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[2011] ZASCA 99
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Senwes Ltd v Competition Commission of South Africa (118/2010) [2011] ZASCA 99; [2011] 1 CPLR 1 (SCA) (1 June 2011)
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THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case No: 118/2010
In the
matter between:
SENWES
LIMITED
.....................................................................................
APPELLANT
v
THE COMPETITION COMMISSION OF
SOUTH AFRICA
......................................................................................
RESPONDENT
Neutral
citation:
Senwes v Competition Commission
(118/2010)
[2011] ZASCA 99
(1 June 2011)
Coram:
Mpati P, Brand, Lewis, Bosielo and Seriti JJA
Heard:
11 May 2011
Delivered:
01 June 2011
Summary:
Competition Act 89 of 1998
─ finding of
Tribunal that appellant contravened
s 8(c)
of the Act by conduct
constituting a margin squeeze ─ held that this conduct not
covered by the referral to the Tribunal
and the finding therefore not
competent.
________________________________________________________________
ORDER
________________________________________________________________
On appeal from:
The Competition Appeal Court (Davis JP,
Mailula and Malan JJA concurring, sitting as court of appeal from the
Competition Tribunal).
1 The application for leave to appeal is granted with costs,
including the costs of two counsel.
2 The appeal is upheld with costs including the costs of two counsel.
3 The order of the Competition Appeal Court is set aside and replaced
with the following:
‘
(a) The appeal is upheld with costs,
including the costs of two counsel.
(b) The order of the Competition Tribunal is set aside and replaced
with the following:
“
The application is dismissed.”’
________________________________________________________________
JUDGMENT
________________________________________________________________
BRAND JA
(MPATI P, LEWIS, BOSIELO and SERITI JJA concurring)
[1] This is an application for leave to appeal against an order from
the Competition Appeal Court (the CAC) dismissing an appeal
by the
appellant (Senwes) against a judgment of the Competition Tribunal
(the Tribunal) in which an application by the respondent
(the
Commission) was upheld. The application for leave to appeal had been
referred for the hearing of argument in terms of s 21(3)
of the
Supreme Court Act 59 of 1959. At the heart of the impugned judgment
of the Tribunal lies its finding that Senwes had contravened
s 8(c)
of the Competition Act 89 of 1988 (the Act) by engaging in what is
classified in the parlance of competition law as
a ‘margin
squeeze’.
[2] Section 8(c) of the Act prohibits a dominant firm from engaging
in an ‘exclusionary act’ which is defined in s 1
of
the Act as ‘an act that impedes or prevents a firm from
entering into, or expanding within, a market’. By the nature
of
things I am bound to return to these provisions as well as to the
concept of a margin squeeze in more detail. But for purposes
of
introduction, a ‘margin squeeze’ is a phenomenon that
occurs when a vertically integrated firm, participating in
both the
upstream and downstream markets, is dominant in the upstream market
and supplies an essential input to its competitors
in the downstream
market. The dominant firm is then said to engage in a margin squeeze
when it raises the price of that input to
a level where the
downstream competitors can no longer survive in that market.
[3] Put very simply ─ for I shall return to the facts in detail
later ─ Senwes provided storage facilities in silos
to farmers
(producers) in a particular area. That is referred to as the
‘upstream market’. It trades in the product
─ grain
and maize, for example ─ by buying from farmers and selling to
processors (millers and bakers) and to other
traders. The trading is
the ‘downstream market’. Senwes is a ‘vertically
integrated firm’ because it operated
as one entity in both
markets.
[4] In concluding that Senwes engaged in a margin squeeze thus
described, the Tribunal made four essential findings:
(a) Senwes is a vertically integrated firm in that it participates in
both the upstream market of grain storage in silos and the
downstream
market of grain trading.
(b) In the upstream market of grain storage Senwes is a dominant firm
within its area of operation.
(c) Storage is an essential input in the downstream market of grain
trading.
(d) Through manipulation of its storage charges, Senwes has prevented
its competitors in the downstream market from earning a viable
profit.
