FLOURMILLERS’ CASE.

Southland Times, Issue 19394, 7 November 1924, Page 6

FLOURMILLERS’ CASE.

RESTRAINT OF TRADE ALLEGED

COUNSEL ADDRESS THE COURT.

DO THE BENEFITS OUTWEIGH THE DISADVANTAGES?

NINTH DAY’S PROCEEDINGS

(Our Special Reporter.) DUNEDIN, November 6. The flour-milling case, in its ninth day of hearing to-day, is nearing the end, and will probably be concluded to-morrow. The Crown claim is for £5OO from each of Distributors, Ltd., Crown Milling Company (Dunedin), Fleming and Company (Invercargill), the Atlas Roller Flour and Oatmeal Mills (Evans and Company, Timaru), Wood Bros. (Christchurch), for an alleged breach of the Commercial Trusts Act. Injunctions are also sought to prohibit Distributors, Ltd., from acting as the sole agents for the other defendants for flour, bran, and pollard. The costs of the action are also claimed. Altogether thirty-two witnesses have been called in support of the Crows case, and twenty for the defendants. MR CALLAN’S ADDRESS. Mr Callan formally moved for judgment against such of the defendants for the penalties and cost set out in the statement of claim. In support of his motion he, firstly, pointed out that it had been proved that a combination of millers had been established to control the milling industry throughout New Zealand. This was admitted by a passage in the documents. If anything further was required the agreements between Distributors, Ltd., and the millers were before the Court. There was also evidence as to what had happened. It was therefore clear that all the defendants were parties to the combination. Under Section 5 of the Statute, it was sufficient if the Crown established that the control aimed at, not necessarily established, was contrary to public interest. In this particular case the control had been completely accomplished. The point at issue under the section was whether the control aimed at or attained was contrary to public interest. These words, “contrary to public interest,” were looking at the potentialities of a scheme in the future, not to its effects. The section referred to conspiracy. If the scheme before the Court was so inherently vicious to threaten the public interest potentially, it was a very grave thing, and the Act should be put into operation. The evidence adduced as to the operations of the scheme should be considered in the light that the Statute took of anything of that nature. The ultimate inquiry of the Court was as to the nature of the control and its potentialities, not as to its effects. In the case that he found it convenient to refer to as the sugar case the judgment set out, inter alia, that all to be considered was the nature of the control, and whether or not it was contrary to public interest. It was perfectly true that where a control or combination had been in operation for some considerable time before it was brought before the Court it would be very difficult to avoid considering its effects. The obvious answer of the defence in such a case was that the defendants had not yet done anything to show that it was inherently vicious. Therefore the Crown had brought evidence before the Court to show that in the time it had been in operation Distributors, Ltd., had manifested its inherent viciousness.

CONTRARY TO PUBLIC INTEREST.” Counsel asserted that Distributors, Ltd., was contrary to public interest because of its inherently vicious terms of control. He would also say that the defendant Distributors, Ltd., was contrary to public interest because it had been accomplished by breaches of Section 3 of the Statute. If that were established, the Crown was absolved from proving detrimental tendencies, and it would be no defence to establish that the combination was an actual benefit to the public. Learned counsel for the defence (Mr Myers) had stated that an attempt was made to bring the case within the sugar case, and that no such argument had been foreshadowed in the Crown pleadings. The Crown was there to prove that Section 3 had been broken, that a monopoly had by those means been accomplished, and that the case was within the sugar case. Mr Callan referred to the Australian Coal Vend case, in which, he said, the agreement was for a body of colliery proprietors who had been engaging in competition to fix prices and not to go under that price, and the quid pro quo was a moneyed effect in the business. The difference between that scheme and the present one was that the coal agreement was a profit-probing one, whereas the present one was intrinsically more noxious. The I’rivy Council judgment in the coal case would not have been before the New Zealand Court of Appeal in the sugar case, judgment in the coal case being given at Home only five days before the sugar case judgment. BREACH OF COMMERCIAL TRUSTS ACT.

