Canada: Vertical Agreements In South Africa: A New Dawn?

Last Updated: June 24 2019
Article by Neil MacKenzie

This article considers the potential for changes in the treatment of vertical agreements under South African competition law as a result of recent amendments to the Competition Act, as well as current policy views within the law-makers and regulators.

Section 5(1) of the South African Competition Act prohibits vertical agreements that substantially prevent or lessen competition, unless technological, efficiency or other pro-competitive gains arising from the agreement outweigh the anti-competitive effect. This provision is not dissimilar from corresponding prohibitions in competition laws elsewhere.

Since the advent of the Competition Act, contraventions of section 5(1) have been punishable with an administrative penalty only for a repeat offence. A first-time offender could be the subject of a behavioural order, most likely to revise the agreement in question to remove the restrictive restraints.

As a result, with a high economic onus for successful enforcement and without the carrot of an administrative penalty for proving a contravention, cases under section 5(1) have been few and far between. Section 5(1) has been a section tucked away deep beneath the higher profile anti-cartel and abuse of dominance prohibitions, with relatively little attention paid to its precise content.

But change may be on the horizon. Recent revision of the law will raise the consequences for a contravention of section 5(1), and one may also speculate that current policy within government and the Competition Commission points in the direction of increased enforcement under the section in the near future.

Legal Consequences – Fine for a First Offence

The Competition Amendment Act, which became law in February 2019 but is not yet in force, will soon enable the Competition Tribunal to impose an administrative penalty of up to 10% of a firm's turnover for a contravention of section 5(1). Repeat offences will attract a fine of up to 25% of turnover.

With an increased ability to grab headlines and promote compliance culture within corporate South Africa, these weighty financial consequences may peek a renewed interest in section 5(1) within the corridors of the Commission. A cynic may also suggest that because successful cases under section 5(1) will soon result in revenue for the fiscus, stronger enforcement may curry favour with the executive actors who control the Commission's purse strings, and therefore further incentivize more casework in this area.

What's more, in a number of recent cases the Commission has sought to characterize supply relations between actual and potential competitors as "horizontal", and capable of adjudication under the anti-cartel provisions of section 4(1)(b) of the Act. In defence, firms are quick to produce evidence that the true economic relationship between them is vertical, rather than horizontal, hoping not only to escape the per se confines of section 4(1)(b) which renders conduct illegal regardless of effects, but also in order to avoid the risk of a fine.

The introduction of an administrative penalty for a contravention of section 5(1) pulls the rug from beneath this defence somewhat. The fight will not end once characterization of the relationship has been concluded, as a section 5(1) dispute will carry more meaningful consequences for both enforcer and respondent.

The Prevailing Policy Winds

Since inception, the Competition Act has sought to achieve inclusive growth through strengthening competition, opening up markets to new entrants and with a leaning towards promotion of small and locally-owned businesses.

This desire to facilitate participation by small firms now seems stronger than ever. Under the Competition Amendment Act, new prohibitions have been introduced which are unfamiliar to competition law orthodoxy and in some cases expressly aimed at protecting the public interest, rather than "pure" competition concerns. These provisions place a heightened duty of care upon dominant firms when supplying or purchasing from small firms. A dominant seller is prohibited from discriminatory pricing if the effect is to impede the effective participation of small and medium businesses, and firms owned or controlled by historically disadvantaged persons. A dominant buyer is prohibited from imposing unfair pricing or trading terms on small and medium businesses, and firms owned or controlled by historically disadvantaged persons, if the effect is to impede such firms' effective participation.

This is a strong show of intent by government, determined to ratchet up the application of competition law to tackle slow rates of transformation and high barriers to participation by small firms.

Simultaneously, through its merger control work, the Commission has often taken care to ensure that small and locally-owned firms are not precluded from supply on fair terms as a result of mergers.

When viewed through this policy lens, it is possible to envisage a move towards more aggressive enforcement against restrictive vertical agreements outside of the merger context, particularly in light of the possibility of a fine for a first offence of section 5(1). For example, where an agreement confers exclusivity or preferential terms on a large supplier or distributor, there may be policy reasons for thorough investigation of whether the effect is to raise barriers to participation by small and locally-owned firms, to the detriment of competition.

Potential Implications

Leaving aside speculation about potential policy incentives of the Commission to increase enforcement against vertical agreements, changes to the financial consequences of contravening section 5(1) in the Competition Amendment Act alone change the playing field in this area.

The competition law community will certainly need to engage with the economic substance of section 5(1) at a level of precision and thoroughness which has to date not been necessary. Identifying and quantifying anti-competitive effects, as well as countervailing efficiency gains, against the factual context of each specific agreement, is likely to become increasingly important, particularly where there is market power.

Under the Competition Amendment Act, the Minister of Economic Development is required to promulgate regulations on the application of section 5. This unusual inclusion in the amendments may signal an intention to reshape the scope of section 5(1) to give greater protection to small business. Alternatively, the regulations may simply articulate the applicable economic test in greater detail than set out in the Act. Either way, this area is likely to see growth and development in the next period which firms and their advisors would be well advised to follow closely.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions