1 at p 42, Donald and Heydon say that "(t)he assessment of substantial effects on competition can never be simply a quantitative assessment. It must involve qualitative judgments about the impact of conduct on the market in general". I agree with that observation. I add that, in making those judgments, courts should have regard to commercial realities and normal commercial practice. It is not difficult to think of examples of contracts which involve a substantial and long-term commitment but which would generally be considered acceptable; even desirable in promoting a competitive economy. Let me take an imaginary case. Assume that a building company, X, habitually purchases bricks from brickyard A, ordering bricks as required at current prices. It uses about 500,000 bricks each year. Promoters of a proposed brickyard, B, approach X with a proposal for a contract whereby B will supply, and X will purchase, not less than 500,000 bricks per year for five years, at prices which are specified but lower than those presently paid by the company to A. B sees such a contract as advantageous because it provides a market base justifying the incurring of establishment costs. The attraction to X is an assured supply of bricks at a known, cheaper price. The contract is made. In theory, X remains free to purchase bricks from A, or anyone else. But, in practice, it is unlikely to do so. If the contract is honoured, its likely needs will be fully met by B. Conversely, B has committed to X 500,000 bricks per year, out of its total production capacity. It is no longer free to sell those bricks elsewhere. To the extent of their obligations, the contract has lessened the ability of both parties to compete in the open market. In a direct sense, the effect of the agreement is to lessen competition in the brick market. This is a market in which X participates. So the relevant competition is "competition" within the meaning of s.45(2) of the Act. Having regard to the volume of bricks involved and the duration of the agreement, it could hardly be said that the effect was insignificant. Yet I venture to think that a court would decline to hold that the agreement was one which substantially lessened competition; but, rather, that it would be impressed with the argument that the agreement was instrumental in bringing into the market a new participant, B; cf. Radio 2UE at pp 567-568. The qualitative judgment of the court, weighing its pro-competitive aspects against its anti-competitive aspects, would probably be that the agreement was not unreasonably restrictive in character and, on the whole, conducive to competition rather than the contrary.
(The above example assumes that my understanding of the s.45(3) notion of competition is correct. But the example could readily be accommodated to the more restrictive view of that notion which requires two parties who are competitive with each other by supposing contracts with two competing building companies: see s.45(4)).
Counsel for the cross-respondents put a similar argument in the present case. They say that, until "Eastern Express" commenced publication, ESN had a virtual monopoly and great market power. For a new entrant to compete successfully with ESN, counsel submit, that new entrant must secure for itself a proportion of real estate display advertisements. If it did not do so, the new publication would not be viable. The quota provisions should, therefore, be regarded merely as a reasonable method of obtaining a sufficient degree of agent support to justify the cost of establishing the newspaper. Counsel say that a quota was not the only way of inducing real estate agents to place advertisements with their client. The mere issue of shares to agents provides some incentive to those agents to use "Eastern Express". That incentive would be heightened if the shares were issued at a high premium or if the shareholders were required to give personal guarantees to secure a line of credit for the company. Counsel say that, if ESN's argument is correct, any of those methods of securing sufficient support would also contravene s.45. They attribute to ESN a case which says that the only potential threat to its monopoly - an arrangement by real estate agents to join in supporting a rival newspaper - is no threat at all because it would have the effect of substantially lessening competition. Such a conclusion, they suggest, is inconsistent with the objects of the Trade Practices Act.
The submission for the cross-respondents goes on to refer to the fact that the total quota commitment by shareholder-agents was less than the total amount received by ESN for real estate advertising in "Wentworth Courier", whether before or after the establishment of the new newspaper. Counsel also point out that the amount actually spent with "Eastern Express" by shareholder-agents in 1990 greatly exceeded their total quota commitment. They say that it should be inferred that the reasons why shareholder-agents chose "Eastern Express" were shareholder loyalty and their belief that it was a better newspaper. Counsel say "(i)f the quota was the reason why they advertised, it would be expected that their advertising would cease once the quota was attained". Accordingly, counsel conclude, the quota has not in practice had the effect suggested by ESN.
It might perhaps be thought that there is a measure of inconsistency in an argument which insists that the quota system, or something like it, was necessary to enable "Eastern Express" to challenge "Wentworth Courier" whilst simultaneously contending that, in practice, that system has not had the effect of causing shareholder-agents to support "Eastern Express" rather than "Wentworth Courier". But everything depends upon the time at which the matter is addressed. I have no difficulty in accepting that it was essential for the promoters of the new newspaper to take some action to ensure that, when it was first published, "Eastern Express" would enjoy substantial agent support. Nothing could have been more unpropitious than early issues containing little display advertising. "Eastern Express" would have been seen by agents and readers alike as a newspaper to which potential purchasers would be unlikely to resort for information about available properties. Once that impression got about, the problem of attracting advertisers would be perpetuated and intensified. On the other hand, success breeds success. Once the new publication had established a reputation for carrying a large number of well-presented advertisements for attractive properties, it would readily be resorted to by potential purchasers; and the knowledge that this was happening would encourage further advertisements.
