South Africa: Exclusive Distribution Arrangements Should Not Be Treated Like Cartels

Last Updated: 9 May 2012
Article by Desmond Rudman and Kathryn Lloyd

The Competition Commission recently found a dual distribution restraint to amount to a market allocation agreement between competitors, which is outright unlawful under the Competition Act, 89 of 1998.

The Commission's approach in this matter is contrary to the prevailing international approach to dual distribution restraints and is, with respect, based on an incorrect interpretation of the relevant legal provisions.

On a proper application of the relevant provisions, such restraints should not be treated as outright unlawful and should only be declared unlawful if they are found to have an anti-competitive effect and cannot be justified on pro-competitive grounds. The Commission's approach is worrying since it may undermine firms' optimal commercial decisions on how best to distribute products.

A situation where a supplier simultaneously sells to independent distributors and to those who might be customers of those distributors is referred to in competition law as "dual distribution". Dual distribution arrangements often include restraints on the supplier not to sell goods to certain categories of customers or in certain territories.

Recently, a restraint relating to a dual distribution arrangement involving Sasol Limited (Sasol) and Spring Light Gas (SLG) came under attack by the Competition Commission. The restraint was contained in a supply agreement between Sasol, an upstream supplier of natural gas, and SLG, a downstream trader of natural gas in KwaZulu-Natal.

In terms of the restraint, Sasol agreed not to compete with SLG for the trading of natural gas in KwaZulu-Natal in order to allow SLG to develop its business. The Commission found that the restraint contravened the outright prohibition against competitors allocating markets between themselves and rejected an application by SLG for exemption of the restraint from the provisions in the Competition Act.

The relationship between Sasol and SLG may be viewed as hybrid in nature as it involves both a supply (vertical) dimension and a competitive (horizontal) dimension. On the one hand, Sasol and SLG are in a vertical supply arrangement with each other as Sasol supplies SLG with natural gas which SLG then on-sells to customers. On the other hand, Sasol and SLG may be perceived to be in a potential competitive (horizontal) relationship with each other, to the extent that Sasol is a potential trader of natural gas in KwaZulu-Natal.

The Commission's approach suggests it believes that restraints which flow from a vertical supply arrangement between parties in a hybrid relationship should be assessed under the stricter prohibitions in the Competition Act − these being the prohibitions that apply to market allocation restraints between firms in a horizontal (competitive) relationship rather than under the more permissive prohibitions that apply to such restraints between firms in a vertical relationship.1

This approach is contrary to the approach that has been adopted in leading competition law jurisdictions and is based on an incorrect interpretation of the relevant provisions in the Competition Act.

Very often dual distribution restraints are entered into between suppliers and their customers for legitimate commercial reasons. A supplier may find it unprofitable or not in keeping with its business strategy to distribute in certain areas, where an independent distributor may be better placed to do so. An independent distributor may require comfort that it will not have to compete with their suppliers for customers in a region before they will invest in start-up costs.

Dual distribution restraints in other jurisdictions

There has been some contention over the years as to how to treat dual distribution restraints due to the hybrid nature of dual distribution. However, the prevailing approach in US law and in the guidelines issued by the competition authorities in Europe and Canada, is to characterise such restraints as vertical rather than horizontal. The authorities in these jurisdictions, therefore, take a more permissive approach towards them.

Recent American cases and leading American commentators have acknowledged that where hybrid relationships exist, a so-called rule of reason evaluation should be performed to assess the net impact of the restraints.2 A rule of reason analysis involves determining whether conduct can be justified on the basis that its pro-competitive gains outweigh its anti-competitive effects.

The guidelines issued by the European Commission treat non-reciprocal dual distribution arrangements as vertical agreements, which are not outright unlawful.3

The Canadian Competition Bureau's Competitor Collaboration Guidelines4 (Collaboration Guidelines) state that, "The Bureau does not consider a supplier of a customer to be a competitor of a customer in respect of the product supplied".

