A recent interim relief order of the Competition Tribunal has raised concerns in relation to restraints of trade. The order was given in the context of a 10 year restraint given by Nedschroef in favour of Teamcor and CBC Fasteners. The Tribunal ruled that the restraint appeared to have the effect of dividing markets among competitors. Market division is per se prohibited under the Competition Act, meaning that it cannot be justified on the basis of efficiency or other pro-competitive gains.
In 2000, Nedschroef purchased certain machinery used for manufacturing fasteners from Teamcor. Since then, Nedschroef has been a manufacturer and distributor of fasteners used in the automotive industry. When Nedschroef concluded the agreement of sale with Teamcor, Nedschroef undertook to restrain itself for a period of 10 years to manufacturing only certain types of fasteners listed in an annexure to the sale agreement. In return, Teamcor undertook to refrain, for the same period, from manufacturing the same products. Nedschroef also undertook to extend the benefit of the restraint to CBC.
The rationale behind extending the restraint in CBC's favour was that in the 1990's, CBC purchased machinery at a premium from Teamcor, which machinery was capable of producing a wide range of fasteners. The premium was paid on the basis that Teamcor would not sell the remaining machinery to a competing firm. When Nedschroef purchased the remaining machinery it received a discount on the purchase price for agreeing to the restraint in favour of CBC. It was this restraint which formed the subject of Nedschroef's application since Nedschroef now wishes to trade in the products which it is contractually restrained from manufacturing.
The Tribunal held that the restraint appeared to constitute a market allocation between competitors, namely Nedschroef and CBC, in that the restraint operates to divide the greater fasteners market. In its defence, CBC argued that Nedschroef was not a competitor at the time the restraint was entered into. The Tribunal ruled that "market division does not require that both firms be competitors prior to the act of division. If they are potential competitors this will suffice." The Tribunal also noted that "there is no requirement in the Act that firms must have been prior competitors for them to transgress section 4(1)(b)."
The overall finding of the Tribunal was that CBC, an unrelated party in a sale, received the benefit of an allocated market, free from competitive presence on the part of Nedschroef. The Tribunal's decision effectively allows Nedschroef to ignore the provisions of the restraint for a six month period on certain terms, during which time the matter will be finally settled by the Tribunal after hearing appropriate evidence should Nedschroef wish to have the interim relief order made final.
While it is improbable that all restraints of trade, especially those between a purchaser and seller as usually contained in sale agreements, will be found to be anti-competitive, parties should nonetheless exercise caution when concluding restraints of trade that they do not divide markets between themselves in violation of the Competition Act.
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