Neutral Citation Number: [2007] EWHC 1373 (Ch)
Case No: HC06C03700 IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
Royal Courts of Justice Strand, London, WC2A 2LL
15/06/2007
Before :
THE HONOURABLE MR JUSTICE RIMER ------Between :
1) CHESTER CITY COUNCIL Claimants 2) CHESTER CITY TRANSPORT LIMITED - and - 1) ARRIVA PLC Defendants 2) ARRIVA CYMRU LIMITED 3) ARRIVA NORTH WEST LIMITED
------
Mr Mark Brealey QC and Mr Gerard Rothschild (instructed by DLA Piper UK LLP) for the Claimants Mr Thomas Sharpe QC, Mr Paul Harris and Mr Conall Patton (instructed by Dickinson Dees LLP) for the Defendants
Hearing dates: 22, 23, 26, 27, 28 February, 1, 2, 5, 6, 7, 22 and 23 March 2007 ------Approved Judgment I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
......
THE HONOURABLE MR JUSTICE RIMER MR JUSTICE RIMER :
Introduction
1. The claimants are Chester City Council (“the Council”) and Chester City Transport Limited (“CCT”). The Council owns all the issued shares of CCT, a bus company providing services in and around the City of Chester. CCT trades as “ChesterBus”. The defendants are Arriva plc, Arriva Cymru Limited and Arriva North West Limited (“Arriva”). The claimants seek declarations, injunctions and damages founded on their assertion that, in breach of section 18 of the Competition Act 1998, Arriva has abused what is said to be its dominant position in the relevant bus market by threatening predatory behaviour directed at driving CCT out of business.
2. The litigation follows the Council’s announcement in August 2006 of its decision to sell CCT by way of a tender. Arriva wished to tender but was not prepared to do so on the terms stipulated by the Council. Arriva was, however, resolute that it wished to provide its own bus services on the commercial routes then served by CCT and on 10 September 2006 it registered duplicate services on all CCT’s commercial routes, registrations which on their face declared an intention to operate those services from 7 January 2007. On 11 September 2006 Arriva followed those registrations with a written offer to the Council to buy the assets and undertaking of CCT. As the offer was not made in accordance with the Council’s tender terms, the Council refused to consider it. The Council further took the view that Arriva’s threatened route duplication was predatory, that its tactics would jeopardise the process of the sale of CCT and that the implementation of what it regarded as a threat to compete with CCT on all its routes would put CCT out of business. On 10 October 2006 the claimants issued proceedings in the Chancery Division and sought interim relief against Arriva restraining it from operating the registered services. Arriva gave undertakings not to do so pending an expedited trial.
3. The claim raised a number of issues. In particular, it raised a factual dispute as to Arriva’s intentions with regard to its September registrations. Arriva’s position is that it never intended to operate those services in competition with CCT: it says that its intention at the time of their registration was only ever to operate them in succession to CCT either (i) following an acquisition of CCT’s assets and undertaking; or (ii) following CCT’s demise as a trading company by January 2007 by reason of insolvency. Arriva’s position was and is that there was nothing predatory towards CCT about its intentions and it appears to marvel at the thought that anyone could have thought otherwise. The claimants’ case is that this is disingenuous nonsense and that at the time of the September registrations Arriva intended to do just what the registrations appeared to declare, namely to operate competing services as from 7 January 2007 on the same commercial routes as CCT at the same times and with the same bus numbers; and they say all the evidence is consistent with that. In addition to this factual issue, the claim raised issues as to whether, even if the claimants were right, Arriva’s actions threatened an infringement of section 18 of the Competition Act 1998. That raised issues as to whether Arriva was dominant in the relevant market and, if so, whether it was threatening to abuse its position as such. The claimants’ position was and is that Arriva is dominant and was abusing its position. Arriva’s position was and is that it is not dominant and that no question of alleged abuse arises. 4. The expedited trial came on for hearing on 8 December 2006. It was adjourned on its first day. The lead up to that was that on 27 November 2006 Arriva had notified the Council that it had de-registered most of the services the subject of the September registrations and now intended to operate an admittedly competing service on just three of CCT’s routes with effect from 21 January 2007. Arriva concedes that, had it entered the market in January 2007 and operated the routes the subject of its original registrations in competition with CCT (whose demise by reason of insolvency has not happened and does not appear to be threatened), it would not have been economic to do so and would have been loss-making: that is because there were not enough passengers to go round. As for the three routes the subject of the revised registrations (1, 1A and 15A), those are CCT’s most profitable routes, which account for the bulk of its revenue from its commercial services and which Arriva intend to operate with increased frequency and at the most profitable times. Arriva was unready to deal at the trial with the claimants’ evidence in response to its late change of stance, and also asserted that the claimants would have to amend their particulars of claim in order to advance the amended claim they were proposing to make. The result was that the trial was adjourned.
5. Arriva has continued its undertakings in the meantime and the adjourned trial took place before me over 12 days in February and March 2007. The issue as to Arriva’s intentions with regard to the September registrations has remained a central issue, even though, as matters stand at present, Arriva has no continuing proposal to operate all those routes. On one view that issue might be thought to have disappeared as a result of Arriva’s change of stance. But its investigation is relevant to the question of the justification for the bringing of this claim in the first place (and so at least goes to costs) and also to the whole picture as to Arriva’s intentions with regard to its proposed operations in the Chester bus market even though now those intentions are, again as matters stand at present, confined to competition with CCT on just three routes. The claimants assert that this revised stance, involving the cherry-picking of the three best routes, is just as predatory as the original one and that it also constitutes a threatened abuse by Arriva of its dominant position, the abuse being said to lie in “flooding” the bus routes and selling below cost. They do not allege that Arriva will charge lower fares than CCT. But they do allege that, as regards the three routes, the fares charged will be insufficient to cover Arriva’s costs, and that as a result Arriva will make a loss. Arriva defends its revised registrations. It asserts that it will cover its costs on the three routes and make a profit. It resists all suggestions that anything it has done was intended to be predatory or amounted to an abuse of its alleged position of dominance in the relevant market. It continues to deny that it was or is so dominant. If it was and is not dominant, the claimants have no case.
6. Some abuses by those in a dominant position are exploitative, excessive pricing being a typical example. Other abuses are exclusionary, being directed at driving others out of business. Predation is an abuse of the latter type. For example, the dominant undertaking might offer goods at uncommercially low prices and so cause a competitor to withdraw from the market, following which the dominant undertaking will raise its prices and recoup the losses it incurred in the predation exercise. The guidance from the Office of Fair Trading (“the OFT”) is that “Predation occurs in the bus industry when a dominant bus operator tries to drive a rival from the market by either flooding a route (or routes) with buses, or charging such low fares that the smaller company cannot afford to stay in the market, or both. This may amount to a breach of the Chapter II prohibition of the Act relating to the abuse of a dominant position” (OFT, Frequently asked questions on competition law and the bus industry, July 2006).
7. Arriva rightly regards this claim as raising serious charges against it. But its position is that the claimants are using these proceedings in order to be shielded from what is no more than healthy competition. If the order sought is made, Arriva will be barred from competing with CCT in Chester. It will, in addition, face the potentially serious consequences of an investigation under the parallel jurisdiction of the OFT, possibly resulting in a fine for any proven breach of section 18. And whilst Arriva will have been removed from the playing field, any other bus company which has the fortune not to be regarded as dominant in the relevant market will be at liberty to compete with CCT in whatever manner it likes. Arriva says none of this is in the interests of the Chester bus-travelling public, who will have been deprived of the benefits on the three routes that (as compared with CCT) Arriva can provide, namely modern, new, quieter, safer buses offering a more frequent service. Competition law is, Arriva says, about protecting consumers’ interests and offering them benefits, yet the claim is directed at denying those benefits to the consumers of Chester. It admits that the three routes on which it wants to compete are CCT’s most profitable ones: but, it asks rhetorically, what bus company would not want to compete on such routes? It claims it can run these routes profitably and wants to do so. Even the claimants’ expert acknowledges that traffic on the routes would be likely to increase by 14% as the result of the better quality service that Arriva can offer as compared with CCT.
8. The claimants do not, I presume, underestimate the potential seriousness of the claim they make. But they say that, for all Arriva’s righteous huffing and puffing (of which there was much at the trial), its conduct in effecting the original and the revised registrations was and is manifestly anti-competitive and that competition law entitles them to be shielded from the threat it represented. They say that Arriva intended and intends to drive them from the market by abusing its dominant position.
The Competition Act 1998
9. Chapter II of the Competition Act 1998 is headed “Abuse of Dominant Position”. Section 18, sub-headed “The prohibition,” provides as follows:
“18. Abuse of dominant position
(1) Subject to section 19 [which has no application in this case], any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom.
(2) Conduct may, in principle, constitute such an abuse if it consists in –
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts.
(3) In this section –
‘dominant position’ means a dominant position within the United Kingdom; and
‘the United Kingdom’ means the United Kingdom and any part of it.
4) The prohibition imposed by subsection (1) is referred to in this Act as ‘the Chapter II prohibition’.”
Burden of proof
10. Mr Sharpe QC, for Arriva, emphasised that the burden is on the claimants to prove every element of their case. It is not for Arriva to disprove any of them. That burden is one according to the balance of probabilities. In applying that standard it is, however, settled that it is necessary to factor into the assessment the seriousness of the particular allegation being considered, the short point being that the more serious the allegation, the less probable it is that it is well founded and therefore the stronger must be the evidence to make it good (Re H and Others [1996] AC 563, at 586, per Lord Nicholls of Birkenhead). The Court of Appeal, in R (on the application of AN) v. Mental Health Review Tribunal (Northern Region) [2005] EWCA Civ 1605, at paragraph 64, went further and referred to cases in which “proof of an allegation may have serious consequences even though it cannot be said that the matter alleged is inherently improbable.” The court’s view was that a like approach to the application of the standard of proof applies in that situation too so that “[t]he more serious the consequences, the stronger the evidence required in practice to prove the matter on the balance of probabilities.” I confess to a personal difficulty as to how, in the ordinary run of cases, that principle is supposed to operate. Is stronger evidence required to make good a £100,000 claim than a £10,000 one? It is, however, fairly said by Mr Sharpe that the allegations levelled by the claimants against Arriva include the assertion that its intent behind the September registrations was a predatory one directed at wiping CCT out, which is a serious allegation, and I accept that I must take due account of that in deciding whether that allegation is made good. I accept also that the consideration of whether Arriva occupies a dominant position requires a careful and detailed inquiry. I further accept that as the essence of the claim is that Arriva has infringed the prohibition in Part II of the Competition Act 1998 in a manner which could, in another arena, attract severe financial penalties, I should only find the case proved if it is supported by strong and compelling evidence. This is in line with the approach adopted by Blackburne J in Ineos Vinyls Limited and Others v. Huntsman Petrochemicals (UK) Limited [2006] EWHC 1241, paragraphs 210 and 211, applying the principle explained by the Competition Appeal Tribunal in Napp Pharmaceutical Holdings Ltd v. Director General of Fair Trading [2002] CAT paragraph 109. Mr Brealey QC, for the claimants, did not question this approach as to the application of the standard of proof.
The Transport Act 1985
11. The purpose of the Transport Act 1985 was to achieve the privatisation of a large part of the bus industry in the United Kingdom, including the transfer of the operations of the National Bus Company to the private sector and the privatisation of the many local authority bus companies. It did not prevent local authorities from continuing to operate bus services through wholly-owned commercial subsidiary companies, but it imposed restrictions on the financing and operating areas of such companies in order to ensure that they could not compete unfairly with privatised area operators.
12. There is no need to refer to the Act in detail but I must refer to some of its provisions. Section 3 established traffic commissioners for each traffic area. Section 6 deals with the registration of local bus services. In order to run such a service, the operator must be the holder of an unconditional PSV operator’s licence or else of certain other permits; he must register particulars of the proposed service with the traffic commissioner for the relevant area; and the period of notice specified in relation to the registration must have expired, that period being now a minimum of 56 days. When Arriva made its September 2006 registrations, it gave rather more than 56 days’ notice.
13. Any such registration can be varied or cancelled on application by the operator, which is what Arriva did when it made its revised November 2006 registrations. The scheme is, therefore, that any holder of a requisite licence can register any service and then vary or cancel it. The legal barriers to entry into the bus market are therefore minimal. Arriva says this makes the market for bus routes very contestable since any profitable route is prey for a new entrant, which can enter the market with ease and challenge the incumbent. It says it follows that it is more difficult for any one bus operator to establish dominance. That is a point to which I shall have to return.
14. Section 63 of the Act imposes a duty on the county council of any non-metropolitan county to secure the provision of public transport services in the county in order to meet requirements that would not otherwise be met. This obligation introduces the dual type of service that a bus company such as CCT may be providing: (a) “commercial services”, under which the operator expects to make a profit; (b) socially necessary services provided under tenders invited by (in the present case) the Cheshire County Council for so-called “tendered services”: for example, a school service for children. The operator tendering at the lowest subsidy will usually win the contract.
15. Section 73 imposes restrictions on what a local authority bus company can do and in relation to its borrowing powers. Under section 73(3), the controlling authority (in this case the Council) must exercise their control of their subsidiary bus company (in this case CCT):
“… so as to ensure that the company –
(a) does not engage in activities in which the controlling authority have no power to engage or permit any body corporate which is its subsidiary to engage in any such activities;
(b) does not –
(i) borrow money from any person other than the controlling authority; or
(ii) permit any body corporate which is its subsidiary to borrow money from any person other than the company, any other subsidiary of the company, or the controlling authority;
with the exception in each case of borrowing by way of temporary loan or overdraft; and
(c) does not –
(i) raise money by the issue of shares or stock to any person other than the controlling authority; or
(ii) permit any body corporate which is its subsidiary to raise money by the issue of shares or stock to any person other than the company.”
16. Section 79 was the source of extensive cross-examination of the claimants’ witnesses. Relating it to this case, section 79(4) enables the Council to make loans to CCT but, by section 79(5), any loan must be “made on terms, both as to rates of interest and otherwise, no more favourable than the terms on which the authority making the loan would themselves be able to borrow at the time when the loan is made.” Section 79(8) empowers the Council, with the consent of the Secretary of State, “to provide financial assistance by way of grants, loans or guarantees for any associated company [eg CCT] which has incurred losses affecting the viability of its business.” But by section 79(9), that power:
“… may only be exercised for the purpose of any plan approved by the Secretary of State for improving the efficiency of the company’s operations and its commercial performance generally so as to enable it to carry on business without further assistance from the Authority or council concerned or from any other council who are a member of the company.” 17. Finally, section 79(10) empowers the Council:
“… where on the winding up of any associated company the assets of the company are not sufficient to meet the company’s liabilities, to make to the creditors of the company such payments as may be necessary to meet the balance of those liabilities (and may accordingly give to the persons dealing or proposing to deal with any such company such guarantees with respect to the exercise of their power under this subsection in relation to that company as they think fit).”
18. In the initial wave of privatisations following the Act, the majority of bus services were sold to management and employee teams or locally based groups. This was followed by a period of industry consolidation, resulting in a position in which now over 67% of the market for bus services in the United Kingdom is served by five groups: (i) First Group plc (20.9%) (“First”); (ii) Stagecoach Group plc (16.3%) (“Stagecoach”); (iii) Arriva (14.3%); (iv) Go Ahead (9.8%); and (v) National Express (6%). As for local authority bus companies, there were 51 in October 1986 but now there are just 16. This has been a consequence of competitive pressures from the large national groups and also the restrictions on the manner and extent to which a local authority can provide financial support for its bus company. In practice, the inability of local authority bus companies to borrow or raise money otherwise than from their parent local authorities – which face many other competing demands in all the areas in which they operate – means that bus companies such as CCT can usually only use the resources they generate internally to invest in new vehicles and network expansion and to withstand competition from other operators. In addition, local authority bus companies are limited by section 73(3)(a) of the Act to providing services for the districts of their parent authorities.
The claimants
19. The City of Chester has an area of about 280 square miles and a population of about 118,000. The Council incorporated CCT in 1986 under section 67 of the Transport Act 1985 in order to operate local bus services within, to and from Chester, for which the Council is the district council. CCT acquired the bus undertaking formerly operated by the Council. It is a “public transport company” as defined in section 72 of the Act. This followed an order made by the Secretary of State for Transport under section 66(2) of the Act removing the Council’s powers to provide services directly.
20. CCT is managed by a board of directors comprising three full-time executive directors, an employee director and six non-executive directors, of whom five are representatives of the Council (including one Council officer) and the other is an external appointments representative of the community. Representatives of the Council meet regularly with the CCT board in discussions centred largely on financial and strategic issues.
21. CCT’s managing director is Stuart Hyslop, who gave evidence. He has considerable experience in the bus industry. He started in 1973 as a conductor, and then a driver, for Rotherham Corporation. He worked his way up through various operational management positions with West Yorkshire Passenger Transport Executive and Darlington Borough Council before becoming Chairman and Managing Director of Darlington Transport Company Limited in October 1986 (a company owned by the Borough Council). He became Chairman and Managing Director of Chesterfield Transport Company Limited in October 1993. Following Stagecoach’s acquisition of that company, he became Divisional Manager of the Stagecoach Group’s Kingston upon Hull Division in August 1995. In March 1997 he became operations manager of a small private sector bus and coach operator, Skills Motor Coaches. He was appointed Managing Director of CCT on 23 March 1998. He has, therefore, had experience in both the public and the private sector.
22. CCT’s current network comprises 13 commercially operated services within Chester itself and the towns and villages within a 20-mile radius. It also operates a number of services under contract to Cheshire County Council (“the County Council”) which the County Council procures under section 63 of the Act, by which it has power to subsidise socially necessary services which are not provided by any operator on a commercial basis. It owns at least 80 vehicles (the evidence appeared to identify different numbers; Mr Hyslop favoured 84 and Mr Brealey favoured 81) and has about 150 employees.
23. In recent years CCT’s commercial performance has been poor. Since Mr Hyslop has been managing it, its policy (agreed with the Council) has not, however, been to maximise profits. Rather, its objective has been to optimise the services it provides without further investment from the Council, in particular to the locally disadvantaged areas, whilst aiming at a target of 5% profitability per year, although it has not achieved that.
24. From 1998 up to CCT’s year ended 31 March 2005, CCT achieved either a small operating profit or an operating loss, the latter being financed from its reserves. In its year to 31 March 2006 it made a rather larger loss. Its performance in recent years has put it at or near the bottom of the league represented by the 16 Council-owned bus companies. The following references are to its loss or profit respectively made in its years ended 31 March: (i) 2000, a loss of £82,808; (ii) 2001, a loss of £108,256 (iii) 2002, a profit of £3,215; (iv) 2003, a loss of £47,823; (v) 2004, a profit of £16,598; (vi) 2005, a loss of £62,174; and (vii) 2006, despite a turnover of £4.2m, a loss of £226,048. The 2006 performance is acknowledged to have been very poor and as mainly attributable to wage, fuel and other costs which had not been budgeted for, as well as declining patronage. That result was despite CCT’s best efforts to minimise its losses, including re-tendering for certain services and pulling out of others.
25. As at March 2006, CCT was therefore trading at a loss. Since then stringent steps have been taken to reverse its fortunes, including cutting loss-making services (in particular the Cliveden/Lache route), restricting wage increases to 3% and surrendering certain loss-making tender contracts to the County Council. In addition, following the giving to senior citizens of free bus travel with a pass, CCT’s revenue from such concessions has increased. It is unnecessary to detail how this has been achieved. As compared with the previous year, CCT’s return from the County Council per passenger is marginally less than it had previously recovered from both passenger and the County Council; but as the bait of free travel has encouraged more senior citizens on to the buses, the overall return has been significantly greater than before. As a result, since 31 March 2006 CCT has (apart from on isolated occasions) operated within its £100,000 overdraft and at better than break even; and, during the year to 31 March 2007, it headed for a profit. Its management accounts to December 2006 showed an operating profit of £210,411 in the first 35 weeks of the financial year and a net profit after depreciation of £74,130. As for the Council, its overall gross budgeted expenditure for the year ending 31 March 2007 was about £65m, all of which was committed to expenditure on its primary functions. There was no provision in the budget for further investment in CCT by the Council, which is limited in the extent to which it can raise further funds: every £75,500 increase in its budget not covered by central government or other external income represents an increase of 1% in overall council tax rates.
The defendants
26. Arriva plc is quoted on the London Stock Exchange. It operates bus and rail services in the United Kingdom and seven other European countries. In the year ended 31 December 2005, it had a turnover of £1.626m, earning a profit on ordinary activities before taxation of £127.4m. It is the third largest bus operator in the United Kingdom, with a market share measured by turnover of some 14.3%. It is the largest bus operator in the London area and has regional bus companies in various areas of England and Wales with more than 5,000 vehicles in service. In the year ended 31 December 2005, its UK bus operations had a turnover of £697.5m and made an operating profit of £68m. Arriva’s UK bus business then owned some 6,000 vehicles and employed some 17,700 staff.
27. Arriva plc runs eight regional bus operations through wholly-owned regionally based subsidiary companies. The largest outside London is Arriva North West and Wales (“ANWW”), which operates in North Wales, Merseyside, Cheshire (including in and around Chester), Lancashire and South Manchester. It operates the majority of inter- urban routes around Chester. Robert Hind is ANWW’s managing director. As he explained in his letter of 15 September 2006 to the Council, ANWW
“… is currently the principal bus service provider throughout Cheshire, Wrexham, Flintshire and the Wirral, and operates the majority of inter-urban links to and from Chester, as well as many local routes between the City and Deeside. In fact, in a radius of 15 miles from Chester its four garages operate over 250 buses in the area.”
28. In his evidence, Mr Hind underlined ANWW’s strength in the area by saying that as at September 2006 it ran 1,319 buses with an annual turnover of £133m. An investment to run the same commercial routes that CCT was running (a reference to the routes the subject of the September registrations), and requiring a fleet of 22 buses, was insignificant. ANWW’s operations are carried on by various Arriva subsidiaries, including Arriva Cymru Limited (“ACL”), the second defendant, and Arriva North West Limited (“ANWL”), the third defendant. The registrations which have caused this litigation were made by ACL. Save where the context shows otherwise, subsequent references in this judgment to “Arriva” are to ANWW.
29. Mr Hind is central to the story in relation to this matter. Like Mr Hyslop, he has considerable experience in the bus industry. It dates from 1968. He worked for Leicester City Transport, a local authority bus operator from 1981 to 1989, becoming managing director in 1984. He was managing director of a Derby bus company from 1989 to 1994, a company which had been a local authority one and in respect of which he led an employee buy-out. He has been managing director of ANWW since 1994.
