Jersey: Exclusive Supply Contracts: When Are They Anti-Competitive?

Last Updated: 13 December 2010
Article by Elaine Kelly

Most Read Contributor in Jersey, September 2018

Generally, undertakings are prohibited, pursuant to Article 8 of the Competition (Jersey) Law 2005 (the "Law"), from making arrangements with other undertakings that have the object or effect of hindering to an appreciable extent competition of the supply of goods or services within Jersey. Such arrangements are known as anticompetitive arrangements. The Jersey Competition Regulatory Authority (the "JCRA") is responsible for, amongst other things, enforcing the provisions of the Law.

This note is not a comprehensive guide to the Law and deals only with the key concepts and obligations that arise in relation to exclusive supply contracts.

Hindering Competition

An arrangement between undertakings may be said to hinder competition if it restricts the ability, and/or the basis upon which, the parties may freely contract with others. The JCRA will assess the effect of an arrangement on competition in Jersey by examining it in its market and economic context.

Appreciable Effect Test

An arrangement will only infringe the Law if it has as its object or effect of hindering to an appreciable extent competition in Jersey. The JCRA takes the view that an arrangement generally will not have an appreciable effect on competition if the parties' combined share of the relevant market does not exceed 25 per cent. The JCRA will also have regard to other factors when determining 'appreciable effect', such as (i) the content of the arrangement and the structure of the market(s) affected by the arrangement; (ii) whether competitors would be able to constrain the conduct of the parties and (iii) whether there are any barriers to entry to the relevant market(s).

An arrangement may be anti-competitive if its object or effect is to: (i) fix purchasing or selling prices or any other trading conditions; (ii) limit or control production, markets, technical development or investment; (iii) share markets or sources of supply; or (iv) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage.

Vertical Arrangements

Certain vertical arrangements, such as exclusive supply or purchase contracts, may be prohibited by Article 8 of the Law if they have an appreciable effect on competition. An exclusive supply contract is recognised by the JCRA as one that causes a supplier to sell its products only to one buyer within Jersey for the purposes of the buyer's own use or resale.

The JCRA will consider whether there are any potential purchasers or distributors that are being excluded from the market entirely as a result of the exclusivity. Further, the purchaser's market share may be of particular importance: the greater its market share the more likely there is to be an appreciable effect on competition. The JCRA notes that the duration of the supply obligation, any entry barriers, the countervailing power of suppliers and the level of trade affected are also relevant factors.

Further, the JCRA has indicated that exclusive supply contracts containing certain restrictions, such as resale price maintenance provisions (i.e. provisions that restrict a buyer's ability to determine the price of a product or service) are most likely to infringe the Law. However, simply recommending a sale price will not generally contravene the Law, provided the buyer is not under an obligation to follow such recommendations and the seller cannot therefore take any action to enforce recommended prices.

If parties have entered into, or are considering entering into, an arrangement which could potentially fall foul of the Law, it is advisable to engage with the JCRA and consider the possibility of making an exemption application.

Consequences of Infringement

If an anti-competitive arrangement is entered into without obtaining prior JCRA approval, such arrangement will be void and unenforceable as between the parties. Consequently, the parties may be exposed to claims by a third party for damages (including punitive damages) where the third party considers and is able to demonstrate that he has been harmed as a result of the unlawful agreement. In addition, the JCRA may impose financial penalties of up to a maximum of 10 per cent of the turnover in Jersey (for up to three previous years) of the undertaking found to be infringing Article 8 of the Law.

Applying for an Exemption

Article 9 of the Law permits the JCRA to grant exemptions to the above general prohibition if it is satisfied that the arrangement:

  • is likely to improve the production or distribution of goods or services, or to promote technical or economic progress in the production or distribution of goods or services;
  • will allow consumers of those goods or services a fair share of any resulting benefit;
  • does not impose terms that are not required in order to achieve the objectives mentioned above; and
  • does not afford the undertaking concerned the ability to eliminate competition in respect of a substantial part of the goods or services in question.

In order for the JCRA to grant an exemption, it must be satisfied that all of the above conditions are met, not just some of them. The objectives and appreciable advantages must be sufficient to outweigh any disadvantage to competition. The onus lies with the parties making the application to demonstrate that the conditions have or will be met.

To date, the majority of exemption applications received by the JCRA relate to exclusive supply contracts for the supply of motor fuels in Jersey (also known as solus tie contracts).

Effect of an Exemption

If an exemption to Article 8 of the Law is granted by the JCRA, no action regarding the arrangement may be taken against the parties during the period of the exemption. A conditional exemption will cease to have effect if any of the conditions imposed by the JCRA are breached. The JCRA has the power to withdraw an exemption, vary or remove a condition or impose additional conditions if:

  • based on reasonable grounds, it believes there has been a material change in the circumstances since the exemption was granted;
  • based on reasonable grounds, it suspects that the information on which the exemption was based was incomplete, false or misleading; or
  • there has been a failure to comply with a condition.

How Long Will the Exemption Last?

The Law allows the JCRA to grant an exemption for such period as it considers appropriate. The typical exemption period granted in relation to solus tie contracts of this nature is 5 years (however, this will depend on a number of factors, including the market share of supply of motor fuels that forecourt has in Jersey).

Retrospective Exemptions

It is worth noting that, if parties have already entered into a potentially anti-competitive arrangement, the JCRA has previously granted retrospective exemptions (however, the exemption period is likely to begin from the date of the agreement, not the date of the application).

Timing and Fees

The JCRA does not specify a time limit for when decisions will be reached in respect of exemption applications. The timing will depend on the nature of the arrangement and the market / economic investigations required. At present, the JCRA does not charge a fee for considering Article 8 exemption applications.

Block Exemptions

The Law provides that the Economic Development Committee (the "EDC"), in consultation with the JCRA, may by Order make block exemptions which exempt particular categories of agreements which are likely to satisfy the statutory exemption criteria. To date, no block exemptions have been prescribed by the EDC.

Small Undertaking Exemptions

Similarly, the EDC may, following consultation with the JCRA, provide by Order that small undertakings be exempt from Article 8 of the Law. Again, no such Order has been made to date.

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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