In August 2017, significant amendments to the Commerce Act 1989 were passed into law under the Commerce (Cartels and Other Matters) Amendment Act (Amendment Act).
In recognition of the fact that New Zealand businesses needed time to ensure that their existing contracts complied with the new legislation, the Amendment Act included a nine month ‘transitional period’, during which time no proceedings could be commenced in respect of contraventions of some of the new statutory provisions.
Significantly, the ‘transitional period’ imposed under the Amendment Act expires on 15 May 2018.
With this deadline fast approaching, any businesses that have not already reviewed its contracts for compliance with the new legislation should do so as a matter of urgency, and in particular, decide whether to seek a clearance from the Commerce Commission for any contracts containing ‘cartel provisions’.
Background
The Commerce Act prohibits parties from entering into contracts or other arrangements (whether written or unwritten) that have the potential to harm the New Zealand economy by substantially lessening business competition.
A key provision of the Commerce Act governing anti-competitive arrangements is section 27. This section prohibits parties from entering into, or giving effect to, contracts, arrangements or understandings that have the purpose, effect or likely of substantially lessening competition in any market in New Zealand.
Under section 27, it is illegal for a business (or any individual) to enter into an anti-competitive agreement and/or to put it into effect. Even attempting to reach such an agreement, or encouraging another party to do so, can breach section 27.
A wide range of activity can be caught under section 27. While a ‘contract’ is a formal agreement between two parties that is enforceable under the law, an ‘arrangement’ or ‘understanding’ for the purpose of section 27 is something less formal, requiring only a consensus that leads to an agreed course of action. Even a ‘nod and a wink’ between parties can form the basis of an ‘understanding’.
Significantly, prior to the enactment of the Amendment Act, the other key provision governing contracts and other multi-party arrangements under the Commerce Act was section 30, which imposed a blanket ban on ‘price fixing’ – a ‘price fix’ being any agreement between competitors that sets the price of a good or service, or interferes with how that price is set.
Amendments to the provisions of the Commerce Act governing anti-competitive agreements
The Amendment Act repealed the old section 30 of the Commerce Act, and replaced it with a provision prohibiting parties from entering into, or giving effect to, a contract, arrangement or understanding that contains a ‘cartel provision’.
The term ‘cartel provision’ is defined at section 30A of the Commerce Act as a provision that has the purpose, effect, or likely effect of:
- Price fixing – e.g. fixing, controlling or maintaining the price for goods or services that any two or more parties to the arrangement supply in competition with each other, or interferes with how that price is set;
- Restricting output – e.g. preventing, restricting or limiting production, capacity, acquisition or supply of goods or services that any two or more parties to the arrangement supply in competition with each other; and/or
- Market allocating – e.g. allocating customers to or from whom the parties supply or acquire goods or services in competition with each other, or allocating the geographic areas in which the parties supply or acquire goods in competition with each other.
The Amendment Act left section 27 of the Commerce Act unchanged. Accordingly, it is still illegal under the Commerce Act for parties to enter into anti-competitive arrangements that have the purpose, effect or likely effect of substantially lessening competition.
Contracts at an increased risk of containing ‘cartel provisions’
Businesses should review their activities carefully and identify any contracts, arrangements or understandings that they are party to, where:
- One or more of the business’ competitors is also party to the contract or arrangement;
- Two or more parties to the contract or arrangement compete with each other; or
- The business separately contracts (or deals more informally) with two or more businesses that compete with each other (this gives rise to the risk of what is known as a ‘hub and spoke’ arrangement, where competitors do not directly contract with each other, but the business in the middle who contracts independently with each competitor has effectively becomes the linchpin for some kind of cartel arrangement).
Businesses should note that the definition of ‘competitor’ in the Commerce Act is deemed to include parties who would be in competition with each other, but for the contract, arrangement or understanding.