The 2003 TAS report
30. As a best value authority subject to the provisions of Part I of the Local Government Act 1999, the Council has a duty to keep its functions under review. It has, therefore, kept under review whether its continuing ownership of CCT was the best way of delivering effective bus services to the population of Chester or whether its performance could be improved by its transfer to the private sector. To that end, in 2003 the Council commissioned The TAS Partnership Limited (“TAS”), specialist consultants in public transport, to review the options for CCT, including a possible sale.
31. TAS’s recommendations were contained in a draft report dated December 2003. There were three authors, of whom the lead author was Chris Cheek. They included Andy Foster, who was called by the claimants to give expert evidence before me. Arriva made much at the trial of the assertion that Mr Foster’s close association with the claimants rendered him unfit to be their expert witness, a matter to which I shall return.
32. TAS found that over the six years from 1997/98 to 2002/03 CCT had made modest operating profits in three years and operating losses in the others, the losses coinciding with competition from South Lancashire Travel, which ran services in Chester for 18 months (CCT saw South Lancashire off, but at the cost of a huge toll on its finances). In addition, its operating profits had never exceeded 1.6% of turnover, whereas (in 2001/02) the average for the municipal sector was 5.2% and, for all major bus operators outside London, 11.0%. CCT’s depot in Station Road, Chester was in poor repair and was on a key redevelopment site. A new depot, following redevelopment, would cost £3m. The Council had to date formulated possible options: (a) construction of a new depot and continuing with CCT; (b) a sale of CCT; and (c) a sale of a minority share in CCT. TAS reviewed CCT’s business plan. They foresaw concerns about the medium- term prospects for it, saying in paragraph 3.3.10:
“… there is a risk bus patronage on the CCT network may be expected to fall over the period 2002/03 to 2009/10 by up to 27%, taking levels down from the current 4.15m passenger journeys to 3.0m. In order to preserve viability, the company would need to increase fares by over 65% in real-terms (75% in cash terms) above current levels. Some mitigation of fares increase might, however, be achieved by reductions in commercial mileage.”
33. Their conclusions were that, in addition to these concerns, they did not consider CCT’s current commercial network to be correctly configured to deliver market growth and modal shift; that there was no overwhelming case to show that service provision was markedly better in Chester because of the presence of CCT; that if its operations were taken over by, say, Arriva, First or another large operator, the likely outcome would be a revision of the existing network with resources concentrated on higher frequencies on a simplified core network, although it was unlikely that this would leave any significant areas unserved; that a trade sale of CCT was a high-risk strategy, involving (a) a failure to achieve fair value for its assets, and (b) a destabilisation of the existing bus network from intensive competitive attack, risking the continuing viability of CCT; and that the spiral of decline would inevitably continue unless there was a radial change of policy. Their recommendation was that the Council should proceed with the relocation of CCT to a new depot site and to review its ownership options from a position of relative strength rather than weakness. TAS made further recommendations to this end, involving a sharp refocus of commercial strategy and a radical new approach to the network. The evidence of Jim Cassin was that he accepted the TAS report in its entirety. He is the Strategic Director (Resources) for the Council. He has worked in local government finance since 1975, qualifying as a Chartered Institute of Public Finance accountant in 1979. He is the principal financial adviser to the Council and was a Council nominee on CCT’s board until May 2006.
The 2006 TAS report
34. In 2006 the Council sought further advice from TAS on the future of CCT. TAS produced a draft report in March 2006. Mr Foster was the team leader. TAS considered the various options open to the Council. The first was that of retaining ownership of CCT. If CCT was to survive and prosper there would need to be a structured relationship between the Council and CCT which defined the financial and social objectives of CCT; and there would need to be a reconfiguring of its current service network to improve its market and financial performance, including further simplification of routes and fares and an increase in promotional activity. TAS had recommended the simplification of routes in its 2003 report, but its view in this draft report was that:
“3.2.3 The company has implemented some elements of the recommendations made but was not persuaded to adopt the radical approach that we believe is necessary to reverse passenger decline. The period in which the changes were implemented was also accompanied by substantial staffing difficulties, resulting in very poor service reliability. The combination of partial implementation of simplification proposals, community resistance to some elements of change and the reliability problems has negated the benefits of improvements and marketing made, and the passenger and revenue has continued downward.”
35. The message there was clear: CCT had not been as radical in implementing TAS’s proposals as it should have been. That, linked to the other matters mentioned, had led to the decline in its fortunes. The Council’s option of retaining CCT was not without risk: CCT’s current financial performance was unlikely to enable it to renew its assets on an ongoing basis; it was vulnerable to competitive attack, a sustained effort from a competitor with significant financial resources being capable of rendering it insolvent relatively quickly; and the small scale of its business meant that economies of scale would be difficult to achieve. Other options TAS considered were (i) a trade sale (a sale of CCT’s assets other than the current depot), which it did not recommend; (ii) an open tender sale of the shares of CCT; (iii) a partnership approach with a private sector company; and (iv) a merger with other similar businesses. In the event an open tender sale was the option the Council chose. With some prescience, TAS noted the risks inherent in it:
“3.4.2 … a business sale by open tender has potentially serious consequences for a business in the short term, which could seriously impair its viability. The past history of trade sales by local authorities in similar circumstances has occasionally proved disastrous and provided the Councils concerned with little or no return on their assets.
3.4.3 The territorial nature of the bus industry means that existing operators in the Chester area (First and Arriva) would be very alert to a third party acquiring ChesterBus and presenting a threat to its current network. Based on previous experience, there is a significant risk that the sequence of events would follow the previous pattern.
3.4.4 Following an invitation to tender, First or Arriva could register bus services in competition with all, or a significant part of, the ChesterBus network. After the required 56 days notice period, competitive services would commence, so threatening to undermine the viability of the company – which, with a weakening financial position, would be unable to sustain such competition for very long.
3.4.5 Any potential bidder from outside the area would therefore either substantially reduce their offer price or withdraw from the deal, as the value of the business to any potential purchaser would be significantly reduced. At its most extreme, the business would be forced into administration.
3.4.6 We believe there is a real and significant risk of the company’s operations and value being undermined in this way. Although aggressive competition within the bus industry may have diminished since the early post-regulation period, recent political comments on the lack of competition may encourage some operators to again take a more aggressive stance.”
36. The claimants assert that TAS’s prediction in paragraph 3.4.4 is almost exactly what Arriva has done. First, by contrast, has (unlike Arriva) been prepared to accept the Council’s tender conditions and has made a bid for CCT. The effect of these proceedings has been to put that bid on ice.
37. TAS’s final report was produced on 27 March 2006. It was headed “Options for the Future of Chester City Transport”. TAS referred to their 2003 report and their recommendations for the adoption of a radical new approach to the network. They said that:
“1.2.4 CCT implemented some, but not all, of the recommended service improvements, generally in a diluted form. It also avoided the more radical changes. The depot relocation has not yet proceeded. 1.2.5 Some changes were introduced in April 2005, after extensive public consultation, but retained much of the previous network’s complexity. In consequence the previous patronage decline continued exacerbated by, we believe, service unreliability through staff shortages in the months after introduction.”
38. TAS then considered the options open to the Council. These included (i) ceasing trading, involving a closure of CCT and the sale of its assets, although TAS’s view was that “this extreme action should be avoided if possible”; (ii) business development. This was along the lines of the 2003 recommendations, involving a move to a new bus depot at Bumpers Lane and the taking of significant steps to improve performance and viability. But the adoption of this course would require time, it would be unlikely to yield fruit before 2007/08, during which CCT would be at continuing risk of a competitive strike from another operation. CCT’s profit was largely derived from the secured services operated for the County Council and its local services in Blacon, and even a limited assault on Blacon, using just three or four buses, would remove the profit from CCT’s services in this area. (Blacon is served by the routes the subject of the revised route registrations that Arriva made in November 2006). TAS’s assessment was that the continued operation of CCT was no longer the best option for the Council; (iii) partnership with the private sector: TAS had strong doubts as to whether this was the best way forward; (iv) merger with a neighbouring local authority bus company, an option which TAS considered might be attractive to the Council if it wished to retain a degree of ownership; (v) full disposal of CCT, either by way of a trade sale of its assets or an open tender sale of its shares. Each option carried the risk that First and Arriva would be “likely to be keen to prevent a third party from acquiring CCT, presenting a threat to their current networks.” TAS’s experience told it that there was a “significant risk that one, or both, … could register services against CCT and within 56 days be competing on some or the entire network. Any other potential bidder would therefore either substantially reduce their offer price or withdraw from the deal. Meanwhile, the value of the business would be significantly reduced and in the extreme, the business could be forced into administration….” (vi) a closed list sale of CCT. This meant identifying potential purchasers of CCT without disclosing the identity of the bus company that was for sale, and requiring interested parties to enter into a confidentiality agreement as a condition of further participation in the bid process. This “would ensure that operators were unable to compete with CCT and undermine its financial viability during the sale process.” TAS assessed this as a viable option.
39. TAS’s overall recommendations were that they did not believe that the further development of CCT’s business was a viable option and that the best way forward was either a full disposal of CCT by way of the “closed list” option or else a merger with another local authority. TAS expressed the view that in the early stages of any sale of CCT it was likely that there would be expressions of interest from many bus operators; but that the most likely buyer for CCT was Arriva or First, which already had operations in the Chester area. This prediction also proved accurate. When, rather later, CCT was put up for sale a number of companies expressed interest. But only Arriva and First made bids.
40. Mr Hyslop, CCT’s managing director, had been shown TAS’s 2003 report in early 2004. The Council did not show him the 2006 report. He only saw it in about August or September 2006, after the Council had decided to put CCT up for sale and had invited expressions of interest from possible purchasers. Arriva’s interest in acquiring CCT
41. Mr Hind had had an interest in an acquisition of CCT by Arriva for some time. He had written to Mr Neilson of the Council on 3 April 2002, referring to a meeting he had had in 2001 with regard to CCT, and proposing another meeting to discuss the matter. By 2006 Mr Hind remained as interested as ever in CCT. On 22 May 2006 he wrote to Paul Durham, the Chief Executive of the Council, suggesting a joint venture with them, saying:
“The industry is facing ever-increasing costs, particularly in fuel and insurance, and I am sure that all operators are having to address their overheads rather than opt for high fare increases or service cuts.
While Arriva is a major operator in and around your area, it may not be possible to consider the outright purchase of your operations, even if this [is?] something your Council wanted, but there may be opportunities to consider common ground and what might be achieved by some sort of joint venture.”
42. Mr Hind explained in his oral evidence that in referring to Arriva as “a major operator” he was referring to the fact that Arriva runs the majority of services into and out of Chester from points outside Chester. He said his allusion to any problem with a purchase of CCT was something the Council might have had. He was twice asked in cross-examination if he had there had in mind the possibility that a purchase of CCT by Arriva would result in a reference to the Competition Commission. His first answer avoided the question. His second was to the effect that at the time he was not thinking that far ahead. He gave no satisfactory explanation of his point that an “outright purchase” might not be possible. His evidence was that, despite his and Mr Durham’s “mutual efforts”, no meeting could be arranged. One of Mr Hind’s suggestions was a joint venture with CCT. Mr Hind’s evidence is that, by September 2006, he had formed the view that, by January 2007, CCT would have ceased trading by reason of insolvency. This letter, in particular the joint venture suggestion, reflects no indication that he had any such thoughts as at its date.
The proposed sale of CCT
43. On 8 June 2006 the Council’s Cabinet, having considered the TAS report and recognised CCT’s weak financial position, resolved to put CCT up for sale (the 2006 accounts had not yet been produced – they were not signed until November 2006, but the Council had an idea of the poor performance for the year). The Council proposed to exclude the Station Road depot from the sale, which it needed for its redevelopment plans. In deciding to sell, the Council focused not merely on a wish to receive the benefit of the proceeds of sale. It also had the objective of seeing a thriving bus service in Chester. It hoped to secure improved bus provision for Chester through investment in better buses and by securing the ongoing provision of bus services in and around Chester. Overall responsibility for managing the proposed sale was delegated to Mr Cassin. The decision to sell was kept confidential and not made public until August 2006, although Mr Hyslop learnt of it shortly after the decision had been made. He was not told of it, but he explained in his oral evidence that he learnt of it from the internet. According to Mr Hyslop, the making of the Council’s decision had been posted there in terms which, whilst not expressly saying what was happening, were sufficient to enable him to work it out.
44. In July 2006, the Council retained DLA Piper UK LLP (“DLA”) as its solicitors on the proposed sale. TAS was also retained. Mr Cassin’s evidence was that, from the outset, the Council and the CCT board had concerns about the risk that either Arriva or First would, upon learning of the sale opportunity, launch a competitive attack on CCT with a view to securing CCT’s market share for themselves and thwarting any new entrant to the market. Mr Hyslop also foresaw the possibility of such an attack. With that in mind, TAS and DLA advised on the options for the sale procedure and the terms for entry to it that might be sought from prospective bidders. Mr Cassin accepted that CCT was the largest bus company in Chester itself (measured by reference to the number of buses there and passengers carried), but he also regarded it as a relative minnow when compared with the might of Arriva and First.
45. On 13 July 2006 the Council and CCT issued a short joint press release stating that they had “met and reaffirm their commitment to maintain and develop bus services in Chester and to safeguard the interests of the Bus Company workforce …. a series of meetings have been planned over the next few months to take matters forward.” It did not say that CCT was to be sold.
46. On the same day TAS sent standard-form letters, signed by Mr Foster, to 19 potential purchasers, including Arriva. They were to the effect that TAS was advising an unidentified local authority in relation to the sale of its unidentified bus company. They said that “The council views a sale of the business as the best way to improve the company’s future viability, through access to new capital, potential economies of scale and a re-invigorated management focus.” They invited initial expressions of interest. TAS would then send to those expressing interest a confidentiality agreement, which would have to be signed and returned before a full memorandum of information about the bus company was despatched. That memorandum would contain details of its territory, financial performance, network description, fleet profile and other relevant information. On an uncertain date in July Arriva replied, confirming its interest.
47. On 21 July 2006 there was an article about CCT in the Chester Chronicle. It opened by saying that an earlier Chronicle article speculating that CCT might be sold had resulted in the issue of the statement of 13 July 2006 to which I have just referred. The article referred to CCT’s loss of £62,174 in 2005 after depreciation but said “it continues to make an operating profit.” It said that an insider had told the Chronicle that the Council had approached Arriva and Warrington Bus with a view to a sale but that neither was interested. At least as regards Arriva, that was inaccurate; and there was no evidence as to any Council approach to Warrington Bus. The same source was reported as saying that “there was a danger an outside company would move in and cherry pick the profitable routes leaving tax payers to subsidise the loss-making services. There was also a fear among drivers about job losses in the event of a buy-out.” The article then said that the press statement which had been issued was aimed at steadying the ship, and it quoted it. The article continued, perhaps a little darkly, by saying that “The council cabinet made a decision to pursue an option recommended by consultants.” It did not say what that decision was. Mr Hyslop said there had been a meeting with the Council on 21 July 2006, when he was formally told of the decision to sell.
48. A copy of the Chronicle article was provided to Mr Hind on the same day, 21 July 2006. In paragraph 6.2 of his witness statement of 1 November 2006, he described the press release as saying that it “reported a continuing loss”. It did not, and nor did the Chronicle article but Mr Hind explained himself in cross-examination by saying that that was his interpretation of it. Mr Hind did not know what CCT’s performance for 2006 had been. He said it was apparent to him that a sale of CCT was being mooted. He contacted Mr Durham of the Council to discuss a possible acquisition, but was unable to arrange a meeting.
49. On 16 August 2006 the Council issued a press release announcing the sale. It stated that the Council had told the CCT staff it intended to sell CCT “in a bid to secure much needed new investment and the long-term future of the company’s staff and services.” It stated that it had invited bids from interested parties; and that “[t]he council had not taken this decision lightly. It has kept the prospects of the company under review for a number of years and feels that the company is now at the point where the prospects for investment and continued development of bus services in Chester would be better served by new ownership.”
50. The press release referred to the Council as having invited bids from interested parties, a reference to Mr Foster’s letters posted in July 2006. As I have said, Arriva had responded, expressing an interest, and on 16 August 2006 TAS wrote to Arriva identifying the company as CCT and enclosing a confidentiality agreement that it (like any other interested party) was required to sign as a condition of participation in the sale process, which was to be by way of tender. The deadline for returning the agreement was 5 September 2006, following which the information memorandum would be released.
51. Clause 7 of the confidentiality agreement imposed a covenant on the would-be bidder (described in the agreement as “the bidder”) that, for a period of 12 months from the date of signature, it would not run any bus services within the Council’s area except (subject to compliance with clause 8) (a) those registered before the agreement was signed, (b) those not directly competing with CCT’s services for more than 1km of route, or (c) those involving minor changes to services already registered. Clause 8 was to the effect that the three exceptions would not apply unless notification of the bidder’s intentions had been given to the Council at least five working days in advance of the registration of such services or change and the bidder could show that it had considered any comments made in writing by the Council or CCT. These restrictions applied to any bidder, whether it made a bid or not, and not just to one that was dominant in the relevant market. The agreement also imposed wider obligations of confidentiality for a period of 24 months. These provisions reflected that during the sale process each side would reveal to the other confidential information relating to its business.
52. Mr Cassin explained that these provisions derived from TAS’s advice. The Council’s concern was that potential bidders might use confidential information disclosed to them in the course of the bidding process to compete on CCT’s more profitable routes rather than for the purpose of assessing the opportunity to purchase CCT. There was a particular concern that companies like First and Arriva, already active in the Chester market, might “cherry-pick” the most profitable routes, and TAS had drawn attention to that concern in its 2006 report. The idea behind the confidentiality agreement was, therefore, that bidders who received information confidential to CCT should commit themselves to preserve its confidentiality and not to compete with CCT’s route network. The intended objective was to prevent any bidder from wrecking the sale process once it had obtained the type of confidential information that would enable it to do so. The Council’s original intention was that the sale process would be completed by 22 December 2006.
53. Of the 19 potential bidders to which TAS had written, 12 (including Arriva) expressed interest in receiving the confidentiality agreement for review, of which eight then qualified for participation in the sale process by signing it. The letter to TAS arrived on the desk of Mr Applegarth (a solicitor and commercial director with Arriva) and he discussed it with Mr Hind over the next few days (they work in different offices). Mr Hind did not see the terms of the agreement until much later, but relied on Mr Applegarth’s advice. The outcome was that Mr Hind wanted to take part in the sale process, but not on the terms of the confidentiality agreement, clause 7 of which he regarded as imposing anti-competitive constraints upon it. He therefore refused to commit Arriva to it. Mr Hind said he regarded the terms as a naked attempt to suppress competition such as he had never encountered before. His stance meant that Arriva could not receive the information memorandum about CCT or, therefore, participate in the sale process
54. On 25 August 2006 Mr Applegarth had a telephone conversation with Mr Stockton of TAS. The purpose was to discuss Arriva’s concerns about clauses 7 and 8 of the confidentiality agreement: Arriva wanted to take part in the sale process but not on those terms. Mr Stockton explained that their purpose was to protect CCT and to ensure that the sale process was not undermined by competitive action planned as a result of the release of commercially sensitive data. He sent an email to Mr Applegarth following the conversation, offering him the opportunity to discuss the matter further with Mr Painter of DLA. Mr Hind did not know if Mr Applegarth had taken that offer up.
55. Mr Hind was still not prepared to deal on the Council’s terms. He requested a meeting with the Chief Executive of the Council, Mr Durham. It took place on 1 September 2006. Mr Cassin was also present. Mr Hind had prepared an aide-memoire. It listed all CCT’s commercial services, together with some degree of detail about them. It listed negative factors about CCT and positive factors about Arriva. It referred to Arriva as having four depots within a 15 mile radius, a reference to those at Hawarden, Wrexham, Winsford and Birkenhead. Under the heading “Process” Mr Hind listed “1. exclusivity; 2. January 1 2007 implementation; 3. register services now.” By that he meant that he wanted CCT to deal with Arriva exclusively, and outside the sales process; he would register CCT’s routes; and, on the footing that the Council were prepared to play ball on Arriva’s terms, there would then be a seamless transfer of the services from CCT to Arriva in January 2007. I should explain that Arriva had no intention of buying the shares of CCT, it merely wanted to acquire its assets and undertaking; and, if it were to be successful in doing so, a separate registration of the routes by Arriva would anyway be necessary. The Council was, for its part, prepared in principle to dispose merely of CCT’s assets and undertaking: it was not insisting on a sale of the company itself. But it was only prepared to consider any offer from Arriva if Arriva first complied with the terms of the bidding process, which required a signing of the confidentiality agreement.
56. The meeting was cordial and Mr Cassin told Mr Hind that he wanted Arriva in the bidding process. Mr Hind’s stance was that Arriva’s offer could not and would not be beaten so that the process was a waste of time. Mr Cassin’s stance was, by contrast, that by now the bidding process was underway, the Department of Transport would not allow the Council to sell otherwise than by a competitive process and, in effect, that those who had signed up to the confidentiality agreement were entitled to the information memorandum and ought to be given a fair crack of the whip and allowed to bid. Mr Cassin was obviously right as to the approach that the Council should maintain and Mr Hind was obviously wrong. Mr Hind acknowledged in his evidence that he would “not be happy” to have learnt, for example, that the Council had done a secret deal with First. The outcome of the meeting was that Mr Hind knew that the Council remained resolute that it was not prepared to deal exclusively with Arriva and that the bidding process would go ahead.
57. On 7 September 2006 the Council sent an email to Arriva extending until 8 September 2006 its time for signing the confidentiality agreement, that signing still being a necessary preliminary to participation in the sale process. The email also attached a revised version of the agreement, which was said to have followed discussions with the OFT: it reflected, as Mr Cassin confirmed in evidence, that the Council were plainly anxious to accommodate Arriva’s concerns about the stringency of the non-competition clause so as to enable it to take part in the bidding process. The revised version reduced the covenant period from 12 months to the shorter of six months and the duration of the sale process. A new clause 7.2 was introduced which was to the effect that Arriva should not be liable for any breach of clause 7.1 (as the main part of clause 7 was now re-numbered) if it could establish that it did not use any confidential information disclosed to it in assessing, planning or implementing any new or varied service whose operation would otherwise constitute a breach of clause 7.1, but nothing in clause 7.2 prevented the Council from excluding Arriva from further participation in the sale process by reason of the operation or variation of any such a service. That was a reference to clause 11, dealing with breaches of the competition covenant and the confidentiality obligations. Clause 11.1 purported to legislate as to the extent of the damages that would be recoverable by CCT and the Council; and clause 11.2 enabled the Council to debar Arriva from further participation in the sale process.
58. In summary, the revised agreement imposed no bar on Arriva from competing in Chester during the shorter of six months or the sale process, provided it could prove it was not doing so by using any confidential information that had been provided to it by CCT; and no bar on competition in Chester after the shorter of those two periods. It had, therefore, moved a considerable distance in Arriva’s direction: it was, in effect, now only seeking to keep Arriva off CCT’s turf during the currency of the bidding process. What, one might ask, was unfair or unreasonable about that?