It was contended, added counsel, that the breaches complained of in the present case were on the form of the agreement itself, and had been amplified by the evidence. Learned counsel went on to show how it was contended the agreement came under the various sections of the Commercial Trusts Act. Apart from the agreement, the miller was free to dispose of his flour how, when, and w’here he liked, subject to the Government maximum price. Distributors, Ltd., however, said the miller had to sell his flour through them, had to pay their commission, and that in consideration it gave them certain things. It gave them the assurance of a current price, fixed for the whole of the portion of New Zealand over which Distributors, Ltd., had control. Under the agreement the organisation did the advertising, canvassing, and paid marketing expenses. The miller was given a definitely named proportion of the total sales throughout New Zealand. Under Government control or before the formation of Distributors, Ltd., there was no such control of the millers’ output. It was contended that when the millers were competing with each other and selling flour where they could the better flour commanded a better market than the flour that was not so good. Never before had an attempt been made as in this case to dictate to the public of this country through the bakers what flour should be used and in what proportions. ALLEGED EXCLUSIVE DEALING. Counsel argued that the promise of a sole agency by Distributors, Ltd., was a promise of exclusive dealing, ar.d brought the defendants within the meaning of the Act. It was stated by Mr McDonald in evidence that Distributors, Ltd., endeavoured to preserve for the millers their old connections, but it was contended that such a view was absolutely contradicted by the terms of the agreement. The effect of the agreement was to give the managing director a free hand to send anybody’s flour anywhere he liked. There was a trifling reservation which allowed the miller to sell five tons per month at the mill door. It was submitted that it could not be disputed that the combination was a commercial trust within the meaning of Section 2 of the Act. It had been shown that at first several millers did not want to join because they could not get the proportion they wanted, but that they had ultimately got the proportion. Learned counsel proceeded to show that the valuable considerations and rewards given by Distributors, Ltd., to the millers were in respect of dealings in goods.

THE LEGAL VIEW.

Learned counsel proceeded to quote numerous authorities to support his contention that what Distributors, Ltd., gave the miller was consideration or reward. Even if the words “dealing with” were to be restricted, however, to buying and selling, there was no doubt that whatever was- given by Distributors, Ltd., to the millers, it was dealing in goods within the meaning of Section 3. In considering the words “reward and valuable consideration” the question must be approached by the Court taking into consideration the attitude of this particular country. The wide divergence of views of promb ent economists and others entitled to give expert opinions as to the advantages and disadvantages of monopolies and free competition was noxious, and different countries took different attitudes to the modern problem of monopoly. Efforts to cope with the problem had been made on different bases. In Australie, for example, a person could not be convicted of being a member of a combine unless it were proved that he had entered it with intent to harm the public. They might have monopolies that were natural, and therefore lawful and not noxious; monopolies that came about by effort which were not illegal so long as they were not contrary to public interest; and, lastly, the monopoly that came about through the exertion of pressure on those affected and (or) the offer of rewards to them. He submitted that Parliament intended that the Statute’s reference to rewards should apply to such whether offered by the buyer or by the seller. Further, he held that the defendant, Distributors, Ltd., operated as a principal, not as an agent.