The Collaboration Guidelines acknowledge that it may be difficult to distinguish between a horizontal and a vertical restraint in a dual distribution context, but they point out that such agreements can be pro-competitive and are therefore not deserving of condemnation without an enquiry into their actual competitive effects.

Dual distribution restraints in South African law

In terms of South Africa's Competition Act, if a market allocation restraint is considered to be a horizontal agreement, it will probably be characterised as outright unlawful cartel conduct in terms of section 4(1)(b) of the Act.5 In other words, it will be considered unlawful regardless of whether it has an actual anti-competitive effect or if it could be justified on the basis of pro-competitive gains.

In contrast, if it is considered a vertical agreement it will be assessed in terms of section 5(1) of the Act. In this case, the agreement will only be unlawful if it results in anti-competitive effects which cannot be justified on the basis of pro-competitive gains.

This distinction is important in that, if a restraint is found to contravene the outright prohibition in section 4(1)(b), a penalty of up to 10% of turnover can be imposed for a first time contravention. By comparison, if the restraint is found to contravene the prohibition applicable to vertical restraints (section 5(1)), it will only attract a penalty for a repeat contravention.

There is no South African case law dealing with the question of whether the relationship between parties in a dual distribution relationship should be treated as horizontal or vertical. However, the guidance that has been provided by the courts to date as well as the principles of legislative interpretation support the view that dual distribution relationships should be treated as vertical rather than as horizontal.

Firstly, in the ANSAC6 case, the Supreme Court of Appeal indicated that conduct should be characterised taking into account the intention of the parties. It found that only conduct which is designed to avoid competition, rather than conduct which merely has that incidental effect, should be prohibited outright in terms of section 4(1)(b).

In the Nedschroef7 case, the Tribunal held that the absence of reciprocity in a restraint may indicate that the relationship between the firms concerned should not be characterised as horizontal.

Secondly, in terms of the principles of legislative interpretation, because of the potentially large administrative penalties that can be imposed for contravening the outright prohibition in section 4(1)(b), this provision should be restrictively interpreted so that only naked forms of cartel behaviour fall within its scope.

Furthermore, too broad an interpretation of section 4 (which applies to horizontal restraints) would render section 5 (which applies to vertical restraints) unnecessary as all vertical relationships would be viewed as horizontal, given that all suppliers are also potential competitors to their distributors.

Conclusion

In our view, the Commission has incorrectly assessed Sasol and SLG's dual distribution arrangement as outright prohibited conduct. A consequence of this is that firms may in future be deterred from entering into such arrangements for legitimate pro-competitive reasons. A rule of reason treatment of dual distribution restraints is therefore preferable.

Footnotes

1. In contrast to this approach, in 2007 the Commission considered a similar relationship to be vertical in nature; The Competition Commission and Zip Heaters (Australia) Pty Ltd, case no. 17/CR/Feb07

2. Antitrust Law: An Analysis of Antitrust Principles and their Application, P. Areeda and H Hovenkamp, at para 1605a

3.The European Commission Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-operation Agreements (2011/C 11/01) specify that the Block Exemption Regulation on Vertical Restraints (Commission Regulation (EU) No 330/2010 of April 2010) and Guidelines on Vertical Restraints (OJ C 130, 19.5.2010) cover non-reciprocal dual distribution arrangements

4. Enforcement Guidelines, December 23, 2009

5. However, it is worth noting that if the competition authorities were mindful of the vertical dimensions of the "horizontal" restraint, they might consider the conduct under section 4(1)(a), which involves a balancing of the pro-competitive gains and the anti-competitive effects of the restraint. This would be equivalent to assessing the restraint as a vertical restraint, which we submit is the appropriate approach to assessing such restraints

6. American Natural Soda Ash Corporation and another v Competition Commission and others 2005 6 SA 158 (SCA)

7. Nedschroef Johannesburg (Pty) Ltd v Teamcor Limited and others, Case No. 95/IR/Oct05

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
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must 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