59. Mr Cassin suggested in his evidence that the essence of the revised confidentiality agreement had been achieved “with the assistance” of Mr Bowden at the OFT. Arriva made something of this at the trial and so I should record the facts. Mr Cassin did not himself speak to Mr Bowden: Mr Painter of DLA did, but he did not give evidence. I infer that Mr Bowden was not shown the proposed re-draft. Mr Painter’s note of the conversation records that he had sought guidance as to a form of words which would not involve a breach of Chapter I of the Competition Act 1998 by restraining competition but would at the same time prevent competitors who had had access to CCT’s confidential information from targeting CCT during the sale process. The note shows that Mr Bowden was a long way from expressing approval of the proposed re- draft. He is not a Competition Act adviser and he explained to Mr Painter that the Competition Act branch would not give informal advice on its validity from a competition viewpoint. The most he was prepared to do was to say that “he could not believe that such short term restrictions, to protect a vendor during sale process, would ever form a priority for investigation by the OFT” (an observation falling short of an assurance that it involved no breach of the Competition Act); and that “he could not imagine the OFT having a problem with this approach [ie that adopted in the re-draft].” That was not advice that the re-draft was Competition Act compliant.
60. Arriva did not, however, appear to interpret the re-draft as making any material concession in its direction. It regarded it rather as an arrogation by the Council to itself of the power to license competition with CCT by any bidder during the restricted period: and the inference is that Arriva wanted to be free to compete with CCT at any point, including during the bidding process. Mr Hind’s decision, based on Mr Applegarth’s advice, was that he was not prepared to sign even the revised form of agreement, innocuous though it might be thought to be. I find, however, that even before receipt of the revised form of agreement on 7 September 2006 Mr Hind had determined to make duplicate registrations of all CCT’s commercial routes and then to write the follow up letter to the Council that he did. I come now to these matters.
Arriva’s September 2006 registrations and purchase offer
61. On 10 September 2006 (a Sunday, but apparently that was no problem) Arriva lodged with the Department for Transport its application for the registration of services matching all CCT’s current services. The proposed start date was 7 January 2007. The earliest start date permitted under the regulations is 56 days from the date when the Traffic Commissioner accepts the registration, so Arriva was giving longer than the minimum notice. The applications were in respect of routes 1, 1A, 3, 3A, 4, 5, 5A, 9, 10, 15, 15A, 15B, 21, 25, 28 and 35. The timetable was to be the same as CCT’s. Theoretically it would mean, for example, that on 7 January 2007 two 1A buses would arrive at the same bus stop at the same time, one being a CCT bus and the other an Arriva bus; and the passengers could take their pick. The making of such duplicate registrations, and carrying them into execution, is an unsubtle way of waging a bus war although Arriva disclaims all suggestions that it was harbouring bellicose intentions. (I comment that Arriva intended only to make registrations matching CCT’s commercial services. Route 28 was a tendered service, and perhaps also one or two others. Arriva accepts that any registration of tendered services was a mistake).
62. On 11 September 2006 Mr Hind wrote to Mr Durham. The letter is important. Mr Hind thanked Mr Durham for the meeting on 1 September. He recorded “how important it is for to Arriva to find a long-term stable solution to the effect on its business of the CCT sale.” He said Arriva wanted to provide Chester’s local network and saw considerable potential to improve the current levels and quality of the bus service. It also wanted to work closely with the Council. He emphasised Arriva’s strength in the market. He then said (and for ease of future reference I have numbered the paragraphs, although they were not numbered in the letter):
“1. Arriva is currently the principal bus provider throughout Cheshire, Wrexham, Flintshire and the Wirral, and operates the majority of inter-urban links to and from Chester, as well as many local routes between the City and Deeside. In fact, in a radius of 15 miles from Chester its four garages operate over 250 buses in the area.
2. It is therefore crucial to Arriva that the sale of CCT does not result in any part of its present network becoming vulnerable to, or even weakened by, the outcome of that process. In fact, Arriva sees the sale of CCT as a unique opportunity to strengthen the bus network in Chester by providing a fully inclusive local and regional pattern of services which give a freedom of movement that hitherto has not existed, because Arriva would be in a unique position to offer co-ordinated frequencies, common and attractive ticketing and an extensive range of journey opportunities.
3. It is because we see so many opportunities to provide such a vastly improved situation for the travelling public of Chester that we feel we would be unnecessarily constrained, firstly, by signing the confidentiality agreement, and secondly by participating in the formal process you are proposing to effect the sale.
4. We believe, as I discussed with you, that Arriva can provide the best outcome for the City Council, the staff at CCT and most importantly all present and future bus users by combining CCT’s commercial operations with the Arriva network without increasing overheads (thus protecting bus passengers from unnecessary cost increases), and provide a seamless transition without any disruption to the network or its customers.
5. We have decided therefore, to register the commercial services currently operated by CCT to commence on 7 January 2007. A list of the routes we propose to run is appended to this letter. We have not at this time registered any of the services that CCT operates under contract to a third party, but would of course do so if and when we were able to reach a suitable agreement with yourselves.
6. We would wish at this time to make a formal proposal to your Council in respect of CCT’s assets and staff. Arriva is willing to acquire the operating assets and assume the liabilities of the existing staff on the following basis:”
63. Mr Hind then set out the terms of Arriva’s offer, which was by way of an asset purchase. They included a proposal to buy all CCT’s buses at market value, less any capital financing; a takeover of all staff apart from CCT’s three directors (Mr Hyslop, the managing director; Mr Pointon, the finance director; and Mr Ridge, the engineering director); an assumption of responsibility for all CCT’s bus operations; and the provision of easy access vehicles on all CCT’s commercial local services. Mr Hind explained that as Arriva would absorb the CCT business into its own operations in the Chester area, it would not require any additional operating base. This meant there could be an immediate release of the Station Road and Bumpers Lane properties for redevelopment. Mr Hind followed the offer with the statement that “We believe this sort of arrangement can create a smooth and efficient transition and can meet all the aspirations of [the Council] for [CCT] and employees.”
64. As regards paragraph 2, the point it is said was being made was that, whilst CCT was disabled from competing outside its immediate area, any commercial enterprise that acquired CCT would not be so disabled and would be in a position to use its foothold in the Chester market as a springboard from which to challenge Arriva. Arriva therefore wanted to get its own foothold into that market and so forestall that risk. That, it is said, was a legitimate stance for it to adopt. As I follow it, that would only make commercial sense if Arriva started running bus services in Chester. Paragraph 3 appears to lack any identifiable rational basis. Paragraph 4 is said to reflect Mr Hind’s confidence that he expected Arriva’s bid to be the best on the merits, offering the best option to the bus- travelling public. As for paragraph 5, the point is made that that was not the statement of a predator, who would have given the minimum 56 days’ notice. The notice actually given was said to be a generous period within which CCT could consider the Arriva offer; and what was being offered was, so paragraph 4 said, “a seamless transition without any disruption to the network or its customers”, with Arriva stepping in on 7 January 2007.
65. There might well have been a “seamless transition” if the Council had accepted the offer and both sides had worked towards a takeover on 7 January 2007. But there was no certainty that the Council would climb down from its previous unambiguous stance, exempt Arriva from the terms of the bidding process and deal with it exclusively. And, subject to one qualification, why should it? The qualification is that Arriva had now played a high card (perhaps a trump) – namely, its apparently unqualified statement of intention, evinced by its registrations, to compete with CCT on the streets of Chester as from 7 January 2007. As it was put at the trial, that stance would be regarded as a gun to the Council’s head: “deal with us - or else”; and the “else” was something that was predictably likely to scare off other bidders for CCT. That would have been obvious to Mr Hind, although he denied it in his oral evidence, also denying that Arriva had adopted an aggressive stance. Unless Arriva was in fact intending to compete with CCT, it made no sense for it to make the registrations at the time it did; and the letter offered no other explanation for the registrations. Mr Hind said nothing to the effect that the implementation of the registrations in January 2007 was only conditional upon Arriva first doing deal with the Council. I find that that they were not so conditional. It was an aggressive tactic of the type in which the Arriva group had engaged before (see paragraph 1.3 of the Report of the Monopolies and Mergers Commission on Arriva plc and Lutonian Buses Ltd, 1998, Cmnd. 4074).
66. It is apparent, and not surprising, that Arriva knew that its registrations and letter were going to provoke a reaction. They would be seen as the adoption of an aggressive stance and Arriva was quick to consider how best to handle it. On 11 September 2006 it was already preparing for the expected fall-out and was proposing to produce a written “question and answer” sheet explaining its position. Julie Jobling, in Arriva’s public relations department, sent an email to Mr Hind, Mr Applegarth and Mr Craven on the topic. It read: “Bob/Chris, attached is a draft Q & A relating to [CCT]. Bob [Mr Hind] is keen to be proactive, however I think we can manage this verbally rather than through a written statement. We’ve just had Coach and Bus Week ask us if we are interested in buying ChesterBus. When we can agree the final Q & A, I suggest Bob calls CBW to talk them through. This clearly will break the news and, as Transit are going to press this week, suggest we tip them off on the basis that we are aware the story is ‘out there’ and didn’t want them to read out perspective elsewhere first.”
67. Mr Hind’s oral evidence was that that email was unconnected with Arriva’s actions of 10 and 11 September 2006. He said it was merely catering for the expected press interest as to whether Arriva wanted to buy CCT. I do not accept that explanation. I agree the email was in part about such press interest. But the “This clearly will break the news …” was, I find, obviously a reference to Arriva’s registrations, which were also the “this” that had to be “managed” and were to be the subject of the tipping off. The draft Q & A had already anticipated the registrations, referring to an intention to make them on 12 September 2006 (they had in fact been made on 10 September); and one of the expected questions was “Isn’t this an aggressive approach? Other operators are likely to back off if you register these services.” As I have said, Mr Hind refused to accept that the move was an aggressive one, but it is obvious that that is how it would be seen, I find he knew that and that is why the question was raised. His letter to the Council had said nothing to dispel the thought that Arriva had made an unqualified declaration of intent to enter the Chester market on 7 January 2007. The draft answer was a paternalistic one to the effect that Arriva’s stance was not aggressive because it knew what was best for the Council, Chester and its people.
68. Mr Hyslop’s evidence was that on 13 September 2006 Rob Bennett of Transit Magazine telephoned him. Mr Bennett told him he had received a call from Mr Hind informing him that Arriva was seeking to circumvent the CCT sale process by registering all CCT’s commercial services. Following this call, Mr Hyslop’s unchallenged evidence was that he telephoned Mr Hind (whom he has known for about 25 years), who confirmed that all CCT’s commercial services would be duplicated by Arriva with effect from 7 January 2007. He did not suggest that Mr Hind also confirmed that he was “seeking to circumvent the sale process”. Arriva’s actions promptly reminded Mr Hyslop of what he regarded as the like predatory actions (so found by the OFT) taken by United Automobile Services Limited and Stagecoach in 1994 upon the announcement of the sale of Darlington Transport Company Limited (Mr Hyslop’s former employer) in 1994. He said in his witness statement that “These examples of registering duplicate routes, on the same routes and at the same time as those operated by the target company and, undermining a sale process by registering, and publicising the intention to operate, the competing services well in advance of the requirement to apply for service registration, are well known throughout the bus industry.” On the following day, 14 September 2006, Mr Hyslop had a meeting with Mr Cassin, whom he told of his suspicions as to Arriva’s motives and explained the parallel with the Darlington case. Mr Hyslop was given a copy of Mr Hind’s letter of 11 September 2006.
69. The Bennett story appeared in Transit Magazine and in the Chester Chronicle on 15 September 2006. Ms Jobling’s email had referred to Mr Hind as “keen to be proactive” and Mr Hind accepted that he contacted Mr Bennett, although only “after they [Transit] had approached us ….” He gave him a telephone interview. The Transit article was headed “Arriva swoops in on Chester Bus in attempt to dodge sales process.” The article reported that Mr Hind had told Transit that registrations were to be submitted for an 18-bus network of routes that would exactly mirror those run by CCT. Mr Hind was quoted, apparently verbatim, as saying “Arriva is the principal operator running buses into and out of Chester to other parts of the globe. To hold secure the long term future of our business in the area we have taken the decision that we want to run the local services too, and the city council’s decision to sell has created that opportunity.” The article continued:
“Hind said that the group has written to the local authority outlining its position. It has told the council that it would be interested in acquiring certain assets, mainly vehicles and staff, if the council comes to the table. However, it would not be interested in acquiring either of the two depot sites occupied by ChesterBus. ‘We don’t need their properties, we could absorb it into our existing sites,’ said Hind. Hind said that registering the commercial network had been done ‘in anticipation of some sort of deal’, but if talks between the two sides came to nothing the competing service would begin operation anyway. He acknowledges that the decision could be interpreted as irresponsible, but believes that it is actually in the best interests of staff, passengers and local taxpayers. ‘We want to ensure that the staff are accommodated, and we can offer benefits to passengers from extending our daily and weekly ticket range in the area,’ he said, adding that Arriva was providing the best exit for the council too. ‘We are saying to them, we’ll take the vehicles and staff off your hands, leaving you to redevelop the depot sites. It seems sensible to us, it’s the most efficient and cost-effective solution as we won’t inherit the overheads of the existing operation or the start-up costs of someone moving into the area.’ Hind pointed out that the commercial routes occupy only 25% of ChesterBus’s fleet, and that if it was successful in acquiring the assets of the company it would look at taking on its tendered bus contracts too.” (My italics)
70. The Council did not itself respond to Mr Hind’s letter of 11 September 2006. It had already made it clear to Arriva that it was not going to consider its overtures other than through the tender process, with the conditions of which Arriva was refusing to comply. But DLA did respond. On 15 September 2006 they wrote to Arriva asserting that it was dominant in the relevant market, with a market share exceeding 46%, and that its threats amounted to exclusionary behaviour in the nature of an abuse of section 18 of the Competition Act 1998 - by flooding routes with buses so that a smaller company could not stay in the market. They invited protective undertakings failing which they threatened High Court proceedings for an injunction. Mr Hyslop’s evidence was that he regarded the Arriva registrations as being “explicable only in terms of a predominant motive of depriving CCT of the revenue necessary to support its business.” His position was that CCT’s financial performance was enjoying a material turn around as compared with its previous year, and that it was heading for a profitable year. His further assessment was that, if Arriva competed with CCT on all its commercial routes, CCT would lose some £700,000 of its revenue, which would spell disaster.
71. Arriva’s riposte to DLA’s letter, on 18 September 2006, harmonises ill with its present case that it never had any intention of competing with CCT. It was written by Mr Applegarth. He wrote that the correct interpretation of Mr Hind’s letter was that Arriva was “seeking to preserve, through legitimate competition, their business.” (My italics). To what “competition” could Mr Applegarth have been referring if not with CCT? Mr Applegarth did not give evidence, but Mr Hind said he was “sure at 18th September Mr Applegarth was fully aware that we did not have any intention of competing with CCT.” If so, what was Mr Applegarth talking about? Continuing with the letter, Mr Applegarth accepted that Arriva was a “sizeable operator” but denied it was dominant – he said it was CCT that was dominant in the Chester bus market. He said it was “only abuse (or possibly threatened abuse) of a dominant position that is prohibited by the legislation.” He said that, if Arriva were dominant, there was no evidence that its actions were likely to be anti-competitive; and he defended Arriva’s right to effect the registrations that it had. None of that was relevant if Arriva had no intention of competing with CCT, so why say it? What Mr Applegarth did not say was that the Council had misunderstood Mr Hind’s letter and that (as Mr Hind now claims) Arriva would only be operating the Chester routes as from 7 January 2007 in circumstances in which CCT would not be doing so, namely those in which (a) it had by then purchased CCT’s undertaking; or (b) CCT had by then ceased trading by reason of insolvency, as Arriva claimed to know it would. No undertakings were offered.
72. On 18 September 2006 Ms Jobling of Arriva sent an email to eight Arriva personnel, including Mr Hind, David Martin, the chief executive of the group and Mike Cooper, the head of UK regions to whom Mr Hind reports. It referred to the Transit article and summarised it. It referred to the comparison made in Transit’s Business Comment section with the notorious Darlington case in 1994. It recorded that the article had said that “if talks with the Council came to nothing the competing services would begin operation anyway.” In cross-examination, Mr Hind denied that he had told Mr Bennett that and the sense of his denial was that the statement was untrue. He said it was merely an incorrect inference that Mr Bennett had drawn. Mr Hind said that he had read the Transit article “a few times” and did not think that this particular observation was being attributed to him.
73. I regard that as a remarkable statement, which I do not accept. Mr Hind’s position was, apparently, that as this observation (unlike others) was not in quotation marks, it would not be read as coming from him; and so any reader would think it was no more than an editorial contribution which might or might not be correct, but either way neither he nor Arriva needed to worry about it. I regard that as nonsense. Quotation marks or not, it is obvious that the article – including this remark - was purportedly based on what Mr Hind had told Mr Bennett. That is how any ordinary reader would read it, that is how Mr Hind must have read it and, I find, that is how he did read it. Had that remark not been true, Mr Hind could have engaged no feet fleet enough to inform the other recipients of the email of the error in the article as to Arriva’s intentions, since it would have conveyed an entirely wrong message, in particular to CCT; and, when writing to Transit in response to the article, as he later did, he would also not have failed to take the opportunity to correct what it had said. I find that the reason he did neither of those things is because the statement was correct and accurately recorded Arriva’s intentions: namely, that whether or not Arriva came to terms with the Council, its buses would be on the streets of Chester on 7 January 2007. In fact, as I shall explain, that is also the case that Arriva now seeks to make as to its then intentions so it is odd that Mr Hind was keen to distance himself from this observation in the Transit article.
74. Consistently with that intention, Mr Hind sent an internal email to Mr Martin and Mr Cooper on 22 September 2006. It read: “You will have seen the first wave of media coverage about our move for Chester and generally, I think, it has been positive. It remains to be seen what effect it has on the process (other than the threat of a High Court injunction, we have had no reply from [the Council]) and what effect it has on potential bidders. One of the journals informed me that [the Council] expected the whole process to be completed by 31 December so I expect we may hear something within the next 3 or 4 weeks. In the meantime, I have briefed the T & G full-time office who is very supportive and I have written to Christine Russell (Chester’s MP) to keep her appraised.
Obviously we are in the middle of budget preparation and we have re-allocated existing work between our depots at Chester [ie Hawarden], Wrexham and Birkenhead so that Chester does not take the full impact of an additional 19 PVR from January 7. We will need to start recruiting in October to meet this deadline. Needless to say this whole issue will remain very high profile and I think it is imperative that we appear on the streets of Chester at the beginning of 2007 with new low floor vehicles. I need 22 of them. I believe Bob McCleod has stock – can I have them please?”
75. To the question in cross-examination what effect he thought Arriva’s actions would have on potential bidders (a matter to which Mr Hind was sufficiently sensitive to cause him to raise it in the email), Mr Hind said he never thought it would have any effect. He said he could not see how Arriva’s actions could deter bidders who were genuinely interested in acquiring CCT. He said Arriva never had any intention of competing with CCT. That is of course Arriva’s case, but it appears that no-one at Arriva, Mr Hind included, had troubled to tell anyone else about that; and Mr Hind chose to leave uncorrected Transit’s statement to the world that (in effect) it did intend to compete. I do not accept Mr Hind’s evidence on this point. It is obvious that Arriva’s threatened actions would have been perceived as likely to have an effect on a bidder’s consideration of the opportunity to acquire CCT. Mr Hind was aware of that, otherwise he would not have mentioned the point.
76. To the further question whether that email reflected that Arriva intended to be on the streets of Chester on 7 January 2007, Mr Hind responded that he was still hoping to do a deal with the Council. One implication of that answer was that, if no deal was done, there would be no Arriva presence in Chester in January 2007. Mr Hind explained that the bodying process for the vehicles would have to start in October 2006, but that if the operation were to be aborted the vehicles could be allocated elsewhere in the Arriva group. I do not accept Mr Hind’s evidence that the only circumstance in which he contemplated using these buses in Chester in January 2007 was if he had first done a deal with the Council. If that had been his intention, he could and would have done the straightforward thing and told both the Council and the world about it. I have no reason to believe he had even told Mr Applegarth, whose letter was entirely inconsistent with the thought. And why, if Mr Hind did not then intend to be on the Chester streets in January 2007, did he say that Arriva would “have to start recruiting in October”? If he did a deal with the Council, he would not have needed to recruit, since he would be taking over the CCT staff.
77. On 26 September 2006 Mr Hind wrote to Transit about its article. His letter was published on 29 September 2006. Its only point appears to have been to put the headline (“Arriva swoops in on Chester Bus in attempt to dodge sales process”) into a context more favourable to Arriva, although Mr Hind did not say that it was misleading (probably because it was not). He wrote that “the fact is that we have given [the Council] another route for consideration, one which we feel is a good deal for the City, bus passengers and for staff at ChesterBus.” He then expanded on the quality of what Arriva could bring to Chester. He said nothing to the effect that the remark that Arriva intended, failing agreement with the Council, to be on the streets of Chester on 7 January 2007 was incorrect. That was the opportunity to do so if he regarded it as inaccurate, as he now claims he did. He did not take it. Nor did he telephone Mr Hyslop to tell him that that statement in the article was incorrect and that he had nothing to fear from competition from Arriva if it was unsuccessful in acquiring CCT’s assets and undertaking. I find he did neither of those things because there was nothing in the Transit article that required correcting. It correctly recorded what he had told Mr Bennett and what Arriva’s then intentions were: namely, (a) to acquire CCT’s assets and undertaking if it could, but (b) if it could not, to provide its own bus services in Chester from 7 January 2007. The email of 22 September 2006 shows that was just what Mr Hind had in mind.
78. As I explain below, the claimants commenced their proceedings on 10 October 2006 and followed them with an application for interim relief. The supporting evidence included CCT’s draft accounts for the year ended 31 March 2006, which showed the large loss for the year of £226,048. Those draft accounts led to an issue which was the subject of much investigation at the trial, and I will come to that later. What is of relevance at this stage is that, having seen the draft accounts, Mr Hind wrote to Mr Durham on 17 October 2006. His letter was headed “without prejudice”, but he still chose to exhibit it to his own evidence and no objection appears to have been raised. He wrote:
“We think it is fair to say that the difficult financial position of CCT (evidenced quite clearly by the draft 2006 accounts and the Information Memorandum, now provided as exhibits to the court evidence) has not been caused by any action of this group. Indeed, until the new registrations we made in September 2006 come into force in January 2007, no action of this group can in any way have contributed to CCT’s difficulties, as our respective operations in the City have continued largely as they have been for many years.”