QUALITY OF THE FLOUR. Mr Callan pointed out that the quality of flour continually varied. The miller, however, had control over various factors which affected the quality. It was within the control of the miller as to whether flour turned out during an accident in the mill went out to the public. Learned counsel proceeded to deal with the evidence. Mr Callan contended that the struggle for business in an open market must make for better flour. This combination, however, had removed that struggle for business. It had been said that the bakers of Otago and Southland, who had given evidence in support of the claims, were not reasonable, but learned counsel contended that it showed an attitude of courageous independence on their behalf. At the back of the Legislature was a realisation that the existence of a combine not in the public interest would have an effect on the lives and spirits of the people. The quality of the flour would be better adjusted under a free market, where the housewife would complain to the baker of bad bread, and the baker would in turn complain to the miller of the bad flour. “FULL OF GRAVE RESPONSIBILITIES.” Mr Callan referred to the powers which were vested in the managing-director of the company, and said the occupant of | that office would need to be a man of ‘ meticulously accurate mind, who had to • discharge his duties with a board of direc- ; tors, who were themselves interested parties. There was the one man agingdirector who had not been long in the service, and who had described the position as being full of grave responsibilities. Learned counsel contended that a superman was required for the office. Then there was the evidence of the Otago and Southland bakers —men who, learned counsel submitted, gave their evidence as if they had a grievance—nearly every one of whom had settled down to some particular brand, and the Southland bakers almost without exception used some northern flour in certain proportions. There could be no doubt that the operations of Distributors, Ltd., had affected those bakers in Otago and Southland who regarded their craft as an art, endeavouring to produce the best loaf possible. Jf infinite variations between different brands existed the best brand was going to command the best price under fair competition, but all that had been done away with by Distributors, Ltd. All flour was on the same level so far as price was concerned, and this must be reflected in the quality of the flour on the market. “SOUTHLAND FOR SOUTHLAND.” Learned counsel also made reference to the difficulty of getting the brands wanted, which, he said, was incidental and not accidental to the scheme. The probabilities that a man sitting in his office, whatever his gifts and his experience, could work out the requirements of different parts of the country were very slight. The resultant difficulties had been experienced in Otago and Southland. This was just where one would expect the trouble to arise, because the southern mills tended to draw their supplies from the north, where the quality of the wheat was admittedly better. Distributors, Ltd., said: “Southland wheat for Southland mills; Southland flour for Southland people. If you don’t like it, you must take it.” If Distributors, Ltd., were going to continue till 1928, the country would experience a poorer class of flour than it had known. This was inherent in the scheme. Passing to the price of flour, Mr Callan submitted that under free competition it would not .be every brand of flour that would command the Government gazetted price, and learned counsel pointed out that the existence of cutting in 1922 supported this contention. The existence of Distributors, Ltd., had the tendency to keep up the expenses, and there must be the relative reactive effects on the price of bread. If there were any substantial reduction in the price of flour the public would get the benefit. This had been proved conclusively in evidence. There was a good deal of competition among Dunedin bakers as to price now, and it would not need much to introduce more. Distributors, Ltd., were not very long in taking a step that meant that the Dunedin bakers had to pay 10/- a ton more for Oamaru flour than they had been paying for some time. BENEFIT OR INJURY TO THE PUBLIC? Continuing, learned counsel said that the defence would probably raise the argument that if there were any injury to the public, it was less than the benefit to the public. The Crown said that if any harm had been done, the defendant was guilty unless it had justification. Mr Skerrett: Has my friend a test of public interest? Mr Callan: I am afraid my friend has put me where he wished to put me.— (Laughter). Justification might be pleaded, he thought, where (vide judgment) a body existed in order to prevent the destruction or crippling of an important local industry in order to ensure the distribution and sale of the product of that industry. An organisation having little objective or both might, he thought, plead justification. Once the Crown proved a detriment, the defendants must then prove that they had rescued the public from a present danger, and that the burden of so doing was on the defendants. If it was argued that a control was necessary, it was equal to saying that the Government relinquished something that was essential to the well-being of the country. Learned counsel held that the protection of the wheat industry was for the Government and that it was an impertinence

for Distributors, Ltd., to say that this was one of the reasons for its formation. So far as the flour-milling industry was concerned, there had been price-cutting always; yet where were the bankruptcies and failures? “NO HEALTHY COMPETITION”

Mr Callan contended that the plea of the defence that their act in forming Distributors Ltd. was undertaken in the interests of the industries* concerned, was unsound because such action was not the privilege of private intervention but peculiarly the special province of the Government. The evidence produced in support of the necessity of some action being taken to prevent the collapse of the wheat and milling industries was, said counsel, of little value because there had been no proof adduced by the defence that th? industry was threatened with chaos, as had been said. No evidence had been put forward as to loss of employment by any body of men nor a ' collapse of any nature whatever. Such price cutting, as previously existed in the ; trade, was of little consequence and re- ■ presented what was to be expected under normal conditions. He would suggest that the millers had neglected their duty in the economic life of the country namely indulging in healthy competition between i themselves.