It is also important to recognise that a business that sells both (a) direct to consumers; and (b) through one or more distributors, is likely to be in ‘competition’ with its distributors for the purpose of the Commerce Act. Distribution agreements and arrangements with resellers should be carefully reviewed to ensure that they do not contain ‘cartel provisions’ (or, if they do, the provision falls within one of the legislative exemptions introduced under the Amendment Act).
Agency and brokerage arrangements should also be scrutinised as they carry a higher risk of containing ‘cartel provisions’. Examples of the kinds of businesses that utilise these modes of service delivery include:
- Airlines and travel agents
- Insurance companies and insurance brokers
- Lenders and mortgage brokers
- Accommodation providers/rental car companies and third party operated online sales platforms
Franchise and licence agreements, and joint venture arrangements, are also at a higher risk of breaching the new ‘cartel provisions’ and/or, in the case of franchise and licence agreements particularly, giving rise to ‘hub and spoke’ issues (see above).
Important exemptions
The Commerce Act recognises that sometimes cartel provisions can form part of agreements that have pro-competitive or benign competitive effects – for example, sometimes agreements that include cartel provisions can encourage innovation, improve product quality, reduce production costs and/or result in lower prices for consumers.
Consequently, the Commerce Act sets out three exemptions to the prohibition on including cartel provisions in contracts and other arrangements. These exemptions relate specifically to:
- Vertical supply contracts;
- Joint buying and promotion agreements; and
- Collaborative activities.
If an exemption applies, then the relevant ‘cartel provision’ is lawful provided that the provision does not have the purpose, effect or likely effect of substantially lessening competition.
Of the three exemptions, the ‘collaborative activity’ exemption is the broadest in scope, permitting the use of ‘cartel provisions’ where:
- The parties to the agreement are involved in a ‘collaborative activity’, being an activity that is:
- Carried on in trade in cooperation; and
- Not carried on for the dominant purpose of lessening competition; and
- The ‘cartel provision’ is reasonably necessary for the purpose of the ‘collaborative activity’.
Significantly, it is up to the person relying on the collaborative activity exception to prove on the balance of probabilities that the exception applies.
Seeking confirmation that a contract qualifies for the ‘collaborative activity’ exemption?
Breaching the cartel provisions of the Act can result in very serious penalties – including fines of up to NZ$10 million, and, if the Commerce (Criminalisation of Cartels) Amendment Bill, is passed later this year, potentially also a term of imprisonment for up to seven years for individuals who knowingly engage in cartel conduct.
If you or your business are party to an arrangement that contains a cartel provision, and you wish to be certain that the arrangement qualifies for the ‘collaborative activity’ exemption before proceeding, you may seek a ‘clearance’ from the Commerce Commission.
A ‘clearance’, if granted, confers immunity from prosecution under section 27 and 30 of the Commerce Act, both for the applicant and any other party to the proposed contract, arrangement or understanding. Clearance will only be granted if the Commission is satisfied that:
- The parties to the proposed arrangement are (or will be) involved in a ‘collaborative activity’;
- Every ‘cartel provision’ under the proposed arrangement is reasonably necessary for the purpose of the collaborative activity; and
- The proposed arrangement will not have the effect of substantially lessening competition in a market.
The Commission charges a fee of NZ$3,680 for processing an application for clearance for a ‘collaborative activity’. Clearances that are not granted within 30 working days after the date that the application was filed are deemed to have been declined, unless the Commission has agreed an alternative timetable with the applicant.
Concluding comments
Lane Neave’s experienced competition and consumer law team can assist you to review your business contracts for compliance with the new cartel provisions of the Commerce Act and/or apply for a clearance for a particular contractual arrangement if necessary. If you would like to discuss any matters raised in this article, please contact Anna Ryan on (03) 3793720 or anna.ryan@laneneave.co.nz.
Business Law team
If you need any assistance with the sale or purchase of your business, do not hesitate to get in touch with the Business Law team at Lane Neave.
Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace, Peter Orpin, Ellen Sewell, Matt Tolan, Carlo Wan, Kristina Sutherland, Jacob Nutt, Whitney Moore, Alex Stone, Ben Cooper, Lisa Catto
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