79. Translated, that meant (i) CCT was apparently in a rocky position, but Arriva had not caused it; and (ii) Arriva would only cause CCT any difficulty when it started to compete on 7 January 2007. The letter continued a little later:
“We would also draw to your attention that our actions in registering in competition with CCT were not those that would have been taken in a predatory ‘bus war’ of the type occasionally seen between operators in the early to mid 1990s, and referred to in Mr Hyslop’s evidence. If we had wished to take such action, we would have registered to operate only the most profitable of CCT’s services, and the period between application and registration would not have been so long as the period from September to January. We registered as we did in the belief that in that period:
- the sale process would reveal no offer comparable with the terms we were prepared to make; and
- the Council would recognise in the period before January 2007 that CCT does not have the financial ability to continue to operate, because of market forces independent of Arriva;
- you would wish to reach agreement with Arriva on acquiring the PSV assets and employees of CCT and continuing to provide all of its current services. This, our registrations would permit us to do.”
80. Those observations are interesting. First, Mr Hind admitted that Arriva had effected its September registrations “in competition with CCT”, an odd admission from someone who claims he never intended so to compete. Secondly, he said that if Arriva had wished to act in a predatory way, it would have registered “only to operate the most profitable of CCT’s services.” That is just what Arriva later did in November 2006, and there is no doubt that it intends, if not restrained, to compete with CCT on those services. Mr Hind now denies that there is anything predatory about Arriva’s revised intentions. Thirdly, as to the second claimed reason for the original registrations, Mr Hind there articulated, apparently for the first time ever - and to anyone - that he contemplated a cessation of trading by CCT by January 2007, a point made only after he had seen CCT’s draft 2006 accounts.
81. Mr Hind’s explanation in his evidence of the decision to make the September 2006 registrations is worth quoting. It is consistent with my finding that Arriva intended to be on the streets of Chester in January 2007 even if it could not first do a deal with the Council, but it puts a different slant on it, one foreshadowed by the letter of 17 October 2006. He said this in his first witness statement of 1 November 2006:
“7.1 Faced with [the Council’s] attitude, we had to consider our options. We could have joined in the bidding process, especially if the confidentiality agreement was modified (as having taken the advice of the OFT, [the Council] subsequently modified the confidentiality agreement) but we were also concerned that any successful bid on our part would run the risk of a referral by the OFT to the Competition Commission unless the OFT was convinced that CCT would no [sic] effective competition to any bidder. A realistic alternative was simply to enter the market and this required notice. We elected to do this with no expectation that we would be competing against CCT because by our calculation CCT was insolvent and would be unlikely to be trading on 7 January 2007 (the date after which we would have started our operations).”
82. When asked whether a possible reference to the Competition Commission had been in his thoughts at the time of his letter of 22 May 2006 to the Council, Mr Hind gave answers I found to be less than straightforward, and I have referred to them. By September 2006, he claims to have adopted the view that a successful acquisition of CCT could result in a reference to the Competition Commission and so the decision had been made simply to enter the Chester market, a decision declared by the September registrations. It is worth noting that, apart from the aide-memoire prepared for the meeting of 1 September 2006, not a single piece of paper was generated by way of explanation of Arriva’s or Mr Hind’s thought processes leading to the registrations.
83. On one interpretation, Mr Hind’s quoted explanation can be read as meaning that, by 10 September 2006, Arriva had abandoned any thoughts of acquiring the assets and undertaking of CCT, in case it led to a reference to the Competition Commission. It is obvious, however, that it had not, since I see no reason to interpret the letter of 11 September 2006 as other than a genuine offer to buy. I have also already found that Arriva’s further intention was to be on the streets of Chester on 7 January 2007 even if it could not do a deal with the Council. All the evidence is consistent with that.
84. Save that Arriva is sensitive to the suggestion that its September registrations amounted to a threat (which I find they did, and that Mr Hind knew and intended it), most of this is in fact admitted. But Arriva’s point (made for the first time, albeit a little obliquely, in Mr Hind’s letter of 17 October 2006) is that the suggestion that it had any intention of competing with CCT as from 7 January 2007 is misconceived. That is because, as Mr Hind claims to have perceived matters as at early September 2006, either (a) Arriva would have acquired CCT’s assets and undertaking by January 2007 (“outcome A”); or (b) CCT would anyway have ceased trading by then by reason of its insolvency (“outcome B”). Although Mr Hind’s evidence does not in terms make the point, it was presumably also part of his claimed vision that in the meantime – whatever CCT’s financial position might have been – no-one else would have been prepared to buy CCT. So, on any footing, as from 7 January 2007 Arriva could serve the citizens of Chester with its own bus services – free from competition from CCT, whether under the ownership of the Council or anyone else. Of course if CCT had ceased trading at, say, early December 2006, there would inevitably have been a hiatus in the provision of bus services to the citizens of Chester, even if (as Mr Hyslop said could be done) the traffic commissioner would in such event have permitted Arriva to advance the commencement of its services. That point seems to have been overlooked in Arriva’s Defence (served on 20 October 2006) which asserted in paragraph 5 that “In the reasonable belief that CCT would no longer be operating any services by January 2007, Arriva registered the said services to commence on 7 January 2007 in order to provide, in the language adopted in the letter [of 11 September 2006], ‘a seamless service without any disruption to the network or its services.’” No-one reading that letter would understand that thoughts of CCT’s expected insolvency underlay any of it; and the “seamless” transition point does not work in relation to it.
85. I do not accept Mr Hind’s evidence that, as at September 2006, he believed that CCT would have ceased trading by 7 January 2007 by reason of its insolvency. It is uncorroborated by any other witness or by any documentary evidence; and (subject only to the budget which Mr Hind prepared, to which I shall come) it is inconsistent with all the documentary evidence in the case. I regard it as untrue and as advanced by way of an ex post facto justification for, and exculpation of, a course of conduct which was, on face of it, intended to be directly competitive of CCT, and which, if implemented, would in practice have been likely to eliminate CCT. Despite Mr Sharpe’s efforts to persuade me otherwise, the facts are that Mr Hind had not a shred of material on the basis of which he was in a position to form his claimed view as at September 2006. He had not seen any accounts for CCT since its 2005 accounts and he had no detailed knowledge of its then current trading position, which was in fact positive and profit making. He regarded its commercial routes as extremely profitable and he wanted Arriva to step in and take them over (whereas Arriva was earning about £84,000 per bus, he had apparently – on the basis of a budget referred to in an email to which I shall come, but which Arriva did not produce in evidence – estimated CCT to be earning at least £100,000 per bus; and in cross-examination, by when he had learnt rather more about CCT, he acknowledged an estimate of about £110,000 per bus); and he knew that the new concessionary fare scheme would have been producing increased revenue for CCT. He claims to have formed his view as to CCT’s imminent insolvency essentially on the basis of the Council’s decision to sell it. He said he drew the inference that things were far worse at CCT than he had thought, and that “it seemed a very peculiar time to be selling, to be honest.” None of that justified any assessment as at September 2006 that CCT was about to cease trading on the grounds of insolvency. On the contrary, CCT was being marketed for sale as a going concern and he had no knowledge of the Council’s reasons for deciding to sell it. Companies facing a forced cessation of trading by reason of insolvency such as Mr Hind claims to have foreseen in September 2006 are not usually put up for sale as a going concern; if there is any hope of rescue they tend nowadays to go into administration. Directors of such companies who have a proper sense of responsibility tend not to be willing to court the risk of accusations of trading whilst insolvent. Mr Hind was in no position to form a view that CCT was about to go bust and I find he did not do so. In line with Arriva’s way of doing things, there is no contemporaneous internal Arriva paper suggesting that he ever did.
86. Mr Hind’s evidence about his intentions as at September 2006 was anyway inconsistent with the case he made in his quoted paragraph 7.1. To the question what he would have done if the Council had responded to his letter of 11 September 2006 by saying they would not deal with Arriva unless it were prepared to take part in the bid process, he replied that it was a hypothetical question and he did not know what his response would have been. But if his evidence in the quoted paragraph 7.1 is true, he must have known what it would have been: he would have stuck to the registrations in the belief that if outcome A did not happen, outcome B would. In relation to a like question as to his intentions as at 13 October 2006, he again said he had not made a firm decision to start operating on 7 January 2007: he said he did not need to do so until the beginning of November, a reference to his right until then to vary or cancel the September registrations. I do not accept that, which is inconsistent both with his email of 22 September 2006 and with his email to Mr Cooper a mere five days later on 18 October 2006. That email followed the issue of the present proceedings, an event which also gave Mr Hind the added benefit of learning from the claimants’ supporting evidence information about CCT’s operations he would otherwise not have had, and which he has not hesitated to use for Arriva’s own commercial purposes, namely in assessing Arriva’s prospects of making a profit on the three routes the subject of the revised November 2006 registrations. He wrote:
“The one thing we didn’t mention last night was new vehicles for Chester. We have to resolve this, this week. Bob Mcleod has the buses – in fact they are all Euro 3 – he will have to find a home for them quickly, but I really believe we have to make an impact on January 7. As I mentioned at our budget meeting, we will always have the opportunity later next year to revisit their allocation to Chester if things go pear-shaped.
The information we have received from Chester City’s solicitors suggests that the total commercial revenue for year ended 31 March 2006 was £2,090,768; for 19 PVR that equates to £110,040 per PVR. We used £100K in our budget presentation so we already have some headroom. Chester City has also showed that the three months April to June 2006 has generated £583,836 – annualised that would be £2,225,344, so it seems to be moving in the right direction. Mcleod is waiting for you to agree the release of the 22 vehicles needed and we are running desperately short of time. Can you sort it please.”
87. That is from the same Mr Hind who said in evidence that, as at 13 October 2006, he had made no firm decision to start operating in Chester on 7 January 2007. I comment that he also appears to have omitted to tell Arriva’s solicitors, Dickinson Dees LLP, what his claimed position was. Their letter of 12 October 2006, in response to the letter before action, was in terms which appeared to assert an unqualified – and allegedly justified – intention by Arriva to enter the Chester market “on the basis that the investment will be profitable from virtually the outset.” That only makes sense in the context of an entry into the market in competition with CCT. If CCT had by then departed the scene, Arriva’s ability to profit from a Chester operation would be of no interest beyond Arriva, its employees and shareholders. I do not overlook Mr Hind’s evidence that he remained of the view that he foresaw a real possibility of a deal with the Council but that, if a deal proved impossible, he intended to reconsider the position. But that statement of intention is inconsistent with all the other evidence of an apparently unqualified intention to be on the streets of Chester in January 2007.
88. I therefore reject Mr Hind’s evidence as to his claimed belief in September 2006 of CCT’s imminent insolvency. I find that, at the time of the registrations, Arriva’s intentions were (a) to acquire CCT’s assets and undertaking if it could; but (b) if not, to compete with CCT as from 7 January 2007. I accept of course, as events proved, that Arriva did vary the registrations. I come later to my observations about that.
89. Arriva produced a 2007 budget for its September 2006 registrations on about 2 October 2006. Mr Hind had not at that stage seen any figures for CCT’s operations save that which was in the public domain, which included no accounts more recent than the 2005 accounts. It forecast revenue of £1.6m for Chester for 2007 and profit of £207,000. Mr Hind said the revenue was estimated on a conservative basis, with the costs based on Arriva’s operations at its Hawarden depot. The Chester exercise would represent merely a small part of Arriva’s (ie ANWW’s) total budget for 2007, estimated to be £150m. Mr Hind made the point that in an organisation the size of ANWW this was insignificant. It can perhaps be said that this budget was a lone indicator that Arriva had no intention to enter the Chester market in January 2007 in competition with CCT – since it assumes it would be picking up all the revenue. Mr Hind’s evidence was, however, that it was prepared on the assumption that Arriva would be acquiring CCT’s assets and undertaking. Set against all the other evidence, I do not regard it as providing any support for Mr Hind’s claimed position. Nor did Mr Sharpe suggest that it was. The proceedings
90. On 5 October 2006 DLA wrote a letter before action to Arriva. The proceedings were issued on 10 October 2006. The claim form sought a declaration that the September registrations breached section 18 and orders for their de-registration and damages. It was later amended to claim like declarations, de-registration orders and damages in respect of the original registrations in respect of routes 1, 1A and 15A, as amended by the revised registrations made on 23 November 2006. By a re-amendment made at the trial the Council abandoned an ill-pleaded claim that it had suffered, or might suffer, a loss of a capital nature in respect of the value of its shareholding in CCT as a consequence of Arriva’s actions. That case had apparently been intended to be based on the suggestion that Arriva’s actions had caused other interested parties to withdraw from the bid process; but any such suggestion was not pursued. There is no evidence suggesting that Arriva’s actions did in fact cause any party so to withdraw.
91. In place of that claim, the Council obtained leave to make a brand new damages claim for wasted expenditure. That was based on the assertion that “As a result of Arriva’s abusive conduct, potential bidders for CCT have withdrawn from the sale process. The one remaining bidder refuses to proceed until judgment in this Claim.” The consequential delay in bringing the sale process to a conclusion was said to have caused – or to be likely to cause – expense by the Council said to amount to £72,067.53 comprising: (i) wasted legal expenses of £52,925.53 charged by DLA; (ii) wasted consultancy fees of £18.142 charged by TAS; and (iii) wasted disbursements of £1,000 incurred by the Council. The description of those costs as “wasted” is a little odd, but I understand its sense to be that they are costs that were, or would be, properly, and valuably, incurred but which would not have been incurred but for Arriva’s alleged wrongdoing.
92. In fact, as emerged from a disclosure order made by Evans-Lombe J on 23 January 2007 (the making of which the claimants opposed), only one potential purchaser – namely, First - had made a bid for CCT, that bid having been described as an indicative one. By reason of the confidentiality surrounding that bid, I say no more about it than that (as was stated in open court) it was made in about early October 2006. No-one else (apart from Arriva) had ever made any bid. Despite this, in paragraph 62 of his witness statement made on 9 October 2006 in support of an interim injunction against Arriva, Mr Cassin had felt able to say that “three indicative bidders” had withdrawn following Arriva’s actions, although “five bidders” remained in the sale process; and, in his second witness statement of 14 November 2006, that Arriva’s offer was “… competitive (but at this stage no more valuable) with those made, at an indicative stage, through the formal bidding process.” (My italics) At paragraph 25 of the same statement Mr Cassin again made a generalised comparison between Arriva’s offer and the offers of others (plural) remaining in the sale process.
93. I regard that evidence as misleading. It is fair to acknowledge that the confidentiality agreement described a would-be bidder, and whether or not it actually made a bid, as a “bidder” and no doubt Mr Cassin was influenced by that. But anyone reading his first witness statement would interpret it as meaning that all eight entities referred to had at some point made a bid of some sort for CCT. The truth was that, apart from Arriva (whom Mr Cassin was not there including as a “bidder”), no-one apart from First ever made any bid. Mr Cassin explained in his oral evidence that the eight bidders to whom he had referred were those who had signed the confidentiality agreements. But that was merely the necessary prelude to the provision of information about CCT that would enable them to know whether or not to bid; and the request for such information could hardly justify the inquirer being classed as a “bidder”. Anyone reading Mr Cassin’s second witness statement would also understand him to have been making a comparison between the Arriva offer and at least two genuine bids from others. But there never were two such bids. Mr Cassin acknowledged that the statement in his first statement was misleading, and that he had made a mistake in his second statement. He accepted that his chosen wording was “not as tight as it should have been” but emphasised that there was no intention to deceive. Nevertheless I regard the manner in which he expressed himself as inexcusable. Arriva did not know what the position was at the time the two statements were made; and they were statements directed at obtaining allegedly urgent interim relief from the court.
The letter of comfort
94. A good deal of trial time was devoted by Arriva to a letter of comfort dated 18 October 2006 that the Council gave to CCT. I do not believe it to be of direct relevance to the main issues I have to decide (reflected by the fact that Mr Brealey devoted no time to it), but since Arriva made so much of it I should tell the tale. The background was that for its year ended 31 March 2006 CCT suffered a loss of £226,048. CCT’s auditors were Baker Tilly. One of their tasks was to review CCT’s going concern status. Their draft audit report produced on 6 September 2006 in relation to the draft 2006 accounts referred to the making of the year’s loss and to the fact that CCT’s current liabilities at the year end exceeded its current assets by £189,988. It stated that “[t]he conditions, along with the other matters explained in note 1 to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the company’s ability to continue as a going concern. The financial statements do not include the adjustments that would result if the company was unable to continue as a going concern.”
95. Note 1 of the draft accounts referred to was to the effect that CCT relied on a bank overdraft facility of £100,000 in order to meet its obligations as they fell due; and that in 2006 the directors had reviewed the profitability of certain routes and had, where necessary, ceased to operate them to try and improve CCT’s position. It continued: “As a result of this, the directors anticipate improved trading results for the forthcoming year with a breakeven position anticipated. On the basis of the above, and all other information available, the directors consider that the company will become profitable and continue to operate within the facilities currently agreed.” The draft audit report reflects that Baker Tilly were not satisfied as to the justification for that opinion.
96. Mr Pointon, CCT’s finance director and a chartered accountant, had a meeting with Mr Davies of Baker Tilly on 6 September 2006 to discuss the audit. Mr Pointon’s evidence was to the effect that Mr Davies knew of the proposed sale of CCT and that Baker Tilly’s inclusion of their note in the draft audit report was provoked in part by a concern of possible head-to-head competition with CCT during the sales process, although there is no suggestion that either Mr Pointon or Mr Davies had focused specifically on Arriva as likely to provide any such competition. Mr Pointon said that in that state of affairs Mr Davies suggested that the Council should provide a letter of comfort indicating that it would, if necessary, provide financial support to enable CCT to continue in business as a going concern. If such a letter were provided, Mr Davies would be prepared to recommend that Baker Tilly should issue their audit report without any expressed concern about CCT’s ability to operate as a going concern. I understand that that suggestion was made on 6 September 2006, but Baker Tilly also wrote to CCT on 21 September 2006 requesting such a letter of comfort from the Council. Their request recorded their understanding that the Council was willing to issue a letter to CCT confirming that “… it will provide financial support to [CCT] to meet its financial obligations as they fall due. The issue of this letter of support will enable us to resolve the going concern issue and we plan to remove reference to going concern uncertainties from our audit report.” Baker Tilly attached a draft two-line letter of confirmation from the Council to the required effect. The inference was that, if no such confirmation was produced, the going concern qualifications would remain in their audit report.
97. Mr Pointon made no note of his meeting with Mr Davies on 6 September 2006, Mr Davies did not give evidence and such note, if any, as he made of the meeting is not in evidence. The draft audit report did not itself suggest that the risk of head-to-head competition as a result of the proposed sale of CCT was any sort of an explanation of the form of the cautionary comment in the draft audit report, or even contributed to it. Accepting, as I do, that the sale was discussed at the meeting of 6 September 2006, I do not accept that it, or the suggested risk of such competition, was a reason for the form of that draft. Mr Pointon suggested that Baker Tilly had there simply used “a fairly standard form of words”, a suggestion which, coming from a chartered accountant, I regard as unworthy.
98. Mr Cassin sought in his second witness statement of 14 November 2006, and in cross- examination, to play down the importance of Baker Tilly’s request for a letter of comfort, but the attempt was unimpressive and it is obvious that the request related to a potentially serious matter. Mr Hyslop, CCT’s managing director, a straightforward witness who could recognise and identify a spade when he saw one, had not failed to note its seriousness. In his witness statement of 9 October 2006 – made in support of the application for interim relief – he described Baker Tilly as proposing to raise a “going concern” qualification in their audit report unless the Council were to provide a statement to the effect that it would support CCT in meeting its financial obligations as they fell due; and he said that a qualified audit report would undoubtedly cause concern to potential bidders for CCT and to its suppliers.
99. There was, however, a problem in producing a simple letter of confirmation along the lines of the two-line draft proposed by Baker Tilly. That was because of the statutory restrictions imposed by the Transport Act 1985 upon the giving by parent councils of financial aid to their bus subsidiaries. Those restrictions resulted instead in a two-page letter from the Council dated 18 October 2006. It had been drafted by Mr Painter of DLA and, subject to one change, was signed in the form of his draft by Mr Cassin.
100. The letter was addressed to the directors of CCT. It opened by saying that the Transport Act 1985 prevented the giving of “an open-ended commitment of the type which your auditors have sought ….” It explained that the Council was currently seeking a purchaser for CCT “… and as part of the assessment of the purchaser will seek to verify that it is able to finance [CCT’s] activities on a going concern basis” [sic: presumably this should have read “and as part of the assessment of [CCT] the purchaser will etc …”]. It continued by asserting that the “remaining bidders are all companies of considerable financial strength and national repute, who we believe are unlikely to cause any solvency concerns.” That statement therefore repeated the incorrect assertion that there were plural bidders for CCT - unless only Arriva were now to be regarded as a bidder and, in relation to this letter, Mr Cassin’s evidence was that it was. I reject that evidence as inconsistent with the Council’s stance at the time, namely that as Arriva was not playing by the Council’s rules its offer was not being considered at all. Moreover, Arriva was not making an offer for CCT which involved a takeover of its liabilities, which was the context of the quoted statement: it was merely proposing to buy its assets and undertaking, although that would involve a TUPE transfer of the employee contracts. The second point to note is that the phrase “cause any solvency concerns” makes little sense. Did the writer mean raise any such concerns? This and the previous quote were taken from Mr Painter’s draft, to which Mr Cassin does not appear to have applied any independent critical thought. The remainder of the relevant part of the letter deserves to be quoted verbatim, and for easy subsequent reference I will number the paragraphs:
“1. … However, if the sale proceeds as we expect, [the Council] would then cease to be able statutorily to underwrite [CCT’s] financial obligations and indeed believe that it would be inappropriate for us to do so.
2. Pending the sale of the share capital of [CCT], however, [the Council] will provide the financial support to enable [CCT] to meet its financial obligations for the financial year to 31 December 2007. Whilst [the Council] would have power to finance [CCT’s] ongoing liabilities and obligations through subscribing for share capital, it can only do so whilst it believes there is a reasonable prospect of receiving a return on that investment. Although this would be [the Council’s] preferred option to finance [CCT’s]] ongoing financial obligations, if required, this would have to be gauged at the time a request for further funding was received from [CCT].
3. The second option would be to make a grant or loan to [CCT] to restore losses or liabilities affecting its viability. Under Section 79(9) of the Transport Act 1985, however, such powers could only be exercised with the approval of the Secretary of State, where he is satisfied that it forms part of a plan for approving the efficiency and commercial performance of [CCT] and will enable [CCT] to carry on its business without further financial assistance from [the Council]. Again, therefore, this would have to be gauged at the time when a request for financial assistance was made by [CCT].