; “PEACEFUL LIFE OF STABILISATION” j Passing to the baking industry counsel ' said the bakers in many instances seemed j to be favourable to the quiet peaceful life ;of stabilisation which was possible under 1 Distributors’ Ltd. but to the ultimate I consumer such a policy was not of ad- • vantage. The suggestion that had been • prominent through the case was that because the Government had indulged in a certain amount of control, Distributors Ltd. were justified in following such a course and that the inference was that such control would have Government approval. Counsel said that never had the Government at any period affirmed the principle that control of industries was desirable or essential as a permanent policy for this country. They were merely War Regulations which it had been the policy of the Government to discontinue so soon as it possibly could, difficult as it was to get out of them once they had been entered into. Even if the scheme had been adopted from the Government, it mattered little, ( but what did matter was what they had done with it once they had brought it into operation. This agency of Distributors Ltd. could not be dealt with by regulations. It was, counsel contended, bad in its core and the only effective manner of dealing with it was to suppress it. MR SKERRETT IN REPLY. Mr Skerrett said that Mr Callan’s address was simply a panegyric of unrestricted competition. He had, he said, dealt in a most cursory manner with the advantages such 1 combinations were calculated to possess in . the public interest, and had failed to weigh ; them against the disadvantages. Atten- ; tion seemed to have been devoted to prob- ' lems of distribution and supply that had 1 existed long before Distributors’ Ltd. came. The object and purpose of the combination was not to increase profits to millers beyond what was fair and reasonable, neither was its object to limit the output of mills and drive out competitors, nor it was not intended that the millers should possess a power not previously possessed by them. The combination had not been responsible for deficiency in qualities of wheat whatever deficiencies existed in any way, but they seemed by the prose- ; cution to be held responsible even for ac- ! cidents in mills. The object of most noxlious combinations was quite contrary to that of stabilisation of prices; it was their object to receive as high a price as possible and so manipulate supplies as to drive competitors from the field, first by increase of output which they finally reduced when the field was clear, thereby bringing about . large increases of prices to the consumers. !It had been suggested that Distributors 1 Ltd. was a combination to control whol- | ly or partially the price of their output and that such control was against the pub- • lie interest, but there were more of the ! evils connected with Distributors Limited ' that characterised noxious organisations. No such character was manifest in it. Minor faults were connected with it, but every combination connoted restrictions of some kind. Such restrictions, when they outweighed the advantages, were against the public interest but if the advantages were greater than the disadvantages, then the combinations could not be considered noxious and this was a positive feature of Distributors’ Ltd., because its purpose was not contrary to the public interest. THE TEST TO BE APPLIED. ‘ What was their test ? Counsel maintained in determining that point one must consider the organisation and balance its effect in and against the public interest. That had been the view taken in the Vend case by the Privy Council which had brushed aside the disadvantages in comparison , with its greater advantages in coming to { a decision. Counsel quoted at length from i Australian judgments supporting his con- ' tention that disadvantages in a trade combination, must be tested by the compensating advantages to the public. Proceeding, counsel said it was the nature of the monopoly or control that was contrary to the public interest that had to be determined and whether the present combination in its general features was contrary to public interest. The present organisation was the successor of the Government schemes for the stabilisation cf industries. Regulations for control and stabilisation of wheat and bread industries had always been a subject of Governmental solicitude. This combination had been set on foot with the knowledge and with the cognisance of the Government and had from the first had the recognition of the Government and its assistance. It would be apparent that the Government concern would not be in the interest of the millers but more particularly in regard to those of the consumers. All agreements had been submitted to the Government. ATTITUDE OF GOVERNMENT. Counsel quoted from a speech by the Minister of Agriculture showing the necessity of Government assistance to the wheat growers’ industry. Mr Leadly, in evidence, had shown that the Government was prepared to assist the agreement between the wheat growers and Distributors’ Ltd. by continuing the embargo on importation of wheat. Counsel further gave a statement by the Minister in April 1923 showing the disinclination of the Government to interfere in any agreement which had for its effect the stabilising conditions in ihe wheat growing industry. The scheme could not have existed without the maintenance of the embargo and it was clear that the Government had abstained from their expressed intention of removing the embargo in order that the agreement might not be hampered in any way. WAR REGULATIONS. Mr Skerrett added that the Government War Regulations were more than mere war measures, because in 1914 the condition of the wheat industry was extremely precarious and the regulations were designed for more than the purposes of arranging supplies under exceptional conditions under Distributors, Ltd.’s control. The Government fixed the price of wheat under an agreement entered into with the knowledge and consent of the growers. Under this scheme there were certain advantags not apparent when the Government had complete control. During Government control there had been limitations of output, but under Distributors, Ltd., there had been no such restriction, because the millers were perfectly free to purchase as they chose; The object of joint merchandising of goods such as existed in meat and dairy control, was not to gain increased prices, but to regulate supplies more equitably. There had been no arrangement by Distributors, Ltd., to reduce the sale of flour and what disadvantages did occur were not contemplated under the agreement and were merely accidental.