[5] Before the CAC, Senwes’ ground of appeal amounted to two
contentions:
(a) The finding of margin squeeze by the Tribunal was not competent
because this was not a case that Senwes was called upon to
answer:
neither a margin squeeze nor the alleged conduct giving rise to the
consequence of a margin squeeze was ever pleaded by
the Commission
(the proceedings contention).
(b) Alternatively, even if the complaint of margin squeeze could
appropriately be entertained by the Tribunal, the elements of
the
complaint had not been established on the evidence (the evidence
contention).
[6] The CAC found both these contentions wanting. In consequence it
dismissed the appeal as well as the subsequent application
by Senwes
to appeal to this court against that judgment. In its present
application before this court Senwes relies on essentially
the same
two grounds. A finding in favour of Senwes on the proceedings
contention will render an inquiry into the evidence contention
unnecessary. I therefore propose to deal with the former at the
outset. But before doing so, it is appropriate to refer to the
general requirements for leave to appeal to this court against a
judgment of the CAC.
Requirements for leave to appeal
[7] These requirements were succinctly formulated
in
American Natural Soda Ash Corporation
v Competition Commission
2005
(6) SA 158
(SCA) para 19.1:
‘
This
Court’s inherent constitutional power to protect and regulate
its own process empowers it to require applicants for leave
to appeal
from a specialist appellate tribunal to demonstrate, in addition to a
reasonable prospect of success, that there are
“special
circumstances” indicating that a further appeal should lie.’
And para 21:
‘
As we
observed in
NUMSA
1
(para
43), the procedures for applying for leave to appeal, and the factors
relevant to obtaining special leave, are well established.
The
criterion for the grant of special leave to appeal is not merely that
there is a reasonable prospect that the decision of the
CAC will be
reversed – but that the applicants can establish “some
additional factor or criterion”. One is where
the matter,
though depending mainly on factual issues, is of very great
importance to the parties or of great public importance.
In applying
this criterion, this Court must be satisfied, notwithstanding that
there has already been an appeal to a specialist
tribunal, and that
the public interest demands that disputes about competition issues be
resolved speedily, that the matter is
objectively of such importance
to the parties or the public that special leave should be granted.’
[8] The central question is therefore whether Senwes has demonstrated
on the basis of either its proceedings contention or its
evidence
contention (a) reasonable prospects of success on appeal; and (b)
that there are special circumstances requiring a further
appeal to
this court. I shall consider these questions against the factual
background that follows.
Background
[9] Senwes has been in existence for almost a hundred years. For most
of that period it was an agricultural co-operative. But in
April
1997, it was converted into a public company. Its area of operation
is mainly in the Free State and to a lesser extent in
the North-West,
Gauteng and the Northern Cape. Within its area of operation it owns
56 grain silos, which represents more than
90 per cent of the grain
storage capacity in that area. The extent of its dominance in that
market is due to historic reasons.
[10] These reasons were, according to expert
testimony before the Tribunal, that agricultural marketing in this
country had been
characterised for many years, by State intervention.
It started in 1937
2
as part of a global trend towards State
intervention in agricultural affairs after the Great Depression.
Grain industries were controlled
by different control boards, eg the
Maize Board, the Wheat Board and so forth. These boards administered
single channel marketing
schemes; they were the only buyers and
sellers of the commodities that they controlled; they administered
fixed prices at which
these commodities were bought from farmers and
sold to millers; and they appointed agents to perform the physical
handling functions
to move the commodities from farm gate to mill
door.
[11] Generally speaking, the agents of the boards were agricultural
cooperatives. These agents earned most of their income from
handling
and storing grain on behalf of the boards. The boards usually
appointed only one agent in a particular area. This, of
course,
afforded the cooperatives a competitive edge in their areas of
operation. To enable them to perform their agency functions,
cooperatives were encouraged to build bulk silos. Financial
assistance was afforded to them, generally in the form of low
interest
loans by the Land Bank. Senwes was one of these
cooperatives.