4. The one circumstance in which [the Council] can discharge [CCT’s] liabilities, without taking into account wider commercial considerations or obtaining third party consent, is on a winding up of [CCT] when, under Section 79(10) of the Transport Act 1985, it can make payments directly to creditors to meet any balance of liabilities which cannot be met from [CCT’s] assets. This is what the Council would ultimately commit to, if other means of funding liabilities affecting [CCT’s] viability were not open. 5. Accordingly, whilst confirming that [the Council] will provide the financial support required to enable [CCT] to meet its financial obligations, in the year to 31 March 2007 and whilst it remains in its ownership, the manner in which such commitment is satisfied will be dependent upon the considerations set out above.”
101. Before commenting on that, it is fair to point out that Mr Painter’s draft of that letter had been provided to Baker Tilly on 12 October 2006, together with a statement from the Council’s Mr Morcumb to the effect that “We are willing to give a commitment but we have to consider certain legal and financial factors so cannot give an open ended commitment. Is this letter satisfactory from your perspective?” One wonders what commitment Mr Morcumb thought was being offered, but he did not give evidence and so I do not know. In that draft (taken from Mr Painter’s draft), the date in paragraph 2 was 31 March 2007 (CCT’s year end). Baker Tilly’s answer to Mr Morcumb was that subject to the statement of support being to 31 December 2007 the letter was “okay”. Mr Cassin accordingly made that amendment in paragraph 2, although he carelessly made no like amendment to paragraph 5.
102. It appears to me that, as a letter of so-called comfort intended to satisfy Baker Tilly that they could now give an unqualified audit report which raised no question as to CCT’s going concern status, the letter of 18 October 2006, properly read, was worthless. The first sentence of paragraph 2 opened with an unqualified statement of Council support down to 31 December 2007: “… [the Council] will provide the financial support to enable [CCT] to meet its financial obligations for the financial year to 31 December 2007.” (My italics). That looks like a commitment, although the rest of that paragraph showed that if the chosen route for such support was by way of a share subscription, there would be a question about the giving of such support, thus promptly qualifying the commitment just made. Paragraph 3 pointed out that, for reasons given, there would also be a question about whether the Council could provide support by way of a grant or a loan. Paragraph 4 pointed out that the Council could underwrite CCT’s losses in the event of its insolvent liquidation, but that was irrelevant to Baker Tilly’s particular concern, which was whether the Council could support CCT for a particular period so as to avoid a liquidation: and could anyway hardly be characterised as a commitment to provide financial support to CCT down to a particular date, which is what Baker Tilly wanted. Paragraph 5 opened with another unqualified confirmation of Council support: “… whilst confirming that [the Council] will provide the financial support required to enable [CCT] to meet its financial obligations, in the year to 31 March 2007 …”. (Again, my italics). But it then added that any such support would have to be dependent on the considerations previously explained, those being that the Council could not guarantee the giving of support save in the irrelevant context of a liquidation. So why did the letter twice confirm that “[the Council] will provide” the necessary support?
103. The letter appears to me to have been a fudge. I find it difficult to believe it was intended to do other than to convey a general impression of Council support, whilst not actually offering any at all – presumably in the hope that it would be enough for Baker Tilly which, perhaps remarkably, it was. Baker Tilly ought instead to have been advised in a short one paragraph letter that the Council was unable to give CCT the letter of support they required. Mr Cassin agreed during his oral evidence that the letter “could [have been] clearer perhaps.” It is a pity he did not first read it with proper care, in which case he might have made a constructive suggestion as to how the Council’s position could be clarified – ideally by tearing it up and replacing it with a simple letter giving Baker Tilly the facts. He said in his fourth witness statement, and repeated orally, that it was intended to convey no more than that the Council would assume CCT’s liabilities on a liquidation, not that it would ensure that CCT could continue to trade. I do not accept that, at the time, he or anyone else on the Council thought that it was confirmation of support of that type for which Baker Tilly were looking. Nor do I follow why, if this is all that was being offered, the letter contained so much irrelevant verbiage.
104. Mr Cassin provided Baker Tilly with a copy of the Council’s letter of comfort. It worked what I presume was intended to be its desired magic. Mr Pointon signed the directors’ report on 9 November 2006 and Baker Tilly signed their audit report on 10 November 2006 in a form unqualified by any going concern consideration. Note 1 to the accounts had been amended to record that the directors had reviewed and approved the financial projections prepared for the period to 31 March 2008 and had secured adequate overdraft facilities until 31 March 2007; that the Council “has indicated that it will provide additional financial support, if such support is essential to enable the company to continue to trade for the foreseeable future”; and that the directors had concluded that the going concern basis was appropriate for the preparation of the accounts. That note leaves no doubt as to how the directors of CCT read the Council’s letter; or, I presume, how Baker Tilly did. That understanding bore no relation to what Mr Cassin now says was the limited intention of his letter. Whose fault was that?
105. There is no doubt how Mr Pointon understood the letter, because he explained it in his evidence. He said in his witness statement that in it “[the Council] indicated that if CCT was unable to discharge its debts and its liabilities, as they fell due, [the Council] would provide such support in the year to 31 March 2007, as would enable CCT to meet the same, on current financial performance and financial projections ….” In referring to “31 March 2007” he does not appear to have read the letter very carefully either, its paragraph 2 of course giving a commitment until 31 December 2007. But what is clear is that he did not understand the limit of the Council’s commitment to be confined to picking up CCT’s liabilities on its liquidation. In cross-examination he stood by the interpretation he had advanced in his witness statement. He disclaimed the thought that in November 2006 he regarded the letter as doing no more than indicating a commitment to assume liabilities on a liquidation. I have no doubt that his evidence was true and that that was how he had interpreted the letter. He also said that there were eight directors present at the board meeting of CCT convened to approve and authorise the signing of the 2006 accounts, and no-one queried the meaning of the letter (those present did not include Mr Cassin, who had ceased to be a CCT director in May 2006). In particular, no-one suggested that the offered comfort was limited to the assumption of CCT’s liabilities on a winding up. In his first witness statement, Mr Pointon asserted that, whatever Mr Hind may have thought about CCT’s prospects of continuing to trade beyond 7 January 2007, the letter made that thought untenable. In cross-examination, he withdrew the basis on which he had advanced that proposition. He accepted that the letter did not mean what he had thought it had meant and did not itself guarantee CCT’s continued trading. But he said the management accounts for CCT for the months following March 2006 showed it was trading profitably and those accounts gave him confidence that CCT would continue to trade.
106. In my judgment, CCT’s 2006 accounts were signed off on a false basis. Properly read, the letter of 18 October 2006 provided CCT with no assurance as to the giving of financial support sufficient to enable CCT to continue to trade. Mr Cassin agreed in his oral evidence that Baker Tilly had “misread my letter of comfort.” I understood him to say that he had not seen or read the relevant parts of the signed accounts until he gave his oral evidence – or, therefore, the effect that his letter had had. His evidence was to the effect that Baker Tilly had read his letter and had got the wrong end of the stick. He said that the Council never had any intention of providing financial support to CCT so long as it was trading. Most of the quoted part of the letter therefore dealt with irrelevant considerations. I also understood him to say that he was aware at the time that Baker Tilly had felt able to give what he called a “clean audit certificate” and he suggested this had been enabled not just by the letter of comfort but also by “… the other factors of sort of cashflow, a return to profitability, turning the company round … .” I do not accept that evidence. It is obvious that the key to the “clean audit certificate” was the comfort letter.
107. On 7 December 2006 Mr Cassin signed a report as to the action he had taken in relation to the giving of the letter of comfort. It was also signed by two other councillors who said they had been consulted about it. It recorded how Mr Cassin had been given delegated authority to take the necessary steps for the sale of CCT. It recorded that it was “envisaged” that prospective purchasers would want to see that CCT had a “clean” audit report for its latest accounts. It suggested that Baker Tilly’s request for a letter of comfort had been made “in the context” of, and (by implication) influenced by, Arriva’s competing registrations of 10 September 2006. That was incorrect and misleading because the registrations had had nothing to do with Baker Tilly’s request: their draft audit report raising the “going concern” point was produced by 6 September 2006. The report described the letter as being to the effect that “the Council will provide financial support, as long as the Council can lawfully do so, to enable [CCT] to meet its financial obligations for the financial year through to December 2007.” That was a strange way to describe an assurance that Mr Cassin says was intended to go no further than to convey that the Council would assume CCT’s liabilities on a liquidation. Since there was no doubt that the Council could do that, the “as long as the Council can lawfully do so” was an odd proviso to add. This was another fudge by way of an attempt to provide a plausible description of the prior one. It was, to borrow from the Prince of Denmark, just “words, words, words”, although Mr Cassin’s evidence was that he thought them “fairly straightforward.” I disagree. The final sentence of the report, reading “This letter of support is necessary to progress a successful sale of [CCT]” says it all. Mr Cassin wanted to ensure that purchasers were not put off by a less than “clean” audit report. His letter of comfort and his disingenuous description of it in this report were a disgrace.
The potential effect on CCT of the original registrations
108. Mr Hyslop’s estimate was that, were Arriva to have carried out its threat to operate competing services on all CCT’s routes, and on the assumption that CCT’s current revenue on the duplicated routes would be shared roughly equally with Arriva, CCT would suffer an estimated loss per year of £700,000; and if Arriva were to compete on fare price as well, CCT would be forced to match it, driving its revenue even lower. Mr Cassin’s evidence was that the Council, as the sole external source of funding for CCT, could not fund losses of such a size. To do so would require an increase in council tax of more than 9%, which would be likely to be unacceptable to Council members and central government alike. If such funding were met from the Council’s reserves it would undermine the Council’s ability to meet its other needs. Mr Cassin’s assessment, therefore, was that (a) if Arriva pressed on with its originally declared intentions and (b) if the Council had been unable to sell CCT, the only option would have been for the Council to put CCT into voluntary liquidation. I find that is what would have happened. It was, so I understood it, also common ground that Arriva would not have recovered its average variable costs of its competing operation and would have made a loss.
The revised November registrations
109. Mr Hind wrote to Mr Cassin on 10 November 2006. He explained that Arriva would have been formally within the tender process but for the requirement that it must first sign the confidentiality agreement containing the restriction on competition by unsuccessful bidders, which Mr Hind suggested was “arguably unlawful.” He indicated that Arriva was prepared to enter the Council’s “process” in a form acceptable to the Council and that it would be prepared to sign a standard confidentiality agreement, but not one including any non-competition clause. He said that, with a view to giving this a chance to work, he had applied to the Traffic Commissioner “to delay the commencement of our existing registrations for Chester City by 14 days, from 7 to 21 January.” He had also made minor changes to three proposed services. He invited the submission of “appropriately modified ‘confidentiality’ letters”, which would enable Arriva to enter the sales process immediately.
110. On 15 November 2006 Mr Painter of DLA wrote to Dickinson Dees to the effect that the Council would welcome Arriva’s participation in the sale process but that it could only be on “an equivalent basis to other bidders” (there being in fact only one) and required (i) a de-registration of the services registered in September, and (ii) a signing of the revised form of confidentially agreement that had been submitted on 7 September 2006.
111. The revised registrations now in contention were registered by Arriva on 23 November 2006. The catalyst said to have provoked them is Mr Hind’s realisation that, given the letter of comfort plus a sight of CCT’s 2006 accounts (which Mr Hind saw in signed form shortly after 13 November 2006), CCT was not, contrary to his earlier assessment, going to go bust either by or shortly before 7 January 2007 or at all. Since I do not accept that Mr Hind had made any such assessment at the time of the September registrations, I do not accept that as a fair description of the relevant catalyst. I have made my finding that his and Arriva’s original intentions were to enter the Chester market on 7 January 2007 in competition with CCT. But by the latter part of November 2006 Arriva had withdrawn from that stance and had decided to compete with CCT merely on the three most profitable routes. Mr Hind had acknowledged in his letter of 17 October 2006 that the adoption of such a stance would be a predatory act. Arriva’s case now is that it is no such thing.
112. The substance of the revised registrations was to cancel all the prior registrations save those in respect of routes 1, 1A and 15A in respect of which a new timetable was to be introduced, commencing on 22 January 2007. The new timetable excluded evening and Sunday services. From Monday to Saturday the services were to be from 7.00 am to 6.00 pm. The 1 and 1A routes are between the bus exchange (just below King Street) and Blacon (with daytime frequency increased from every 15 minutes to every 10 minutes); and the 15A route is between the bus exchange, Blacon and Saughall (with daytime frequency increased from every 30 minutes to every 10 minutes). The increased frequency offered on routes 1 and 1A effectively replaced the withdrawn routes 3 and 3A, but minus the unprofitable diversion involved in a service they provided to the Countess of Chester Hospital. Overall the effect is to double the number of buses on the routes. Blacon is an area that was formerly a Council estate and is now largely owned by a housing trust. It has a high percentage of unemployed people and a low percentage of car owners and is good bus territory.
113. On 24 November 2006 Mr Hind wrote to Mr Cassin. He referred to his earlier letter of 10 November 2006 and to Mr Painter’s letter of 15 November 2006, which had made clear that the Council was “not willing to consider allowing Arriva to enter the bidding process unless we deregister the services and sign a confidentiality letter. Your insistence on total deregistration means that we are unlikely to find a way forward.” He continued:
“I registered a replica of the bus services offered by [CCT] on the reasonable assumption, from the information available to me, that due to its parlous financial state CCT would no longer be operating in January 2007. I therefore did not implement a solely competitive strategy to enter the Chester City Centre market since my main concern was to ensure a seamless transfer of services to Arriva, to preserve passenger loyalty to bus services.
In the course of these proceedings, I have seen your letter of ‘comfort’ to CCT dated 18 October 2006 and understand that you are prepared to ensure that CCT can meet its liabilities, to enable it to continue to operate beyond January 2007. Whilst both I, and my advisors, have doubts as to the legality of the comfort letter, from a commercial perspective I have had to assume that CCT will be operating (either lawfully or otherwise) when we commence our services in January. I have modified our strategy for entry into the Chester market accordingly.”
114. The first quoted paragraph makes the same fallacious point about a “seamless transfer” as the Defence. Mr Hind then explained that Arriva had that day applied to (i) register an increased frequency on routes 1, 1A and 15A, and (ii) to deregister “the following less profitable services”, which were all the other services that had been the subject of the September registrations.
115. The claimants maintain their objections to the revised registrations. They say that they will “flood” the routes with buses, which is not normal commercial behaviour. The inevitable consequence will be that CCT will make losses on the routes and will be forced out of business. The claimants’ objection to Arriva’s strategy, as Mr Hyslop made clear, is not on the ground that the competition would cause CCT to suffer losses. It is on the ground that, so the claimants assert, Arriva will not itself be able to run the three routes profitably. Mr Hyslop made it clear that, if Arriva could run them profitably, CCT could have no objection to competition from it. But the claimants assert that Arriva will not even recover its average variable costs and that a presumption of a predatory intent accordingly arises, a proposition for which Mr Brealey referred me to Akzo Chemie BV v. Commission of the European Communities, Case C-62/86 [1991] ECR 1-3359, paragraphs 69 to 72. In that context, Mr Sharpe referred me to Arkin v. Borchard Lines Ltd and Others [2003] 2 Lloyd’s Law Reports 225, at paragraphs 293 to 304, which supports the view that even in a case in which pricing is below average variable cost, the need to prove abusive or eliminatory intent is not displaced, but in such a case the burden shifts to the dominant undertaking to disprove eliminatory intent.
Can Arriva run the three routes at a profit?
116. Some time about 23 November 2006 Arriva produced a 2007 budget in respect of the revised registrations. Mr Hind said it was only after 23 November 2006 that Arriva started to look at the detail of what the new registrations would involve. That might be thought an odd approach upon which to embark upon the revised exercise. Mr Hind’s theory seemed to be that the first thing to do is to decide to compete on the revised routes; and then to see whether a profit might be made. Some might regard that as the wrong way round.
117. Mr Hind’s budget estimated the 2007 revenue for the three routes on two alternative bases. The first basis (“basis 1”) derived the estimated revenue from an analysis of CCT’s 2005 accounts and a review of its timetables. Mr Hind estimated revenue of £605,000. As Arriva proposes to use 10 buses on the three routes, that represents revenue per bus of £60,500, which is below the lowest revenue per bus (£84,000) that Arriva’s other operations achieve. The second basis (“basis 2”) estimated the revenue by drawing on the figures in Mr Hyslop’s evidence. That information would not be in Mr Hind’s knowledge but for this litigation, but if the relevant exercise is to make an estimate of revenue, I cannot see why he was not entitled to draw on it. From those figures, Mr Hind estimated revenue for 2007 of £687,000.
118. As regards costs, Mr Hind based his estimates on those of Arriva’s Hawarden depot. He therefore set an estimate of CCT’s revenue earned in urban Chester against the Arriva costs of its non-urban operations from Hawarden. The net result was that on basis 1 the operation would result in a loss of £81,000; and on basis 2, Arriva would make a trading profit of £1,000, an outcome to gladden the shareholders’ hearts.
119. There were, however, fundamental errors in the basis 2 revenue estimate and in the costs estimate, of which Mr Hyslop was quick to advise Mr Hind. First, Mr Hind overstated the revenue by some £43,000 because he overlooked that Arriva is not proposing to provide an early morning, evening or Sunday service. Secondly, he overlooked that part of his revenue figure included revenue on sections of the three routes in which Arriva is not proposing to provide a service at all, an error accounting for a further overstatement of some £42,600. Thirdly, he understated the driver costs (put at £375,000) by perhaps up to some £40,000 because he had not included enough driver hours to enable the provision of Arriva’s proposed increased services. Had those errors not been made, the basis 2 budget would also have disclosed a material loss for the year. Mr Hind admitted he was not proud of any of this, but he said it was all done in such speed that he had not had sufficient time to look at the detail, an explanation indicating that Arriva’s consideration of this particular business venture was little more than a “back of an envelope” job. Mr Hind would, however, no doubt say, as he did in his third witness statement, that his estimates did not take account of possible passenger growth or fare increases, and his view was that growth of 20% during the year was a reasonable prospect. On the footing of growth of that sort, with costs remaining constant, Mr Hind’s estimated profit for 2007 would be £138,000; and, with growth at just 10%, the profit would be £70,000. These outcomes did not, however, take any account of the core errors in the starting figures.
120. In his fourth witness statement, Mr Hind, having repented of his errors, produced a revised budget for 2007. He in fact produced three, reflecting different assumptions. Table 1 was based on Mr Hyslop’s figures for CCT, but it now corrected the £43,000 error and it revised the operating hours estimate. It did not correct the £42,600 error, as I find it should have done. The budget now assumed a 4% fare increase in 2007 (an idea which had occurred to Mr Hind between 30 November and 21 December 2006), so pushing the revenue to £680,000. It assumed the same total costs of £733,000, including direct costs of £581,000, as the prior budget. The direct costs are for engineering, drivers, fuel, tyres and insurance, being the costs of producing the services. Mr Hind explained that the costs had been taken from the 2007 budget for the Hawarden depot, which had reflected an increase of costs for 2007, including increases in wage and fuel costs. The result was a net trading loss for the year of £53,000. Had the £42,600 adjustment been made, the estimated revenue for the year would have been down. The direct costs would have been covered, but not the total costs. There would have been a trading loss.
121. Table 2 assumed what Mr Hind described as a modest revenue growth of 10%. It also included the 4% fare increase. The estimated route revenue was £708,000, and (including advertising and the 4% fare increase) the gross revenue totalled £746,000. That covered the total costs of £733,000 and resulted in a small trading profit of £13,000. If the like £42,600 adjustment is made, the outcome would again have been that the direct costs of £581,000 would have been recovered, with a margin of in excess of £100,000, but not the total costs of £733,000. There would have been a trading loss.
122. Table 3 assumed that the revenue estimate made by Mr Foster, the claimants’ expert, was the correct one. Its adoption by Mr Hind might be viewed as a little surprising, because, as I shall explain, Mr Sharpe submitted that I should reject all Mr Foster’s evidence. If so, then presumably this piece of Mr Hind’s evidence would go as well. For reasons I will come to, I do not propose to accede to Mr Sharpe’s submission in relation to Mr Foster’s evidence, and so Mr Hind can consider himself lucky, despite the best efforts of his leading counsel, to be able to retain this part of his case. Mr Foster had estimated route revenue of £727,000, a figure higher than Mr Hind’s best estimate. His estimate involved a more sophisticated analysis than Mr Hyslop’s and had applied growth projections of between 10% and 14% to each section of the route. Adding £10,000 advertising revenue to Mr Foster’s figure produced total revenue for the year of £737,000, which resulted in an outcome for the year of a trading profit of £4,000.
123. In his oral evidence, however, Mr Foster adjusted the £727,000 downwards to £708,000 to take account of his erroneous inclusion of revenue for various bank holidays when Arriva is not proposing to provide a service. If that adjustment is made to Mr Hind’s table 3, the total revenue for the year is £718,000, which covers the direct costs of £581,000, with a margin of £137,000, but not the total costs of £733,000, the outcome for the year being a £16,000 loss.
124. Mr Sharpe objected to the making of that downwards adjustment, because it was not made by Mr Foster until day 8, which was after the conclusion of Mr Hind’s cross- examination, indeed after the conclusion of all the factual oral evidence. It was not, therefore, a matter upon which Mr Hind was cross-examined or one upon which he had the chance of expressing a view whilst giving his oral evidence. Therefore, submitted Mr Sharpe, fairness required the unadjusted figure of £727,000 to stand. On the other hand, whilst the adjustment was a late one, Mr Sharpe had the opportunity to take Mr Hind’s instructions on it and, if so instructed, to challenge Mr Foster on its justification. He advanced no such challenge but simply made the submission just summarised.
125. I have had some uncertainty as to how to deal fairly with this. I am sensitive to the point that the change in Mr Foster’s evidence was not put to Mr Hind; and, had it been, he might have had something to say about it. On the other hand Mr Sharpe did not take up the opportunity to challenge Mr Foster about the adjustment. Moreover, this was in effect a case in which Mr Hind had chosen to adopt a part of Mr Foster’s evidence as his own; and if that evidence turned out to be wrong, as I find it did, it appears to me that it would be odd to allow Mr Hind to retain its uncorrected benefit. That would be to proceed on a false basis with regard to the evidence. In those circumstances, whilst the handling of the matter was imperfect, I conclude that better justice will be done by adjusting the £727,000 figure accordingly, with the consequential effects on Mr Hind’s table 3 that I have described. The net result is that, taking Mr Hind’s third budget for the year, the result is that Arriva will cover its direct costs of £581,000 (with a margin of £137,000), but will make a loss for the year of £16,000.
