How new amendments affect your business. By Amy Jardine and Reece Leggett from Kensington Swan’s Corporate and Litigation teams.
RECENT AMENDMENTS to the Commerce Act 1986 have significantly expanded the scope of prohibited ‘cartel conduct’. Many current contracts will now potentially breach this Act. Prohibited cartel conduct has been widened to include arrangements between competitors relating to price fixing, restricting output, and market allocation.
Joint venture agreements between competitors, or distribution agreements where the supplier also sells products to end consumers (which means the parties will be ‘competitors’) should be reconsidered in light of these amendments.
If the agreement between competitors contains provisions relating to pricing, restrictions on supply, or market allocation, these provisions are likely to be prohibited under the Commerce Act, unless an exception applies.
On a positive note, the amendments also expand the exceptions that apply, including two new exceptions that apply to collaborative conduct and vertical supply contracts.
Risk of breaching the Commerce Act should be taken seriously. The maximum fine for breaching this Act is the greater of $10,000,000 or three times the gain (or turnover if the gain cannot be readily ascertained).
Prior to the amendment, the focus of prohibited cartel conduct was on preventing ‘price fixing’, that is arrangements that have the effect of fixing, controlling, or maintaining the price of goods. The section on price fixing has been replaced by a general prohibition on ‘cartel provisions’, which are provisions in contracts, arrangements or understandings between competitors that relate to:
- price fixing – for example, competitors agreeing to discount goods at the same time;
- restricting output or capacity – preventing, restricting or limiting the production capacity or supply of goods; or
- market allocation – allocating customers or geographic areas between competitors, for example, competitors agreeing to only sell in the North and South Island respectively.
It is a strict prohibition notwithstanding the market share of competitors or whether the ‘arrangement’ in fact affects competition in the market.
Two new exceptions to cartel provisions
If a provision in a contract is a cartel provision, it will be prohibited unless an exception applies. Two of these exceptions are the ‘collaborative activity exception’ and the ‘vertical supply contracts’ exception. The purpose of these exceptions is to protect pro-competitive arrangements that enhance efficiency and benefits to consumers.
- Collaborative activity exception:
The collaborative activity exception applies when, at the time of entering into the contract:
- the parties are involved in a collaborative activity; and
- the cartel provision is reasonably necessary for the purpose of the collaborative activity.
‘Collaborative activity’ means an enterprise, venture, or other activity, in trade that:
- is carried out in cooperation by the parties; and
- is not carried out for the dominant purpose of lessening competition between the parties.
When considering whether the collaborative activity exception applies, it is important to consider the venture as a whole, and whether the dominant purpose of the venture is to lessen competition.
An example of collaborative conduct might be where two competitors provide resources and expertise to create a new product or service.
- Vertical supply contract exception:
The vertical supply contract exception applies where a cartel provision:
- is in a contract between a supplier of goods or services and its customer;
- ‘relates to’ the supply of goods or likely supply of goods; and
- does not have the dominant purpose of lessening competition in the market.
An example of a cartel provision that would be subject to this exception would be where a supplier sets a maximum resale price as part of a distribution agreement. The vertical supply contract exemption would apply unless the dominant purpose of the provision was to lessen competition in the market.
There has also been an expansion of the exception to price fixing for joint buying and promotion agreements. The original exception has been expanded to also include the collective negotiation of the price of goods or services followed by individual purchasing at the collectively negotiated rate.
When do the amendments apply?
For contracts signed before 14 August 2017, there is a nine-month transitional period (until 14 May 2018) for parties to consider and amend (where required) existing contracts. The is no transitional period for contracts signed after 14 August 2017.
Tips for complying with cartel conduct provisions:
- be aware that this is a complex area of law which attracts significant penalties and great care should be taken before entering into a commercial arrangement with a competitor;
- ensure your business and staff are aware of the new cartel conduct provisions;
- determine structures and terms for your commercial arrangement that avoid cartel conduct (arrangements to be mindful of include: joint ventures between competitors, distribution agreements between suppliers and distributors who each sell to consumers, and arrangements between franchisors who own run company-owned stores and their franchisees);
- if the arrangement will result in prohibited cartel conduct, consider if an exception applies, such as collaborative conduct or vertical supply contracts;
- check existing contracts for cartel conduct before the transition period expires on 14 May 2018; and
- if you are in any doubt about an existing arrangement or potential arrangement seek legal advice.