[12] Drastic changes in the system came about with the deregulation
of agricultural marketing in terms of the
Marketing of Agricultural
Products Act 47 of 1996
. Under the deregulated system, single
marketing channels were formally terminated, control boards were
disbanded and grain traders
entered the scene. What did not change,
however, was that the agricultural cooperatives retained ownership of
the silos. In addition,
silos are enormously expensive and since
there proved to be a general over-supply of silo storage capacity in
the country, the
construction of new silos does not constitute a
financially viable option.
[13] Under the deregulated system the vertical linkages in the South
African grain industry can broadly be described as follows.
The first
link of the supply chain comprises the grain producers, ie the
farmers. The next level is the silo owners. Then there
is the level
of grain traders and finally, there are the processors, consisting of
the millers and (in the case of wheat), the
bakers. The new entrants
after deregulation, the grain traders, provide an intermediary
service between the producers and the processors.
In doing so they
usually earn a margin from the difference between the purchase price
and the sale price of grain.
[14] Another significant change brought about by
deregulation was that grain can now be traded as a commodity on the
South African
Futures Exchange (Safex).
3
In order to facilitate this trading, contracts are
standardised according to product (eg white maize), contract size (eg
100 tons),
date of delivery in the future and location (eg
Bultfontein Silo). A requirement for trade on Safex is a negotiable
instrument.
In the case of grain, this instrument is referred to as a
silo certificate which is issued by a Safex approved silo. Silo
certificates
guarantee the holder’s entitlement to a fixed
quantity of the specified grain product at the issuing silo on the
specified
date of delivery. The Senwes silos are authorised by Safex
to issue these silo certificates.
[15] Safex transactions do not necessarily result in physical
delivery of grain. On the contrary, the amount of grain traded on
Safex exceeds the physical grain trade by a factor of eight. For
present purposes we are not really concerned with the Safex trade,
but with the physical trade in grain. Yet the Safex trade is
important because the prices that traders offer to farmers in the
physical trade are determined with reference to the Safex price. In
broad outline, the physical price of grain is calculated by
deducting
the anticipated price of storage and transport as well as the
trader’s margin from the Safex price. Because Safex
constitutes
a national market, grain prices are determined with reference to a
national standard of which both producers and processors
are well
aware. Moreover, committees within Safex recommend annual tariffs for
daily storage rates. Though these rates are not
binding, they are in
practice followed by silo owners, including Senwes.
[16] Storage plays a vital role in the physical grain trade. It flows
from the fact that the harvesting season of grain is limited
to three
or four months. In the case of maize – which comprises about 80
per cent of the grain crop in South Africa –
it is between May
and August. Processors, on the other hand, require a constant supply
throughout the year. Grain not consumed
during the harvest season
therefore requires to be stored. Storage is predominantly supplied by
silo owners. An alternative is
to store grain in huge silo bags (up
to 200 tons). At present, however, this alternative has some features
that makes it less appealing,
not the least of which is that silo
bags are not eligible for silo certificates and are therefore
excluded from the Safex trade.
In the end, about 75 per cent of the
total grain crop is stored in commercial silos like those that belong
to Senwes.
[17] Storage cost forms a major part of the eventual price of the
grain that requires storage. It is calculated on the basis of
one ton
per day, for which the Safex recommended tariff was, at the time of
the proceedings before the Tribunal, in the region
of 40 cents.
Storage for 100 days would therefore amount to R40 per ton, which
can, by way of illustration, be compared to the
trader’s margin
which was, during the same period, in the region of R15 to R17 per
ton.
[18] This brings me closer to the complaints brought against Senwes
which centred around the storage tariffs that it imposed.
Historically Senwes offered two options to all its storage customers
─ both farmers and traders: A daily tariff which was
the Safex
recommended tariff; and a lump sum storage amount that was roughly
equivalent to 100 days of storage at the daily tariff.
This was
referred to as the capped tariff. The capped tariff applied only
until the next harvest season when either the daily tariff
or a new
capped tariff started again. In May 2003 Senwes removed the capped
tariff for traders and offered it to farmers only.