126. If those various estimates advanced by Mr Hind are taken at face value, they each, therefore, support Arriva’s case that it will recover its direct costs in the first year. That, however, is not the end of the story. Mr Hind’s evidence is, in effect, that all the growth projections are conservative and that within a short period Arriva will significantly increase its revenue; and he estimated growth for the year of up to 20%. That expectation is based on his experience of Arriva’s operations in the bus industry, which was not challenged and I do not question it. He gave as an example Arriva’s registration in August 2004 of route 20 in competition to Glenvale Transport. Glenvale, like CCT, was running old buses on the route and was providing an unreliable service. Arriva, as it proposes to do in Chester, introduced a more reliable and frequent service on low floor buses; and Mr Hyslop accepted there was scope for improvement in the reliability of the services offered by CCT. Arriva’s original projections were that it would barely cover its direct costs, but within three months it was showing a substantial profit. Over the 26 months since it has been in operation, route 20 returned a 9% margin over all costs despite an intensified response from Glenvale and, since July 2005, Stagecoach, which had acquired it.
127. Against that, however, the claimants assert that Arriva has materially underestimated its costs. One point at issue between Mr Hind and Mr Hyslop is how many buses Arriva would require in order to operate the three services. Mr Hind estimates that his peak vehicle requirement will be 10 buses. CCT uses 10 buses in providing the less frequent services that it currently offers. Mr Hyslop’s evidence was that it is not feasible to provide the additional promised services with only 10 buses, and that an extra one would be required. In particular, on the Chester/Blacon service it is proposed to use just six buses doing the 28 minute round trip, providing 12 journeys per hour. That will allow each bus only two minutes to recover time lost during the journey, change its destination board and collect passengers from the central bus station. Mr Hyslop said that Arriva would find it necessary to add at least one bus to its peak vehicle requirement. The counter-case is that CCT’s own peak vehicle requirement for these routes is only ten buses, and that its timetable also includes (in certain instances) only a two-minute recovery time. The riposte is that Arriva omits to acknowledge that CCT currently inter-works the three routes with its services on less frequent routes, a system enabling it to substitute a bus operating on another route for buses on one of the three routes at least every three journeys on those routes, and more at peak times. This enables CCT to accommodate inevitable service delays. It is said that an increase of the required buses from 10 to 11 would result overall in increased annual costs of some £56,000, said to be split between driver costs (£40,000), extra insurance (£3,000), increased depreciation (£9,000) and increased engineering costs (£4,000). Apart only from the engineering costs figure (which was put to Mr Hind in a separate context, and with which, as I explain, he advanced a justified disagreement), none of those figures was put to Mr Hind in cross-examination, an omission for which there was no excuse.
128. As between these rival cases, I consider there is a real risk that Arriva will not be able to meet the promised timetable with just 10 buses, but I also take the view that I should be wary of purporting to second guess the business judgment on a matter such as this of someone as experienced as Mr Hind is in the running of bus operations, including the entry into new markets. I decline to do so. In any event, even if I had been disposed to accept the claimants’ point, I do not see how I can fairly make a finding as to the probable costs consequences: I simply do not know what Mr Hind would have said about the figures. I consider it would be unfair for me to produce a figure by way of an adjustment of the estimated costs upon which he has been given no opportunity to comment.
129. Another point made by Mr Hyslop is that Mr Hind has not budgeted sufficiently for fuel costs. His assertion is that the typical stop/start journeys in Chester (an urban area) require more fuel than the more limited stop inter-urban services (in particular from Hawarden, where Arriva has a depot) on the basis of which Mr Hind has estimated the fuel costs of the Chester operation. Mr Hind accepted that in principle it is more expensive to operate an urban service than a country service. There was a dispute between Mr Hind and Mr Hyslop as to whether Arriva currently provides any “limited stop” services from its Hawarden depot. Mr Hyslop asserts that it does, in particular the X44 service on the Chester Railway Station, Hawarden, Mold route. Mr Hind said it does not. I was treated to the timetable of that X44 route, showing that the X44 stops a good many times, but Mr Hyslop’s point (based on an obviously close knowledge of the route) was that there were considerable gaps between some of the stops, including ones where buses can do 50/55 mph, which makes the service (as Arriva itself describes it) a “limited stop” one and which means that it is not likely to be as fuel-heavy as will be the provision of services on the three routes in dispute. By contrast, most of the CCT routes (with, in particular, the exception of the Whitchurch route) have stops no more than at most 200 yards apart. 130. Mr Hind’s evidence was that most of the Hawarden services operated into and out of Chester, mainly northwest to Deeside, where he said the traffic is a horrendous stop and go. He said it was not dissimilar to operating in the centre of a town, even though a glance at a map would not convey this. His position was that “the general operating speed of our services in Hawarden overall, I do not think differs greatly from the intensity of Mr Hyslop’s services in Chester.”
131. Mr Foster’s evidence on this topic was that the Hawarden limited stop services provided by the X11, X44 and X55 accounted for 22% of the “in service” miles from Hawarden, a percentage Mr Hind did not challenge. Mr Foster made much the same points as had Mr Hyslop about the higher average speeds and fewer stops of these services, leading to lower fuel and engineering costs. Mr Hind disagreed with that, saying that those three services stop at virtually every stop, save in a section where nobody wants to get on or off which therefore enables an increase in the average speed. He said Mr Foster had not taken into account services 3, 4, 10, 11 and 12 out of Hawarden to Mold and into Deeside, which are all regular stopping services affected by traffic congestion. He said the budget was based on average costs at Hawarden and that Mr Hyslop and Mr Foster were both placing far too much weight on the operations of the X44 and X55.
132. Without a detailed analysis of the relative fuel costs of the buses on all the CCT routes and the Arriva/Hawarden routes – and I express my relief that I was not treated to that - I cannot make any sort of scientific finding as to the degree of any (if any) underestimate of fuel costs. I regard it as probable that overall the average fuel costs of operating buses on the three, traffic-congested routes in Chester are marginally higher than that of the average fuel costs of the Hawarden operations. I find that CCT’s point is therefore in principle well founded, although I am not satisfied that the degree of underestimation in the Arriva budget was as much as Mr Foster would assert, namely some £26,000. Again, that figure was not put to Mr Hind for comment and I do not see on what basis I can fairly revise his own fuel estimates.
133. Mr Hyslop’s next point is that Mr Hind’s budget had not taken due account of whatever retaliatory action that CCT might bring to bear in response to the arrival of Arriva on the scene; and Mr Hyslop’s evidence included an assurance to Mr Hind that, if CCT were still there, retaliatory action there would certainly be. I do not understand how at this stage of this potentially undignified game it is reasonable to expect Mr Hind to prepare his budget on the basis of as yet unknown retaliatory tactics; and Mr Hyslop was disposed to agree with that. I attach no weight to this point.
134. Another issue was as to Mr Hind’s estimate of the maintenance costs of the buses on the new routes. In his October 2006 budget for the original registrations Mr Hind had estimated costs of £5,844 per bus, based on the budget for the Hawarden depot. In his budget for the revised registrations he estimated a material reduction from that figure, namely an estimate of £2,504 per bus, a reduction of over 50%. This estimate is for new buses, which will have a warranty. The explanation for the reduced estimate is that, because the buses are new, “25% of normal wage costs and consumables are used.” Mr Hind’s elaboration of that in his oral evidence was that the 2 October 2006 budget was produced for the full Chester network, for which he had used average costs at Hawarden. There was a mixed fleet at Hawarden, including some new, but not brand new, vehicles. When preparing the budget for the three Chester routes, it was based on the cost of maintaining exclusively brand new vehicles. Mr Hind had recent experience of their cost of maintenance following from the introduction of 39 new buses into Runcorn a year earlier. By the time of his budget he had had 12 months’ experience of their operating and fuel costs. He discussed the matter with his engineering director, Malcolm Gilkerson, who was confident that a fair projection for year 1 was £2,500, although it will go up in years 2, 3 and 4. Mr Hind’s experience is that Arriva is normally back to full engineering costs by year 4 or 5. Mr Foster’s opinion was that a 50% reduction on full costs would normally be the maximum for a new bus. Mr Hind’s response to that was that he did not know where Mr Foster’s figure came from, but his own figure came from a discussion with Mr Gilkerson, which was itself based on Arriva’s experience.
135. Mr Hyslop’s evidence was that, contrary to what one might instinctively think, new buses are more expensive to maintain in their first year than old buses, as in their second and third years: there will be a host of matters not covered by any warranty (accident damage, vandalism, cleaning, servicing, replacement of consumables) The new, low floor buses would also face suspension problems in negotiating the speed bumps. Mr Hyslop gave a graphic illustration of the costs of maintaining a modern, new bus: a heater switch for one of CCT’s new buses was said to cost £900, as compared with 47p for one of their old buses, although that was not put to Mr Hind for comment. Against that, Mr Hind buys lots of new buses every year and, with that experience, has still plumped for a maintenance estimate of £2,504.
136. On this issue, I have concluded that I should, and do, accept Mr Hind’s estimate of the maintenance costs of the new buses as being fair. It is, I accept, based on Arriva’s own experience and I prefer Mr Hind’s evidence on this issue to the contrary opinions of Mr Hyslop and Mr Foster. Mr Foster’s opinion is based on data that is now over 12 years old, and even he accepted that it may now be out of date.
137. Another issue was as to whether the need for a manager and inspector on the new routes would add to Arriva’s average variable costs. Mr Hind’s evidence was that these functions would be provided out of existing resources, the managerial task being to monitor the new operation during its initial weeks. The theory is that the requisite manpower will either be spread more thinly over the Arriva operations, or else it will be expected to work harder, but either way there will be no additions to Arriva’s variable costs and so the budget included no figure for such costs. The cost of the provision of such managerial and supervisory functions is a central head office resource. I find that this issue does not require any budget adjustment.
138. The issue of meal breaks was a contentious hot potato. Mr Hyslop asserted that the budget had not provided for the cost of drivers travelling to and from Hawarden to enter and leave service and for meal breaks. Mr Hind’s response was that this was a false point as there is a relief point at Chester station “a few minutes walk from the Exchange bus station. The costs already include the costs of transporting the drivers to enter and leave service.” In cross-examination Mr Hind said that the costs there referred to included the costs of transporting them for meal breaks, which appeared to make nonsense of his “few minutes walk” point. The thrust of his evidence appeared, however, to be that insofar as costs would be incurred in this connection, they were covered in the budget but that what he had not budgeted for was for the payment due to drivers whilst taking their meal breaks at Chester station. Mr Foster’s evidence, again only provided after Mr Hind’s evidence was concluded, was that this required an addition of £13,000 to the budget. No figures were put to Mr Hind by way of a suggested budget adjustment, and so he again was not given any opportunity to comment. For like reasons as before, I therefore decline to make any adjustment to his budget on this score.
139. Finally, Mr Brealey submitted that Mr Hind’s budget had omitted to provide for a departure charge of 40.8p per departure from Chester Bus Exchange, which he said, supported by Mr Foster, required an adjustment to the budget of £24,000 per year. Neither the point nor the suggested cost was put to Mr Hind and so I propose to ignore it.
140. The net result of all this is that I decline to make any finding that the costs estimate should be adjusted upwards by any specific amount, even though I consider that at least in relation to fuel costs, and probably also in relation to the meal break issue, an upward adjustment would be justified. I bear in mind that in any event the budget currently estimates the margin of revenue over direct costs at more than £100,000. I find therefore that, even if some upward adjustment of the costs estimate is justified, the probabilities are that Arriva will still at least recover its direct costs, although not its total costs. I regard it as probable that in the first year it will make a trading loss.
The challenge to Mr Foster’s evidence
141. The claimants’ expert was Andy Foster, to whom I have referred. He has prepared four reports which were all adduced in evidence and Mr Sharpe cross-examined him. Mr Sharpe devoted much effort towards persuading me that I should nevertheless attach no weight to any of his evidence and disregard it all as if none of it had been adduced. The thrust of the argument was that Mr Foster did not have the qualifications to give the expert evidence he purported to give; and anyway he had been, and is, too close to the action to be able to give evidence that could safely be regarded as that of an impartial expert.
142. As to the former point, Mr Sharpe said that Mr Foster is not eligible as an expert on the competition issues relevant in this case (in particular the relevant product market, the geographic market and questions of abuse) because he is not a trained economist. The submission was that economists have a monopoly of the training and expertise necessary to assist the court on such issues and no one else can match them. Mr Foster’s disqualifying misfortune is that he does not have an economics degree and is not an economist. His degree, from Aston University, is in transport operations, planning and management, and even though his course included transport economics, that was not good enough. In addition, he has not published anything by way of a contribution to the learning in the sphere about which he purports to speak. He has no post-graduate qualifications in economics. He has had no experience as an economics (or other) expert witness. The fact that he obviously has a vast mental library of knowledge and practical experience about the bus industry, as well also as a grasp of the competition issues in the case, is simply not good enough. Far better to leave the field exclusively to experts like Dr Gunnar Niels, Arriva’s expert, whose training and experience as an economist is, I accept, self-evident and impressive, even though (as it appeared to me) in certain respects his knowledge of the bus industry did not quite match Mr Foster’s. As it was, Mr Sharpe asserted that during his cross-examination Mr Foster showed himself to be out of his depth.
143. As regards the second point, Mr Sharpe made a number of criticisms of Mr Foster’s suitability to act as an impartial expert. He is employed by TAS as an associate director, TAS being the consultants whom the Council had used since 2003. He played a key part in the production of the two TAS reports, being the team leader for the 2006 report. He had played a like part in the administration of the sales process, including the advice that interested parties should sign a confidentiality agreement. He had evaluated First’s indicative bid. He had even played a recent, and partisan, role in the litigation, writing to Mr Brown of Stagecoach on 5 January 2007 asking him to confirm that CCT had not (as Arriva was thought to be suggesting) put Stagecoach up to writing a letter in October 2006 to the effect that Arriva’s actions had caused it to decide to take no further part in the sale process; and inviting Stagecoach to provide any further information that it would like the claimants to present to the court as to why, in the light of Arriva’s actions, Stagecoach had decided to pull out of the sales process. He was, therefore, there soliciting evidence in order to assist the claimants’ case in contentious litigation in which he had already been retained as an expert.
144. Mr Foster’s explanation of this last point was that DLA had asked TAS to approach Stagecoach in this way. I find that evidence surprising. DLA was conducting the litigation, so one might have thought they would have asked Stagecoach. Equally, Mr Foster was vague in his recollection as to quite how the DLA instructions came to TAS (he thought they came from Mr Painter, either by way of a telephone call or an email), and I regard it as possible that he was in fact mistaken that it was DLA who asked TAS to make the inquiry. But if not, who did? Mr Foster said he did not give the making of that request of Stagecoach much thought: he was at that stage in the middle of preparing his third expert report. But, however it came about, I find it astonishing that Mr Foster, an expert who was at that stage preparing himself to give impartial assistance to the court, was prepared to descend into the arena of the litigation in that manner. It ought to have been obvious to him that he should have declined to do so: non haec in foedera veni.
145. Mr Sharpe also made a point about fees. TAS charges the Council by the hour for its assistance in the sales process, subject to a cap of £40,000 plus VAT. It charges Mr Foster’s time at the rate of £525 per day. TAS and, so it was suggested, Mr Foster therefore had an interest in the sales process continuing, including by way of a re- launch following these proceedings, because that would generate more fees for them. As to that Mr Foster responded that there would no more money in it for him, as he is paid a salary by TAS; and that TAS would anyway never advise a client to proceed along a course of action on the basis that it would earn it more money. As a barrister, that is something that Mr Sharpe would understand. Mr Sharpe further made the point that Mr Foster had made his mind up about the relevant economic issues even before the litigation had begun, those views being expressed in a preliminary report dated 9 October 2006, a view to which he had resolutely stuck. I record that that report was commissioned on short notice for the purposes of the claimants’ injunction proceedings, time was of the essence and Mr Foster was asked to prepare it as someone with first hand knowledge of the local market.
146. Mr Sharpe said that in these circumstances Mr Foster was (a) unqualified to give any expert evidence and (b) was anyway fatally compromised in coming to the court as an expert and so the court could and should waste no time on his evidence. The sense of the latter point, apparently, is that his evidence must be presumed to be unjustifiably biased in the claimants’ favour. The submission was to the effect that the opinions expressed cannot safely be regarded as representing Mr Foster’s true views, or at any rate that the court could and should be deeply sceptical about whether or not they did. The submission is, therefore, one that carries with it a serious implication. Mr Sharpe referred me to Toth v. Jarman [2006] EWCA Civ 1028, in which, at paragraph 102, the Court of Appeal expressed the view that “[w]here an expert has a material or significant conflict of interest, the court is likely to decline to act on his evidence or indeed to give permission for his evidence to be adduced.” As Mr Foster’s four expert reports have all been put in evidence and he has been cross-examined, I am asked to decline to act on his evidence.
147. TAS is a specialist public transport consultancy, of which there are only a few. It is obvious that Mr Foster has a wide understanding of the bus industry and how it operates, as well as a wealth of experience of that industry. Whilst the concepts required to be investigated in a competition law case are no doubt most easily grasped, explained and opined upon by trained economists, they are concepts drawn from and related to the operation of the markets of the real world; and I regard it as unreal the thought that it is only trained economists with a list of learned articles to their name who have the expertise necessary to understand them and to help the court on their application to a particular case. I have no doubt that Mr Foster has sufficient expertise, no doubt largely absorbed in the college of life, to entitle him to offer his opinion to the court on the matters in question; and it is for the court to decide whether or not, or to what extent, that opinion, tested by cross-examination, is one which is as expert as Dr Niels’s and which the court can accept. As I shall explain, in one respect Dr Niels was himself directly influenced by Mr Foster’s expertise, in relation to a 30-minute “dead run” drive time: Dr Niels was happy to regard that as supporting his own, still somewhat uncertain, assessment. I say simply that I was satisfied that Mr Foster had a sufficient understanding of the relevant economic issues, as well as a vast knowledge of the bus market and industry, to qualify him as an expert and I reject Mr Sharpe’s submissions that he was not so qualified.
148. As regards Mr Sharpe’s second line of attack on Mr Foster, I recognise that Mr Foster’s undoubted closeness to the action would make him unsuitable to give expert evidence if the relevant test were that he should display the same absence of connection with the party calling him as, for example, must anyone engaged in a judicial function. But that is not the test when considering the ability of someone to give expert evidence. There is, for example, no automatic basis for a successful challenge to an expert witness that he is an employee of the party calling him. Mr Foster is not even as close to the claimants as that. He is an employee of TAS, and there is no evidence that he has any financial interest in the outcome of the case. As it seems to me, Mr Sharpe’s submissions on this come down to the proposition that, putting it at its lowest, I should assume that there is a material risk that Mr Foster would, by his evidence, be dishonestly advancing an economic case he knew to be untrue in order to better the interests of the claimants. Indeed, in his closing submissions Mr Sharpe in terms submitted that Mr Foster was “part of the home team. He was a safe pair of hands. He could be relied upon to find Arriva dominant and abusive.”
149. These are harsh submissions and I do not regard them as carrying the day. Mr Foster made it clear that he recognised that his duty was to the court rather than to the client and he was aware of the obligation to consider whether the claimants’ instructions placed him in any conflict with his duties as an expert. He was aware of his duty not to promote the claimants’ cause or to engage in the role of an advocate, and said he had adhered to that throughout. He said his views would have been no different in the, admittedly unlikely, event that Arriva had asked him to act as an expert. I was satisfied that Mr Foster was giving his evidence honestly and was doing so in proper recognition of his duties to the court. I recognise also, however, that he has been very close to the action on the claimants’ side of the record, and that there is therefore a risk that his opinion may perhaps have become unconsciously coloured by the claimants’ interests. I have come to the conclusion, therefore, that whilst I should reject this part of Mr Sharpe’s submission as well, I should nevertheless bear this risk in mind in assessing the weight to be given to Mr Foster’s evidence. That was, in effect, the essence of Mr Brealey’s submission as to how I should approach the matter.
Dominant position
150. I have earlier set out section 18 of the Competition Act 1998. Arriva admits that the defendants comprise an undertaking for the purposes of the section. It denies that it enjoys a dominant position in the market or, if so, that it is threatening to abuse that position. By contrast, the claimants assert that Arriva is dominant. The claimants assert that the implementation of the September registrations would have wiped CCT out; and that the implementation of the revised registrations will have the same effect. They say that those consequences would respectively have effected, or will effect, the provision of bus services in Chester, which they submit will be sufficient effect upon trade for the requirements of section 18. No question of abuse arises, however, unless Arriva is in fact dominant in the relevant market. I turn to that issue.
The relevant market
151. The EC Commission in its Market Definition Guidelines states at paragraph 2:
“Market definition is a tool to identify and define the boundaries of competition between firms. It serves to establish the framework within which competition policy is applied by the Commission. The main purpose of market definition is to identify in a systematic way the competitive constraints that the undertakings involve face. The objective of defining a market in both its product and geographic dimension is to identify those actual competitors of the undertakings involved that are capable of constraining those undertakings’ behaviour and of preventing them from behaving independently of effective competitive pressure. It is from this perspective that the market definition makes it possible inter alia to calculate market shares that would convey meaningful information regarding market power for the purposes of assessing dominance or for the purposes of applying Article 85.”
The product market
152. The first task in market identification is to identify the relevant product market. The question here is whether that market includes modes of transport other than buses – cars, taxis, trains, coaches, bicycles (aircraft were not suggested); and whether both commercial and tendered bus services should be included. The market will comprise those services which the consumer regards as interchangeable or substitutable by reason of their characteristics, prices and intended use. Mr Foster’s opinion, explained in his first report, is that both commercial and tendered bus services within the relevant geographical area constitute the product market and that such services constitute a separate and distinct product market for which no other mode of transport is substitutable on demand or supply grounds.
153. Dr Niels, Arriva’s expert, abstained from a detailed focus on the relevant product market. He had not been asked to do so. He did, however, at least refer to the available rail services in the Chester area and to their possibility of placing competitive pressures on buses and asserted that Mr Foster had not sufficiently analysed their impact. He referred also to competition from cars. In that connection, whilst noting Mr Hind’s evidence that he would wish Arriva to hold its own against cars, and asserting that car competition was at least a relevant factor in assessing the market dominance of any bus operator, he nevertheless drew no conclusion as to whether cars, any more than trains, should be included in the product market. He agreed that that market at least includes both commercial and tendered services; and for the purposes of his analysis of the relevant geographic market he proceeded on the basis that the product market was one for the provision of these two types of bus service. The relevant bus services are, I find, in the nature of local bus services, which are to be distinguished from long-distance express coach, excursion or tour services. Mr Hyslop gave convincing evidence as to why the cost and design of many express and holiday coaches and open top tour vehicles make them unsuitable for use on local bus services. The characteristics of local bus services are that they use public service vehicles for the carriage of passengers at separate fares and stop to let them board and alight at least every 15 miles (see section 2 of the Transport Act 1985).