It follows from this analysis that any contracts which were merely designed to ensure that "Eastern Express" got off to a good start, in relation to the number and quality of its advertisements, ought not be regarded as substantially lessening competition. On the contrary, any such contracts should be seen as an essential prerequisite to anyone making a serious challenge to "Wentworth Courier's" dominant market position. Like my hypothetical brick agreement, any such contracts should be regarded as pro-competitive, even though they would have the effect of limiting market choice at that stage. But it is another thing to justify such a contract in the long term. Once the new publication had made a successful start and established a reputation amongst readers and advertisers, it ought not need propping up by a contractual commitment. Indeed, this is the cross-respondents' very argument in contending that the quota provisions are now irrelevant to shareholder-agent support of "Eastern Express".
There is no doubt that the quota provisions lessen competition in the relevant market, whether that market is defined in the way contended for by Eastern Express or by ESN. Those agents who are Eastern Express shareholders are contractually bound, upon pain of having to pay for any shortfall, to lodge with that company's publication advertising roughly equivalent to their previous total volume of local free newspaper advertising. This obligation must inhibit their freedom of action within the market and the opportunity for usual market forces to affect the advertising decisions of themselves and their clients. The question, then, is whether the degree of lessened competition is such that, making a qualitative judgment and taking into account the need for Eastern Express to engender some support to enable it to challenge ESN, it should be categorised as substantial. I think that it should, for two reasons. First, whilst it would in my view have been permissible to bind agents to support the early issues of "Eastern Express", so that it could build its reputation and establish its competitive position, article 4A(2) goes too far in binding agents to support each and every issue indefinitely. It is true that an existing "A" class shareholder may sell. But the purchaser must be a real estate agent or a person associated with a real estate agent and that person would then be bound to advertise. As long as this provision endures, however successful "Eastern Express" becomes, each shareholder, whoever he or she may be, is bound to advertise in each edition of "Eastern Express" or to pay for the deficiency. This is a permanent hindrance of competitive forces which has no justification after the establishment phase.
Secondly, although the article binds the agent in point of law, it is likely seriously to interfere with the freedom of choice of the vendor. There is evidence from a number of agents, and it is not challenged, that in practice most vendors allow themselves to be guided by their agents in determining their advertising program. This is hardly surprising; the whole purpose of retaining an agent is to harness his or her selling expertise and contacts. But, if an agent has a contractual commitment to put a substantial volume of advertising in a particular newspaper, the objectivity of the agent's advice is inevitably compromised. From the competition point of view, the vice in the situation is that the vendor's decision is less likely to reflect competitive factors. The situation is unlike that which applies where the principal has examined the market situation - as, for example, in my hypothetical brick supply case - and made a decision by reference to competitive factors.
I need not pause to examine an alternative submission by ESN, to the effect that the quota operates to maintain the prices of "Eastern Express": see s.45A. Upon the basis just discussed, I uphold ESN's contention that the quota provisions have the effect, or likely effect, of substantially lessening competition. The making of article 4A(2)(e) infringed s.45(2)(a)(ii) of the Trade Practices Act. Although it is submitted that, if I reach that conclusion, relief ought to be denied upon discretionary grounds, I propose to so declare. The discretionary argument is founded entirely upon the alleged necessity for the quota as a weapon to combat ESN's monopoly. But, as I have indicated, the effect of the quota goes beyond support for "Eastern Express" in its establishment phase. A matter such as this is better taken into account in the process of considering whether a contract substantially lessens competition, rather than in relation to the exercise of the Court's discretion. To give effect to article 4A(2)(e) is to contravene s.45(2)(b)(ii). Accordingly, I will order that, within a period of sixty days or such further time as a Judge may allow, the cross-respondents take all such steps as may be necessary and open to them to delete article 4A(2)(e) from the articles of association of Eastern Express. By agreement of the parties, the matter of damages was deferred. Although it is not obvious to me that ESN would be able to prove that the insertion into the articles of the quota provision, as distinct from the recruiting by Eastern Express of agents as shareholders, has occasioned it damage, I will preserve its opportunity to attempt to do so by formally reserving the claim for damages in the cross-claim.
Under the circumstances, it is not unnecessary for me to deal with the alternative claims made by ESN, in reliance upon s.45D and s.47. The cross-respondents must pay the costs of ESN in relation to the cross-claims.

[1991] FCA 413

23 JULY 1991