This new
dispensation became known as the differential tariff because it
differentiated between farmers and traders. A trader who
stored for
longer than 100 days thus continued to pay the daily tariff. At the
same time a rumour started amongst competitors of
Senwes that farmers
were only eligible for the capped tariff if they sold their grain to
Senwes. If they sold to other traders
instead, they would have to pay
a daily tariff on an uncapped basis. Against this background I now
turn to the complaint as it
was formulated by the Commission in its
referral to the Tribunal.
The referral
[19] The complaint against Senwes was referred to
the Tribunal by the Commission in its prosecutorial role on 20
December 2006.
It had its origin in a formal complaint by a
competitor of Senwes in the trading market, C T H Trading (Pty) Ltd
(CTH), which was
filed on 2 December 2004. In accordance with the
rules of the Tribunal, the referral was by way of notice of motion,
which embodied
the prayers for relief, supported by an affidavit,
stating the grounds of the complaint and the material facts upon
which the Commission
relied.
4
[20] The referral was in line with, though substantially narrower
than, the original complaint. So, for example, complaints by
CTH
about administrative charges raised by Senwes and the fact that
Senwes provided finance to farmers who sold their crops to
it, were
not referred. What the referral focussed on were two allegations of
fact. First, that Senwes offered a capped tariff only
to farmers who
sold their grain to it. Second, that Senwes discriminated against its
customers who are traders in that the capped
tariff was offered to
farmers only and was not available to traders.
[21] The first alleged factual situation was said to constitute a
contravention of s 8(d)(i) of the Act, which prohibits a
dominant firm from ‘inducing a customer not to deal with a
competitor’. Senwes’ answer to this charge was a denial
that it offered the capped tariff only to farmers who ultimately sold
to it. As a fact, so Senwes contended, its storage charges
in no way
distinguished between farmers who sold their crop to it and those who
did not. Even at this early stage I find it convenient
to point out
that on this issue the Tribunal found for Senwes and that the CAC
accepted this finding as correct. In consequence
we need no longer be
detained by this charge.
[22] The second complaint relied on the differential tariff levied on
farmers and traders, respectively, which practice was admitted
by
Senwes. The Commission’s main complaint based on this practice
was that it constituted price discrimination as envisaged
in s 9
of the Act, which provides, in relevant part:
‘
An
action by a dominant firm, as the seller of goods or services, is
prohibited price discrimination, if –
(a)
it is likely to have
the effect of substantially preventing or lessening competition;
(b)
it relates to the
sale, in equivalent transactions, of goods or services of like grade
and quality to different purchasers; and
(c)
it involves
discriminating between those purchasers in terms of –
(i) the price charged for the
goods or services;
(ii) any discount, allowance,
rebate or credit given or allowed in relation to the supply of goods
or services . . . ‘
[23] As to why the differential tariff constituted a contravention of
s 9, the Commission motivated its case as follows in
paragraph
32 to 34 of the affidavit supporting the referral.
‘
32 The
service of provision of commercial handling and storage facilities of
grain by Senwes to producers and traders constitutes
a sale, in
equivalent transactions, of services of like grade and quality to
different purchasers.
33 Senwes’ differentiated
pricing policy for grain storage between producers and traders is
such that it involves discriminating
between those purchasers in
terms of:
33.1 The price charged for the
service; or
33.2 The discount or rebate
given or allowed in relation to the supply of the service.
34 The aforegoing conduct
further has the effect of substantially preventing or lessening
competition within the contemplation of
section 9(1) and is therefore
prohibited price discrimination in terms of the Act.’
[24] Senwes’ answer to this charge was in essence that farmers
and traders are not competitors in the same market and that
the
differential tariff would therefore have no negative effect on
competition. In the event, both the Tribunal and the CAC held
this
complaint to be ill-founded as well. Again, we therefore need not be
detained any further by the charge of price discrimination
under s 9.