154. The question, however, is whether I can and should accept Mr Foster’s evidence that the relevant product market is one for the provision of local bus services, both commercial and tendered; and that car and/or rail transport forms no part of the market. As regards cars, Mr Foster’s exclusion of them can be regarded as involving nothing very novel: the Monopolies and Mergers Commission came to a similar view at paragraph 2.38 of its report into the proposed merger of FirstBus plc and S.B. Holdings Limited (Cmnd. 3531, January 1997). So did the OFT in its First Edinburgh/Lothian decision (CA98/05/2004), paragraphs 18 to 20. As regards rail travel, Mr Foster made the point that the local bus market in the Chester area is not served by any equivalent rail service, such services providing “point-to-point” journeys at less frequent intervals and with fewer stops. In addition, concessionary fare passengers provide a significant proportion of local bus users, their travel since 1 April 2006 being free; by contrast, fares are charged for concessionary train travel, points which appear to me to have force. 155. The question, however, is whether Mr Foster’s analysis of the relevant market is sufficient to enable the court to be satisfied that it comprises only local bus services. The evidence satisfies me that there is an element of substitution between buses and other modes of transport. Mr Foster is aware of that because he was the key author of the 2006 TAS report, which referred to TAS’s 2004 report (to the preparation of which he was also a party) having developed an action plan “for the network to deliver patronage growth and modal shift.” Modal shift meant, as Mr Foster agreed, a shift to buses from other modes of transport, including cars. That recognised an apparent degree of substitutability between buses and other transport modes. And TAS’s own view, in a report it published in 2006, was that the view favoured by the regulators that there was a discrete market for local bus travel was wrong and that the bus industry was right in the view that the market included other modes of travel, including in particular the car. This expression of view was, either in whole or in part, that of Chris Cheek of TAS, who had apparently given some help to Mr Foster in the preparation of his first report and whom Mr Foster described as his boss. That opinion, from Mr Foster’s employers, was inconsistent with Mr Foster’s opinion as an expert.
156. Of course Mr Foster was not obliged to agree with his employers. Not surprisingly Mr Sharpe asked Mr Foster who was right on this question: was it the regulators, with whose views Mr Foster was aligning himself; or was it TAS and the bus industry? Mr Foster’s answer was not a convincing one. He opened with a generalised assertion that, in the particular market he was looking at, he was right, although he accepted that in some circumstances the TAS view was also right. He suggested, for example, that within the London congestion charge zone, there was more of a level playing field between buses and cars. But the TAS article was not focusing on London, or on any specific market; it was focusing generally. Mr Foster nevertheless stuck to his opinion that, at any rate in Chester and the surrounding market area, buses and cars are not sufficiently substitutable. Further questioning on this disclosed that his opinion on the product market was based on other – undisclosed – studies by colleagues at TAS in relation to the relative costs of cars and buses, and being studies which were also not Chester-specific. As regards any substitutability between trains and buses, Mr Foster admitted that he had done no analysis of the point made by Dr Niels in his report as to the competitive pressures on the local bus services of train services offered by Merseyrail.
157. Mr Sharpe also made what I regard as a fair point in criticism of Mr Foster’s analysis. In any analysis of whether local buses form an exclusive product market, the usual approach is to hypothesise a small but significant non-transitory increase in price for bus services of 5 to 10% and determine what alternative modes of transport (if any) become a substitute. That is the right approach, whereas Mr Foster appeared to regard it as equally relevant to consider whether buses were a substitute for cars. Buses may be competitively constrained by cars, but cars may not be competitively constrained by buses.
158. I have concluded that Mr Foster did not conduct a sufficient analysis on the basis of which I can safely conclude that the relevant product market is comprised exclusively of local bus services. I record that Mr Brealey did not put to Dr Niels that the product market was so comprised. I do not find that it is not so comprised. I find merely that the claimants have not proved that it is. Geographic market
159. Both experts advanced opinions as to the applicable geographic market. There was a material difference between them. They were, however, agreed that its identification is dictated by supply-side rather than demand-side considerations. This involves assessing the potential for undertakings in neighbouring areas to supply the focal market, in this case Chester. Whatever the correct identification of the market, there was also a dispute as to the right metric for measuring the respective market shares of the bus operators in it. Before setting out the opposing cases (and I start with Arriva’s), I record that I consider that it is for the claimants to prove the market, and the Arriva market share, which they plead. The claimants devoted much effort to exposing alleged deficiencies in the exercise that Dr Niels had carried out, and to assertions that he ought to have carried it out in a different way. But there is no alternative pleading by the claimants asserting any sort of “Niels variant”.
160. Arriva’s preferred geographic market has not been consistent and has developed from (i) an area confined to the City and District of Chester, via (ii) an area something in excess of a 20-mile radius to (iii) the choice advanced and maintained by Dr Niels. His opinion is that it is bounded by an isochrone, an imaginary line drawn around Chester each point of which is no more than 30 minutes “dead run” (out of service) driving time from Chester. He regards that as the maximum distance from which a bus depot can economically provide local bus services in Chester itself. The logic is that the more distant the depot is from the focal market, the greater the cost of the operation in that market (drivers’ wages, and fuel and other running costs). Dr Niels ascertained the line of the isochrone, and thus the market, by using a computer programme called MapInfo. His opinion is that, when then assessing the market power of bus operators in that market by reference to the supply side, the applicable metric is one directed at ascertaining the capacity of a bus operator to compete in the market for local bus services in Chester. To that end he applied a metric based on a bus count of vehicles in depots within his market. On that basis, and having done such a bus count for all operators, he assessed Arriva to have a market share of no more than around 22%.
161. Dr Niels recognised that his isochrone might be drawn too near to Chester by a few minutes. To cover this, he tested his opinion as to Arriva’s market share by way of sensitivity analyses including one under which the isochrone was extended to a 35- minute drive time. This had the effect of bringing into account Arriva’s depot at Birkenhead, which lies just 300 metres outside the 30-minute isochrone and whose inclusion in any calculation of market share the claimants regard as essential. The result was that Arriva’s market share was still 22%. That was because the extension of the isochrone included other depots as well. Dr Niels also carried out other sensitivity analyses to take account of various criticisms of his approach (to which I will come and with which he did not necessarily agree), and they resulted in Arriva having a market share of no more than 31%. He also carried out sensitivity analyses based on isochrones ranging from 10 minutes (which gave Arriva a 0% market share) via 10-minute increments to 60 minutes (showing a share of 24%). The high point of that exercise was the 36% market share for Arriva produced by the 50-minute isochrone. Neither expert, however, suggested that the relevant dead run drive time is more than approximately 30 minutes. 162. Mr Foster’s market is materially larger than Dr Niels’s. His primary position is that it comprises (a) the entirety of the eight local authority administrative districts in which are located those bus depots from which an operator could economically serve Chester (those districts being Chester, Ellesmere Port and Neston, Wirral, Halton, Vale Royal, Crewe & Nantwich, Wrexham and Flintshire); but, by a later addition, that (b) it also includes an undefined area stretching beyond those boundaries. Save in two minor respects (at points to the north east and south west of Chester), the district boundaries nowhere fall within Dr Niels’s isochrone. At all other points they are outside it (perhaps a little remarkably, they lie in part in the River Mersey and in the sea). By his fourth statement, served shortly before the trial, Mr Foster is said to have introduced an alternative, and unpleaded, case to which I shall come.
163. Mr Foster explained his choice of market in cross-examination as follows. His starting point was to identify which depots can economically provide bus services to Chester, whether or not any such depot in fact does so; and that part of the exercise is one with which in principle Dr Niels agrees. He then defined the market as comprising the areas that those depots serve or can serve, and he concluded that for practical purposes that meant it comprises the eight local authority districts in which the depots are situated; and with that approach Dr Niels disagrees. Thus, for example, Arriva’s Winsford depot (to the east of Chester and outside Dr Niels’s market) is said to be capable of economically operating into Chester; and the Crewe and Nantwich administrative district lying to its south-east (and increasingly remote from Chester) into which services from Winsford are also possible is therefore also said to fall within the geographic market. In adopting this approach, Mr Foster was influenced by that of the OFT in paragraph 27 of its decision in the First Edinburgh/Lothian case (CA98/05/2004):
“Buses that operate from the same depot can generally be switched between routes emanating from that depot. This suggests that all routes within the catchment area covered by a single depot might form part of the same geographic market. Where there is a significant overlap between catchment areas, the geographic market may include the areas served by a number of depots.”
164. The effect of Mr Foster’s approach (unlike Dr Niels’s) is thus to include in his market depots from which he accepts it would not be possible for any operator economically to provide local bus services in Chester. Having so identified his market he also disagrees with Dr Niels as to the appropriate metric by reference to which the market shares of bus operators in it should be assessed. He used a “bus hours” metric – derived from an analysis of timetables operated in order to provide the timetable registered with the traffic commissioners – which he adopted as a proxy for an operator’s turnover for the area. The result of his analysis is that Arriva’s market share is around 53.5%.
165. There is, therefore, a divergence of approach by the experts. Arriva’s case is that, if Dr Niels is right, there is no question of Arriva having dominance in the market; and even if Mr Foster’s approach is to be preferred, its case, supported by Dr Niels, is that the market for local bus services in Chester is so contestable that it is unreal to regard Arriva or any operator as having dominance. The claimants assert that Mr Foster’s approach is right and that Arriva’s market share of more than 50% raises a presumption of dominance. 166. Arriva made much in argument and cross-examination of the assertion that the claimants had not pleaded Mr Foster’s market as he ultimately identified it. In his closing submissions Mr Sharpe submitted that the claimants and Mr Foster had adopted a muddled and incoherent approach to the identification of the market and he submitted that they had advanced no less than 12 different cases as to what the market is. The original pleaded case was that the market was “the provision of bus services in Chester and to and from Chester within a radius of 20 miles”, which means as the crow flies. Some particulars identified the starting point in Chester to be “broadly Chester City Centre”, which had an element of generality about it although they explained that Mr Foster’s report provided the relevant touchstone and that “the 20 miles is a guide to the maximum radius around Chester from which it is economically feasible to operate services of the type registered by Arriva on 10 September 2006, but does not exactly delineate the geographic market.”
167. An amended case then enlarged the market to “an approximate radius of 20 miles” which was said to equate to “the [eight local authority districts]” and the pleading referred to paragraph 4.7 of Mr Foster’s first report, which did appear to adopt those districts as the market. The equating of that “approximate radius” to those districts was, however, inexact, since their furthest point from Chester was more than 30 miles, which not many would regard as within “an approximate radius of 20 miles”. Raymond Simmonds, an Arriva driving instructor, gave unchallenged evidence of four trips he made between Chester and Dyffryn-Ceiriog, close to the limit of one of the districts – a journey of 32.9 miles in a Dennis Dart that took an average time of just under 72 minutes; and other drivers also proved the inaccuracy of the “approximate radius” point.
168. Whilst, however, that amended pleading is less than felicitous, and whilst Dr Niels’s first report expresses a difficulty in understanding what geographic market case Mr Foster was making, I nevertheless take the view that Mr Foster’s first report made sufficiently clear his basic economic case, namely that his starting point was to identify depots “within approximately 20 miles (and not more than 30 minutes ‘out of service’ travel time”) from Chester” (paragraph 4.5.14); and that to arrive at the relevant geographic market he had then extended the area of the market beyond those depots so as to include the eight districts (paragraph 4.6). In paragraph 5.2.9 of his second report, Mr Foster claimed to avoid doubt about his position by saying that his chosen area was based on those depots of all operators “who are able to provide buses to the centre of Chester within an approximate … out of service journey time of 30 minutes”, a contribution which was not in fact a clarification, but a qualification, of his earlier “not more than” approach; but there was no departure from the eight district approach.
169. I am not sure that Mr Sharpe was strictly correct that the claimants advanced as many as 12 different cases, and it may be that at least certain of the suggested cases were merely references, in varying terms, to the manner of the identification of the depots which could economically serve Chester. But those depots do not, according to Mr Foster, actually identify the market, which is said to be the eight districts in which they are situated, and that basic case has remained unchanged, save to the extent that in his fourth report appears to have Mr Foster extended his market beyond them in some undefined way, an extension enabling him to include Arriva’s Oswestry depot as contributing 504 bus hours and other operators 799 hours to his market share assessment. Mr Sharpe was, though, entitled to make the point that Mr Brealey’s opening skeleton argument for the trial introduced what was said to be a case different from Mr Foster’s basic case. It was that the relevant market was “a provision of local bus services within Chester and to and from Chester within a radius of approximately 20 miles and an approximate travelling time of 30 minutes. The reference to 20 miles is 20 miles driven and not as the crow flies.” As to that identification of the market, it can be said that (i) it made no mention of the eight districts; and (ii) the stated time/distance criteria cannot identify a “radius” from whatever unidentified starting point was referred to because a radius is a constant equal line between the centre and circumference of a circle. But, whatever that skeleton argument may have had in mind, Mr Foster basically stuck to his eight districts; and cases are made by pleadings and evidence, not skeleton arguments.
170. Reverting to the substance, there is, therefore, broad agreement between Mr Foster and Dr Niels that in practice the market identification exercise requires (in Dr Niels’s case as the first and last stage, and in Mr Foster’s case as merely the first stage) the identification of depots within a “dead run” driving time of Chester from which it will be economic to provide bus services into and within Chester. Dr Niels identifies those depots as being the ones within his 30-minute isochrone, and his view is that that marks the limit of the boundary. He did not independently carry out any costing exercise with a view to ascertaining the extent to which it was economic to operate in the focal market from the depots within his isochrone. CCT has a depot in Chester, as does First. Arriva does not have a depot in Chester itself. It does, however, have one at Hawarden (south west of, and some six miles from, Chester, and Dr Niels and Mr Hind treated it as a Chester depot). It also has a depot at Wrexham (further to the south west); and one at Runcorn (north east of Chester). Those three depots are the only Arriva depots within Dr Niels’s market. Central to the claimants’ complaint about Dr Niels’s market is that Arriva’s depot at Birkenhead (to the north west of Chester in the Wirral) fell just 300 metres outside his isochrone and was not included in it. The Arriva Birkenhead depot has 102 buses with a capacity for 175.
171. Mr Foster agrees that the only depots from which it is practicable to serve the local Chester market are within a limited, out of service drive time from Chester, which he in due course put at being an approximate 30-minute such drive. He can, therefore, be said to favour, as a relevant depot-identification starting point, a notional isochrone of approximately 30 minutes. He therefore adopted what might be regarded as a more flexible approach than Dr Niels in identifying the depots from which an economic operation into Chester is practicable. In identifying them he carried out certain costings in order to test the extent to which they could economically operate into Chester, although he did so only in relation the Arriva depots. His calculation was that the revenue per bus in Blacon and Saughall is £32.45 an hour, whilst the cost of operating buses into Chester from (a) Hawarden, was £20.09 per hour, and (b) from Birkenhead, was £25.03 per hour, which reflects the important fact that the cost of operations from Birkenhead is higher than from Hawarden. Mr Foster’s market includes the same three Arriva depots that are in Dr Niels’s market. He also included two further Arriva depots, namely those at Birkenhead and at Winsford. He therefore included five Arriva depots in his original market, all falling with his eight administrative districts. In his fourth report, he also included Arriva’s Oswestry depot, one lying outside them. In that report he is said to have advanced what Mr Brealey characterised as an alternative (and also unpleaded) case under which the geographic market is simply represented by a line around those depots that can supply the Chester focal market, including the five Arriva depots (Hawarden, Runcorn, Wrexham, Winsford and Birkenhead).
172. Mr Foster further explained as follows the rationale for adopting the eight districts as comprising his market. Arriva can, for example, provide services into Chester from its Runcorn depot. If it is going to consider whether to switch resources from that depot to Chester, being resources that would otherwise be providing services in other areas, it will have to consider not just what is happening in Chester but also what is happening in those other areas, which Mr Foster identifies as comprising the eight districts. Arriva’s decision (and that of any other operator) as to whether to move resources will be coloured by that consideration; and therefore the bus services provided by bus operators from more remote depots in those districts must be brought into account in the identification of the geographic market since they will or may exert competitive constraints on the actions of other operators within those districts. I have explained how in his fourth report he went further and included 1,303 hours for operators (including Arriva) from depots beyond those districts. He did not, however, go to what might perhaps be thought the logical length of including all depots outside the administrative boundaries which provide bus services within them. His explanation for his restraint in that respect was that, if that were the right approach “you could sort of go on for ever increasing the geographic area.” He said he had to draw the line somewhere and had done so (with the imprecise exceptions just mentioned) at the district boundaries. Mr Foster’s overall approach can, therefore, be said to carry with it difficulties of definition and identification, of which one is that the choice of district boundaries for marking what ultimately emerged as only the approximate limits of the geographic market is arbitrary, those boundaries having no economic relevance to the operations of the bus market and no relevance for competition considerations.
173. Dr Niels was cross-examined as to the way in which, and why, he had arrived a rigid 30 minute isochrone by which he identified the market. His reports did not explain why he had chosen 30 minutes, which might be thought an odd omission in respect of something so central, but he explained it in his oral evidence. It was that the time constraints for preparing for the trial did not permit him to make a detailed assessment of the economic profitability of using remote depots for services in Chester. He had, however, some discussions with colleagues at Oxera, the economics consultancy of which he is a director, which threw up examples of the approximate length of dead runs in the bus industry and indicating that they did not normally go much over 25 or 30 minutes. That was confirmed with Martin Robinson of Arriva, who told Dr Niels that dead runs are not all that common and that “30 minutes is sort of, well, really the maximum you can do this over.” He also spoke to Mr Hind, who I presume (although Dr Niels did not say) said much the same. Dr Niels was forming those thoughts whilst still preparing his first report; but before he had finalised it, he saw Mr Foster’s first report, from which he “was actually greatly encouraged to see that Mr Foster had independently come to the view that 30 minutes is a relevant cut off point.” In that report Mr Foster had of course favoured a “not more than” 30-minute limit, although he later departed from that. Dr Niels’s evidence was that Mr Foster’s opinion “kind of sealed it for me. That is why I stuck to 30 minutes.” He also made it clear that in any event the choice of a precise dead run time, whether 30 minutes or a few minutes more or less, was anyway not critical because he always foresaw that he would be doing sensitivity analyses on the assumption that the right dead run period was longer or shorter by a few minutes; and he did just such analyses. He knew that the effect of increasing the isochrone would be to bring more depots into account, including Birkenhead. On that basis, his favoured 30-minute cut off point was not, therefore, likely to be of critical significance of itself, at least if the market shares thrown up by an extended isochrone did not disclose a materially different picture. I comment that none of Dr Niels’s discussions about this matter was recorded in disclosed notes, and nor had he disclosed until cross-examination how he had arrived at his 30-minute period. That is the sort of shortcoming for which Mr Sharpe was ready to criticise Mr Foster – yet it was ultimately (as Mr Sharpe would have it) the unqualified Mr Foster whose opinion sealed the qualified Dr Niels’s own opinion on this particular matter.
174. The part of Mr Foster’s first report which so influenced Dr Niels was paragraph 5.1.24, where he set out a table setting out possible “dead running” exercises between various depots and Chester city centre in terms of mileage and time taken. It was compiled using Microsoft’s “MapPoint Europe 2004”, with speeds varying from 20 mph to 50 mph, according to the type of road. Mr Foster tabled journeys from 12 depots (including Birkenhead and Winsford, both outside Dr Niels’s isochrone). The distances and times ranged from 6.4 miles and 13 minutes (Hawarden) to 31.6 miles and 52 minutes (Rhyl). The Runcorn, Birkenhead, Winsford distances and times were, respectively, 17.7 miles and 31 minutes; 18.2 miles and 32 minutes; and 19.2 miles and 34 minutes. Dr Niels included Runcorn within his 30-minute isochrone.
175. To the question why, having been comforted by Mr Foster’s report, and seeing that Birkenhead was only two minutes drive-time over Dr Niels’s 30-minute limit, Dr Niels nevertheless excluded it, his answer was to the effect that he had chosen to work on the basis of a 30-minute limit, and so to make a local exception to that approach simply so as to bring in Arriva’s Birkenhead depot was an unprincipled approach to market definition. In any event his assessment was that Mr Foster’s own calculations showed that it was not economic to use Birkenhead as a depot for the provision of local services in (as opposed to) Chester, and that this was so even if allowance was made for interworking from Birkenhead. He said he “took 30 minutes independently, sort of before looking at who was actually then in or out, and then I did my sensitivity analysis and considered who was in or out.” He chose 30 minutes as the boundary and then did a sensitivity analysis around it. One variation was to increase the isochrone to 35 minutes. That was obviously sensible and even Mr Hind accepted in cross-examination that there was nothing magic about a 30-minute cut-off and that a 32-minute dead run could not be excluded. The effect of the 35-minute isochrone was to include (inter alia) Birkenhead (with 102 buses), a Warrington Borough Transport depot (31 minutes from Chester, 115 buses) and a Halton Transport depot (also at 31 minutes, 60 buses). The outcome was that Arriva’s market share remained the same, at 22%. Dr Niels also did a test with a 25-minute iscochrone, which showed Arriva to have a market share of 24%. The claimants criticised this sensitivity analysis as being insensitive. Their point was (or included) that the correct adjustment he should have made was a special exception to the isochrone so as to include Birkenhead but to exclude Warrington and Halton, from the geographic market. In his first report Mr Foster had accepted that “[a] greater claim might be made for including the district of Warrington in the market area, if it was not outside the 20 mile radius (30 minute travel time) within which economic operation appears feasible.” He then made some general points about the character of the Warrington area, none of which suggested that it would not be economic to operate from it into the Chester market. He repeated the point in his second report, adding (although I do not understand him to have had the figures) that the costs of operation from Warrington “are likely to be around 50% or more than Hawarden’s cost levels if it were to choose to operate local services in Chester.” Whatever may be the position in relation to Warrington and Halton, Arriva’s case, supported by Mr Hind, is that because of the relatively high costs of the Birkenhead operation, it is anyway not economic to operate local services within Chester from Birkenhead, a matter to which I shall return.
176. Dr Niels was criticised in cross-examination for adopting a rigid 30-minute isochrone, a criticism that should perhaps be tempered by the fact that he could be said to have followed Mr Foster’s own original approach. He was criticised for determining his isochrone by using lower average bus speeds than could lawfully have been used, the point being that the choice of a higher average speed, where the type of road permitted, would have resulted in the inclusion of Birkenhead and Winsford in his isochrone. I find it would, although his choice of a maximum speed of 50 mph was the same as Mr Foster had used for his first report. He was criticised for using a particular starting point for his isochrone (the postcode for 45 addresses in Northgate Street, Chester), the point being that it had the potential to result in errors at the other end. Dr Niels was sensitive to these criticisms and, whilst he did not accept them, he carried out further sensitivity analyses to take account of them. He moved the centre of his isochrone to each of Saughall and Blacon. At 30 minutes, the effect was to increase the Arriva market share to a maximum of 26%; and, at 35 minutes, to a maximum of 31%.