PRICE-CUTTING.

Counsel referred to the conditions in 1922 when price cutting occurred in consequence of free warrants of purchase, consequent upon over-stocking by millers. The prosecution had attempted to discount that price cutting but the evidence of Wellington bakers showed serious concern over this price cutting. Whatever price cutting occurred previously had been negligible but that referred to had been serious. He called attention to the intervention of the master bakers, who had seen the dangers of cutting and had taken an active part in the formation of Distributors, Ltd., as a part of a policy of self-protection. For a time, under price cutting, the public might get the advantage, but the final result was of no benefit because this was invariably followed by mergers that in the end were diametrically opposed to the public interest. Touching on the agreement of 1922, counsel said that the effect immediately had been a reduction of £1 per ton in the price of pollard and the placing of £25,000 in the pockets of wheat farmers in increased prices for their wheat. To Mr Callan’s contention that the industry should have waited for danger until it occurred, he would answer that the wheat growers were concerned for the future of the market and wheat growing was a business of anticipation of market. As to the control of an industry being purely a matter for Government action, he would agree that if the embargo and tariff were removed Distributors, Ltd. would go, but so also would the wheat growers, the millers and dairy and allied industries and ultimately the public would suffer. No industry should sit quietly by awaiting a debacle. “A BENEFICIAL SCHEME.” Counsel said that if it was established that the general scheme of Distributors, Ltd. had been thought by the Government of the day to have been beneficial to the interests of the wheat growing industry, it would go a long way towards a justification of its existence. Counsel here referred lengthily to the prosecutions and interpretation of certain sections of the Act under which the proceedings had been instituted and contended that they referred to payment or reward unconnected with the intrinsic nature of an actual trading agreement. Such payments or commission as were received by Distributors, Ltd., were in respect of services carried on as actual agents and were not in any sense external to its purpose as the regularly constituted agent of the mills. Passing on to the minor disadvantages of Distributors, Ltd., counsel asked were they so serious as to prevent the normal course of business and interfere in its successful prosecution? Were they permanent or merely temporary or of a kind which it was the object of the combination to turn to its own advantage ? It had been said that the combination had the purpose of restricting the competition of millers. That was true to an extent in that each miller was guaranteed a share of the total output but that circumstance was only improtant according to the magnitude of the restrictions and whether it reached to the detriment of public interest. That was a feature of all combinations, however, and so long as the restrictions were not such as to inflict serious inconvenience on the public, they could not be condemned. QUESTION OF QUALITY. Counsel said that it was also suggested that they had a tendency to bring about a depreciation in quality. He would say again that Distributors, Ltd., was not concerned with gristing and manufacture, but it was a fact that any miller under the scheme would not for a moment think of losing his customers because the scheme was designed so that each miller retained his brands and his position of poularity among his clients. The evidence, moreover, had shown that the quality of flour generally throughout New Zealand had been improved. From the bakers’ point of view the evidence was all one way, because the nature of the competition between bakers had been transferred from one of price to one of quality. Careful provision had been made in the agreement to ensure that a good quality of flour should be manufactured and the powers of rejection which Distributors, Ltd. possessed, had been exercised in respect to inferior products. Again the bakers were entitled to reject inferior flour and no previous protection which the bakers had, had been taken away. The Court ‘adjourned at 5.30 and Mr Skerrett’s address will be continued to-morrow mom>B-