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.

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