177. There was equal criticism of Mr Foster’s choice of market. It is said that his choice of the eight districts was wrong. It included depots from which he conceded it was not economically feasible to operate local bus services in Chester, but the bus hours in respect of these services were included in his market share assessment. It is said that Mr Foster’s imprecise extension of the market beyond the eight districts made a wrong case worse. I have summarised Mr Foster’s explanation for extending the market beyond what I might call the economic depots in the way he did. Dr Niels disputed the justification for such an approach. His opinion was that when using supply-side substitution as a basis for market definition it is a mistake to include all geographic areas into which suppliers can substitute regardless of whether this is towards or away from the focal market, in this case Chester. To commit such a mistake is to result in an overly broad market, since only supply-side substitution towards the focal market is relevant to capture competitive constraints on that market. He refers to it as being well known in competition policy. He says that Mr Foster committed that basic mistake.
178. In addition to the identification of the relevant market, there was an issue as to the right metric by which to measure the respective market shares of the bus operators in whatever the right market might be. Mr Foster adopted bus hours. His theory, put simply, is that each bus hour costs wages and other costs; and, on the footing that the bus company is making a profit, it is likely that its revenue will exceed its costs for each hour. His position is, therefore, that, absent access to accounts which might provide reliable information as to an operator’s turnover in a particular market, bus hours provide the best proxy guide to its turnover and thus to its market share relative to other companies. Bus hours therefore serve as a proxy for revenue, and revenue determines market share. Mr Foster did no analysis of CCT’s accounts in order to make good his proposition about the relationship between bus hours and revenue. Nor did he produce any data in relation to other companies with a view to supporting the theory, no doubt because none was available. He accepted that if he is wrong that bus hours are a good proxy for revenue, then his market share figures would be wrong. He did not use a mileage metric, apparently in part because that would have been likely to have resulted in giving Arriva a larger market share, because its inter-urban services clock up a large number of miles each day. I do not understand that explanation, since one might think that the prior, more relevant, consideration was whether a mileage metric was the appropriate one: and if it was, Arriva’s performance under it could not be said to rule it out. (A bus mileage metric was in fact originally pleaded by Arriva as the best proxy for passenger numbers or revenues, but it changed its mind). Mr Foster accepted that the Competition Commission had sometimes used a mileage metric and had also used turnover. In the Monopolies and Mergers Commission Arriva plc and Lutonian Buses Ltd Report (Cmnd. 4074) the view at paragraph 4.19 was that passenger miles is the best measure of the supply of local bus services, but the problem is that bus operators do not (or at least did not then) collect the necessary information. Registered mileage was regarded as having a number of drawbacks as a measure of supply, but can provide a useful, if approximate, measure. Turnover was also regarded as a good indicator but has the drawback that it is difficult to identify it for particular areas or routes since it has to take into account a variety of considerations. Mr Foster accepted the Commission had never used bus hours.
179. The bus hours metric received no support from Mr Hyslop. His evidence, by contrast with Mr Foster’s, was that it is “the resources available to an operator to commit to a particular market, which governs its ability to compete in that market.” Mr Hyslop’s view, that of a man with great practical knowledge and experience of the bus industry, is that it is the capacity of a company measured by reference to its depots, the size of its bus fleet and staff which is the key to the ascertainment of its market power – and his own assessment of Arriva’s market power was based on the fact that it has (so he asserted) four depots in the area and 250 buses, all of which are capable of being focused on services within and around Chester. He asserted that these resources are 2.7 times more than those available to CCT. Mr Foster ultimately agreed that fleet size is one measure of market power, but disagreed that it was the best. He maintained that bus hours provide the best guide because they reflect the size of the fleet and a company’s financial ability. He pointed out that the difference of approach between him and Mr Hyslop showed how independent his opinion was.
180. Dr Niels’s adoption of bus numbers was in line with Mr Hyslop’s approach – namely, that the number of vehicles, or fleet size, available to would-be competitors is the more appropriate metric. He explained that there are roughly three categories of market shares – sales value, volume and capacity. He regarded bus hours as a measure of volume, or activity. It is not a monetary measure. He agreed they are related to costs, including labour, maintenance and fuel costs but considered that they provide an unsound revenue guide. First, because the link between bus hours and costs is not straightforward; secondly, because the link between costs and turnover is not uniform. He agreed that bus hours were more closely related to turnover than bus numbers. He also agreed that, if the relevant market were being defined by reference to demand-side substitution, turnover could be regarded as the best metric for measuring market power. But his opinion was that where, as here, the market is being defined by reference to supply-side considerations, capacity is the best metric for measuring market power. The relevant inquiry is what operators are capable of doing, not what they are actually doing: the right metric depends, he said, on the nature of the case. He was also of the opinion that mileage was not a good proxy for revenue. He agreed that, subject to having all the relevant information, he could have done a bus miles count as well as a vehicle count, but said he did not do both because from the outset he regarded capacity (measured by reference to a bus count) as the relevant metric. He recognised that even that is not perfect, since the count may include buses that are being used intensively and others that are being mothballed.
181. The range of vehicles Dr Niels had included in his bus count exercise totalled 655 and was challenged. He had included Anthony’s Travel as having 3% of the market. That is a coach company covering Manchester, Liverpool, Merseyside, North Wales and beyond. He included Pats Coaches, also with a 3% share, an operator specialising in coach tours in the UK and on the continent. He included Matthews/Protours, with a 2% share, a coach company operating high specification luxury coaches. He included Selwyns, an operator of National Express coaches, with a 10% share. Mr Hyslop’s evidence, which I accept, is that for various reasons coaches such as these companies use are unsuitable for local bus services in Chester. Dr Niels’s response was that these companies also offered local services in the area and could switch the vehicles they had, or else add to them, in order to compete in the Chester market.
182. There was also criticism the reliability of Dr Niels’s bus count. He took the number of CCT’s buses, 84, from the particulars of claim. Arriva provided him with the numbers of its and First’s buses in the depots in the area. He took the numbers of buses owned by some 13 other, smaller, operators from the records of Vehicles and Operators Services Agency (“VOSA”), a VOSA licence being required for a bus, although he recognised that there can be a difference between the number of VOSA licences for a particular depot and the number of vehicles actually in the depot. He did not carry out a count of the buses in the depots of those other companies. The cross-examination revealed that the exercise that Dr Niels carried out was imperfect, and reflected probable inaccuracies as to the true capacity of some of the smaller operators. It emerged that Dr Niels had no real understanding of the workings of the VOSA licensing system and he accepted in cross-examination that the number of VOSA licences themselves do not give a good indication of capacity. For Dr Niels to have used the VOSA licensing system to measure the number of vehicles in the depots of some companies but actual bus numbers to measure the capacity of others was to adopt an inconsistent approach. In his defence, however, it can be said that he probably did the best he could with what he had. This case showed the inadequacy of the adversarial system of litigation for an inquiry into markets and market shares.
183. There is, I consider, no need to detail further the criticism of Dr Niels’s bus count, in particular the introduction by the claimants of the suggestion that The Little Red Book gave a more reliable guide to bus numbers, and showed bus numbers in excess of VOSA numbers. Dr Niels did not accept this criticism (he described The Little Red Book as a little red herring), or the criticism of the types of vehicle he had included in his market share exercise. Again, despite that, he carried out sensitivity analyses to test the effect on his assessment if the criticisms were well founded. The application of those adjustments to his basic 30-minute isochrone pushed the Arriva market share to a maximum of 31%; and, when applied to the 35-minute isochrone, a maximum of 27%.
184. Dr Niels was disposed to agree that the depot capacity figures in a table produced by Mr Foster in his fourth report – which might exceed the actual numbers of buses in any depot – provided a relevant way of assessing market shares, although he disagreed with the geographic area covered by that table. I understood him also to agree that it might in principle be a more sensitive assessment of market shares, because he had earlier accepted that merely looking at current bus numbers could underestimate the true scope for supply-side substitution. That is because, subject to the capacity limit, an operator can add to the buses in any particular depot. Mr Hind’s evidence, for example, was that Arriva buys between 400 and 500 buses a year and that Arriva could easily slot another 60 buses into its Hawarden and Birkenhead depots if needed, which Dr Niels agreed was a relevant factor to take into account in assessing dominance. But he said did not distinguish Arriva from other operators, who could also add resources to their existing operations. He made the point that in order to enter the Blacon/Saughall market in Chester no more than 10 to 12 buses are required. Other operators, like First, and also the smaller ones, like GHA, have the capacity to enter that market. Mr Foster’s table showed that First’s three depots in his favoured geographic area had capacity for 132 buses, and (as I find – there was some debate about this in Dr Niels’s cross- examination) had spare capacity for at least 22 buses. But even if Mr Foster’s depot capacity table was applied to Dr Niels’s market, Arriva’s market share was still at most about 32%, or 26% if a correction was made to the figure for the capacity of the Wrexham depot.
185. As I have said, the Birkenhead depot was regarded as a sensitive subject on both sides. The claimants were critical of the fact that it was not included in Dr Niels’s market, although it may be that they might not have been similarly critical if the depot had been owned by First. Mr Hind’s evidence, however, was that whilst it was feasible to interwork services from Birkenhead so as to provide services through Chester, he would not use it as a base to supply local services within Chester because the wage rates and other costs of operating the Birkenhead depot are higher than those of other depots and would make it prohibitive. In addition, Arriva also has its depot at Hawarden, a mere six miles from Chester, from which Arriva can operate at a materially lower rate (£1.30 an hour on drivers’ wages). There is also the problem that if a bus from Birkenhead to Chester is then devoted to providing an internal city service, another bus has to be found to do the first bus’s return journey to Birkenhead. He said, and I accept, that interworking from Birkenhead so as to provide local services within Chester was “just something we would not think of, regardless of the operational difficulties.” Mr Foster accepted that that was Mr Hind’s present state of mind about Birkenhead, but asserted it did not follow that Birkenhead cannot be used to provide services into Chester. Even he accepted that it was only economic to operate services within Chester from Birkenhead if there was no competition in Chester. He accepted that if there was competition there, it was not economic to do so. There is something odd about Mr Foster’s inclusion within his market of a depot from which it is only possible to operate economically if there is no current competition in Chester. Mr Sharpe’s submission was that it is the post-competition revenue that is the relevant one when assessing the relevant market, not the monopoly revenue.
186. Whatever the correct analysis of Arriva’s market share, Dr Niels’s opinion was that even if it has a share as large (or even larger) than that assessed by Mr Foster (53.5%), it still does not follow that it enjoys any relevant dominance in the market. That is because the low entry barriers to the market enable any operator to enter it. There is ample scope for supply-side substitution and the market is a contestable one, as Mr Foster accepted. If there is a profitable opportunity in it, it is easy to enter it without making a major commitment, and it is equally easy to exit from it. To the proposition that that meant that it was easy for a company with a high market share to predate, Dr Niels disagreed. His point was that any would-be predator might well succeed in driving an incumbent operator out of business, but it would not necessarily be able to reap subsequent monopoly profits because a like would-be predator could then also enter the market. In this context, Dr Niels accepted that in considering the ability of any operator to contest the Chester routes it was necessary also to have regard to that operator’s ability to enter, and establish a base in, the geographic market in the first place. Theoretically any operator, even if not already based in the geographic area, could mount a challenge to the Chester routes. But Dr Niels agreed that any such operator would need first to establish depot space within the geographic market, which would constitute a potential barrier to entry to the market. But he pointed out that no more than about 10 to 12 buses were needed to mount a challenge to the routes in dispute and that it is relatively easy to find parking space for such a limited number of vehicles. He referred to the challenge to CCT earlier mounted by South Lancashire Transport, which had entered on a small scale and had rented a parking lot next to the railway station. He accepted that Arriva’s undisputed depot capacity in the geographic area gave it market power, but not power of a degree that it would give it dominance.
187. It was put to Dr Niels that a further consideration to take into account in assessing an operator’s dominance or otherwise was whether its prices were higher than its competitors. That was said to be an indication of an operator’s ability to act independently of competitors and, ultimately, of consumers. It was pointed out that from 2004 to 2007 CCT had merely increased its fares by 8%, whereas Arriva had increased its Chester service fares by over 20% over the same period. CCT had of course made losses over that period, which may not be the best starting point for a comparison of relative fare increases. Dr Niels’s response was, first, that Arriva’s fare increases had not been of the same amount across the board, and the fare increases for its so-called multi-journey tickets had not been of the same order; secondly, that the increases were not out of line with average fare increases in the bus industry; and, thirdly, it was necessary also to take into account costs increases over the same period. Dr Niels admitted he had not carried out a comparison of price increases between bus operators, but said that that would have involved an assessment of their respective profitability and he said, and I accept, that it would have been impossible for him, or anyone, to have done such an exercise in this case.
Conclusion on dominance
188. I have not attempted to detail, or even summarise, all the many points made by the experts in their eight reports but I have attempted to identify the main areas of dispute the subject of inquiry at the trial. I take the view that the starting position is that it is for the claimants to prove their case as to what the relevant market is and what Arriva’s market share in it is. They have to do that in a cogent and principled way and I have to be satisfied there is compelling justification for the case they seek to make.
189. I have concluded that I am not satisfied that the relevant market is that for which Mr Foster contends. Nor am I satisfied that he has adopted the appropriate metric for a calculation of market shares.
190. As regards Mr Foster’s primary market, the eight districts, I hold that to be wrong in principle. First, it is arbitrary. There is no rational basis for regarding the districts as marking it; and there is no rational basis for the further arbitrary, and undefined, extension of the market beyond those districts. Secondly, I accept Dr Niels’s opinion, whose evidence I found authoritative, persuasive and convincing, that when identifying a geographic market by reference to supply-side considerations it is a mistake to include all geographic areas into which suppliers can substitute regardless of whether this is towards or away from the focal market; and that only supply-side substitution towards the focal market is relevant to capture competitive constraints on that market. Dr Niels’s opinion is that Mr Foster has committed the error of overlooking this principle and so has erroneously promoted a broader geographic market than is justified. I am satisfied that Dr Niels has greater experience than Mr Foster in considering issues such as these and I accept his opinion.
191. As regards Mr Foster’s “bus hours” metric, I also regard this as wrong in principle. Mr Foster accepts it has not, so far as he knows, been used before. He produced no material showing a reliable link between bus hours and turnover and I regard the metric as at least an unreliable proxy for turnover. But even if it is to be regarded as a proper such proxy, I also accept Dr Niels’s opinion that such a metric is not an appropriate one for measuring market power in a case where the market is being determined on a supply- side basis, even though it may be where it is being determined on a demand-side basis. Turnover measures what operators are actually doing, not what they are capable of doing, whereas in a supply-side case the inquiry is what they are capable of doing. Dr Niels’s opinion, which I regard Mr Hyslop as sharing, is that in such a case capacity is the best metric for measuring market power. I accept that opinion and agree that a vehicle count is one way of measuring it. I understood Dr Niels also to agree that an alternative way is to measure the bus capacity of particular depots. I find that Mr Foster used the wrong metric in order to ascertain market shares in a wrongly identified market.
192. Mr Foster’s alternative market is said to be raised in his fourth report, namely a market represented by a line around those depots that can supply Chester, including the five Arriva depots that Mr Foster includes as the starting point for his primary market. I do not myself read that report as advancing such an alternative case. That case is anyway not pleaded, although the claimants sought and obtained other pleading amendments at the beginning of the trial and could have sought an amendment to make this alleged alternative case as well, but did not. I therefore see no reason to consider it. In any event, I regard it as too imprecise. I am also not satisfied that Birkenhead should be included in the market. It appears to be accepted that if it is not economic to provide local bus services within Chester from Birkenhead, it can properly be excluded from the market; and I find that it is not so economic. That was the thrust of Mr Hind’s evidence, which I accept; and I accept Mr Sharpe’s submission that the relevant question is as to the revenue that could be earned from a Birkenhead operation on the footing of existing competition in Chester.
193. I do not, therefore, accept Mr Foster’s bids for the identification of the market and market share. By contrast, I found Dr Niels’s approach to be a principled and cogent one. His use of an isochrone for the determination of the market is, I accept, a well established technique. His 30-minute isochrone produced, however, a particular market about which the claimants complain because it fell just short of Birkenhead. Their stance was, therefore, that he should have made a local exception to the operation of the isochrone and extended it to include Birkenhead. I regard that suggestion as unprincipled. Either the isochrone correctly identified the boundaries of the market or it did not. If it did, there was no case for a Birkenhead extension. But since even Mr Hind sensibly accepted that a cut-off point of 30 minutes had nothing magical about it, then it is obvious that the way to deal with the Birkenhead point was not to make an unprincipled local exception but to make a principled enlargement of the isochrone so as to reflect a longer drive time. That is what Dr Niels did and it had the effect I have summarised of including Birkenhead and other depots, with no change on the Arriva market share. I can see nothing wrong with that: and if the claimants wish to say that Warrington and Halton should be out, as to which I take the view that there is no convincing evidence, I hold that so should Birkenhead. In any event I regard these considerations as being beside the mark: as I said earlier, the claimants do not advance a “Niels variant” as an alternative case. In my judgment Dr Niels’s approach was sound and consistent, as well as including the use of an appropriate metric for measuring market share. I have summarised the effect of the various sensitivity analyses he conducted so as to take account of the claimants’ criticisms of his exercise. None produced a market share for Arriva in excess of 31%. The use of Mr Foster’s depot capacity figures produced a share of at most 32%.
194. There is no question of market shares within the range just summarised giving rise to any presumption of dominance in the relevant market. I find, therefore, that Arriva was not so dominant. If, contrary to my view, Mr Foster is right that Arriva has a market share in the order of 53%, then whilst that might give rise to a presumption of dominance in the relevant market, I would still not be prepared to conclude that Arriva is in fact so dominant. Dominance means, as explained in Hoffmann-La Roche & Co AG v. Commission of the European Communities Case 85/76 [1979] ECR 461, paragraph 38:
“… a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained in the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers, and ultimately of the consumers ….”
195. Dominance must be proved in both the product market and in the geographic market. I have found that the claimants have not proved that the relevant product market is confined to bus services. If the product market is wider than bus services, Dr Niels’s unchallenged opinion is that that would serve to reduce Arriva’s market power. As for the geographic market, the extent to which a large market share will be reflected in a status of dominance will vary from market to market. In the case of the local bus services market the low entry barriers enable any operator to enter it. There is ample scope for supply-side substitution and the market is a contestable one, as Mr Foster accepted. If there is a profitable opportunity in it, it is easy to enter it without making a major commitment, and it is just as easy to exit from it. Anyone wanting to present a challenge on the three routes in dispute need produce no more than about 12 buses. South Lancashire Transport mounted just such a challenge to CCT. There is no evidence satisfying me that, were Arriva to enter the market in Chester, it would be able to operate to any substantial degree in a way that was independent of any competitor. It will be constrained from raising fares by the risk that a competitor will enter the market and undercut it. As regards customers, there is no evidence that, for example, Arriva has been able to increase its fares independently of rising costs. Abuse
196. In view of my conclusion that Arriva is not dominant in the relevant market, no question of abuse arises.
The claimants’ damages claim
197. This does not arise but I should make my findings on it. The claim is based on the proposition that Arriva’s wrongful actions have caused, or will cause, the Council to incur additional expense by reason of the delay they have caused to the sale process and the jeopardy in which they have put that process. The total claim is for £72,067.53, including VAT.
198. The first head of claim was for additional DLA costs of £52,925.53 including VAT. The only witness who sought to prove it was Mr Cassin, and he relied on a letter dated 7 February 2007 from DLA to Mr Taylor of the Council. The letter was apparently Mr Painter’s work. It gave a generalised explanation of how DLA’s original fixed fee of £138,000 plus VAT was likely to have to be increased to £195,715, plus VAT and disbursements. It contained no detailed breakdown of how the additional costs had been estimated; and the claimants’ decision (presumably on advice) that Mr Cassin was the man to prove this head of claim is surprising. He could not answer any questions about it, save to agree (as he had acknowledged in his sixth witness statement, following Mr Painter’s acknowledgment in his letter of 16 February 2007) that in one respect it was an over-estimate by £12,672; and the claimants called no-one from DLA who could answer any such questions. Mr Cassin also agreed that, to the extent that the letter of 7 February 2007 suggested (absurdly) that DLA’s costs of advising in relation to the comfort letter were something that could be laid at Arriva’s door, the suggestion was unfounded. In his letter of 16 February 2007 Mr Painter admitted that he had compiled the figures in the earlier letter in haste but he was not prepared to defend his hurried figures in the witness box: and Mr Cassin was unable to do so for him. That was no way to prove a head of claim such as this, and the claimants failed to prove it. I add that in the course of further cross-examination Mr Cassin agreed that, in view of the fact that the sales process had generated only one bidder, it was likely that material parts of the work covered by DLA’s original fixed fee schedule of work would not have to be carried out at all. If so, one might think their fee would be reduced accordingly, although Mr Cassin was not prepared to agree that. The relevance of that is that the claim for additional costs was only for costs over and above that fixed fee. If, however, the total fixed fee properly fell to be reduced, that would complicate the question of what, if any, additional costs were recoverable from Arriva. I heard no argument on that and do not propose to say any more about it. I find that the claimants did not prove this particular head of their claim.
199. The second head of claimed additional costs was TAS’s additional fees of £18,142 including VAT. Mr Cassin sought to make good that head of claim by producing a letter dated 7 February 2007 from TAS’s Managing Director, Mr Grant. That simply made a broad estimate of the likely additional costs. It took a mid-point figure in the £10,000 to £15,000 range in respect of repeat work that might have to be done, added it to a figure of £2,940 for four hours of word done by Mr Foster and added VAT. The letter admitted that Mr Grant had not carried out any detailed analysis of any work that TAS might have to repeat – time had not allowed that: all he had done was to produce his so- called “best estimate.” TAS’s terms of service required it to keep records of the time spent by each of its personnel in providing its services, but Mr Cassin failed to produce any such records in relation to Mr Foster’s four hours of work. The claimants’ attempt to prove this head of loss was as misconceived as it was in relation to proving the extra DLA costs. Mr Cassin was unable to answer any questions on the topic. He could and did no more than produce the TAS letter. Mr Grant did not give evidence. The claimants’ policy appears to have been to ensure that they did not call a witness who knew anything about the relevant facts: far better instead to call one who knew nothing about them. It is a novel way to try to prove a case, but it is not one to be recommended.
200. The third head of wasted expenditure, which came to the conveniently round figure of £1,000, was for various alleged outgoings. The figure was taken out of the air, it bore no relation to anything, and not a penny was made good. I reject this head of claim as well.
Result
201. The claim will be dismissed.