With any new business opportunity, there may be a need for capital expenditure to acquire new assets or retro-fit existing assets, to build further capacity into the existing asset base. This is often a pre-condition of a tender to win work from customers. Transport companies with capital expenditure needs therefore, often seek sufficient volume certainty from their customers to ensure that they can operate profitably.
It is common to see mechanisms such as requests for supply exclusivity, an offer of volume rebates and minimum volume commitments sought from customers. These all have the intended effect of trying to build a minimum revenue base from which to derive certainty of earnings and hedge the capital expenditure decision.
Where a company is a niche provider, has a geographical hold over a market, or is generally one of the bigger players in their market, they need to be mindful that a request for exclusivity raises the barriers for entry and could make it more difficult for competitors to compete with it. This could lead to a legal challenge from aggrieved competitors who have failed to win the business or an aggrieved customer seeking to exit a no longer desired contract.
How exclusivity fits into the Competition Law
The Competition and Consumer Act 2010 ("C&CA") provides that any condition which restricts a customer from sourcing from another supplier at all, or only to a limited extent, is only allowed if it does not have an anti-competitive purpose or effect. The purpose is taken to occur if one of the main reasons for the restriction is to disrupt the usual competitive process, while the effect will occur if practical market conditions change for the worse from an open playing field perspective.
The Harper Policy Review issued a draft report in September 2014 in which the panel expressed the view that the C&CA provision should specifically be re-drafted to clarify that discounts, allowances, rebates and credits in contract structures could have the effect of being anti-competitive in certain circumstances. By locking in customers they may be seen to be utilising a back door method to achieve the competitor lock-out that the C&CA is wary of.
Variations on exclusivity contracting
There are various types of exclusivity mechanisms found in the transport contracting market place, including:
- All exclusive – wherethe entire volume of that customer must be with the supplier company;
- Rebate arrangements – a rebate is triggered if a customer achieves a threshold or hurdle volume;
- Volume discounts – usually a tiered structure where price per unit decreases as volume increases;
- Proportional discounts – e.g. move a minimum proportion of the volume;
- One offs – offering special discounts for specific tasks; and
- Bound deals – agreeing to use other equipment or services of the supplier in exchange for better pricing.
Crossing the red lines
There is the potential for larger or niche players to stray into legal difficulties with exclusivity provisions. Some of the pertinent questions that need to be addressed in assessing whether to seek further legal advice surround the other terms of the arrangements.
As a rule of thumb, if the term of the contract in which the exclusivity arrangement is found, is longer than three years, the effect of the exclusivity will be considered to be more pronounced. Further, if the exclusivity is there to lock the customer in, as a result of specific and identifiable new capital expenditure required for the contract (e.g. funding four new B-doubles to the fleet) this is another factor. If a minimum volume is required to support the new investment then this will be a more defensible position from a competition perspective.
Where volume discounts and rebates are the key mechanism, it is less of an issue where the discount or rebate is based on an overall estimate of margins for volumes and costs for those volumes. Other instances where there may be a red flag, occur where the supplier gives the customer another arrangement, such as a co-location arrangement at a depot. Where that co-location arrangement is contracted for longer than the 'exclusive' supply arrangement, this may indicate that the term of the supply agreement is actually longer than the specified date in the contract.
Generally, a company seeking a high level of exclusivity will be on safer ground where they are not a niche provider or a large national company (ie have a hold on the market), where the arrangement is for less than three years, where the exclusivity can be justified to make a large capital outlay and where there is no other arrangement, such as a co-location arrangement. Where this is not the case, seek some advice.
* This article was originally published in Australasian Transport News magazine: www.fullyloaded.com.au
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