[25] But according to the referral, the Commission
founded an alternative complaint on the basis of the differential
tariff, which
the Tribunal and the CAC eventually endorsed, namely,
that the differential tariff constituted an exclusionary act with
anti-competitive
effect as envisaged in the prohibition contained in
s 8(c) of the Act.
5
The terse motivation advanced in the referral for
the alternative complaint was that:
‘
Senwes’
practice of charging differential tariff fees for storage, is
exclusionary and has an anti-competitive effect, as
it impedes or
prevents CTH and other grain traders who compete with Senwes from
expanding within the downstream market for grain
trading and is thus
in contravention of section 8(c) of the Act.’
[26] Senwes contended from the start that the
charge under 8(c) was, on the face of it, without a factual
foundation. After it had
filed its answering affidavit,
6
Senwes therefore applied for the Tribunal to
adjudicate the complaint based on a differential tariff by way of
exception.
7
As the basis for the exception it contended that
‘it is axiomatic that conduct can only have an effect on
competition between
identified persons or groups of persons if the
persons identified compete with each other in the same market’
and that, because
the roles of farmers and traders ‘are
complementary, not competitive, giving producers better storage rates
than traders,
can never produce anti-competitive consequences’.
The Commission did not deal with the exception on its merits. It
opposed
the application on two procedural bases: That its case
against Senwes was set out with sufficient clarity and particularity
in
the referral; and that Senwes had elected to file an answering
affidavit and thereby waived its right to except. In the event the
Tribunal dismissed the application for leave to except out of hand
and without reasons.
Witness statements
[27] Subsequently, witness statements were exchanged between the
parties. This happened shortly before the commencement of the
hearing
before the Tribunal. The witness statements pertained to both expert
witnesses and witnesses on fact. According to factual
witness
statements filed on behalf of the Commission, traders competing with
Senwes complained that they would be better able to
trade if they
were afforded the benefit of the capped tariff. But their complaint
went further. Because they were not offered the
capped tariff, so
they said, Senwes was able to beat the offer they made to farmers in
that it was able to deduct a lesser amount
for storage from the Safex
price. What this amounted to, of course, was not a comparison of the
position of traders
vis-à-vis
farmers, but with the
position of competing traders
vis-à-vis
Senwes qua
trader. In short, the complaint thus formulated was that Senwes as
storage provider offered a better deal to its trading
arm than to
other traders. The witnesses were careful, however, not to level this
charge in express terms. They put the charge
no higher than ‘I
suspect that Senwes does not deal with its own trading division as it
does with a third party trader when
it comes to storage charges’.
[28] In the same vein, factual witnesses also complained about
administrative charges that were levied by Senwes – qua storage
provider – on other traders, but not on its own trading arm.
So, for example, they complained about a charge of R8,50 per
ton
levied by Senwes on other traders for information about their own
stock stored in the Senwes silos. If a trader therefore sought
information about its own stock of, say, 5 000 tons in a Senwes
silo, it had to pay an amount of R42 500. Further, if
a trader
required Senwes to issue a silo certificate, the cost would be R1,50
per ton, irrespective of volume. A silo certificate
for 100 tons
would therefore cost R150 and a 10 000 ton certificate, R15 000.
Neither of these charges, so the witnesses
said, were levied on the
Senwes trading arm. Since competing traders were bound to deduct
these expenses from the Safex price in
arriving at the price that
they offered to farmers, it was almost impossible to compete with
Senwes in a market where the profit
margin was no more than R15 per
ton.
[29] The concept of margin squeeze was pertinently raised for the
first time in the witness statement of an expert economist, Dr
Nicola
Theron, which was filed by the Commission, together with its factual
witness statements. With reference to this concept,
she levelled the
following charge against Senwes:
‘
A
margin squeeze generally prevents rivals also active in the
downstream market from making a profit. The dominant firm uses its
power over supply of the downstream input to distort competition in
this way. This can be done by raising input prices to a level
where
the rival firms cannot survive or compete. Generally, there should
not be a discriminating difference between prices charged
to the
downstream rivals and its own integrated business . . . . In the
current case this is the alleged practice that Senwes is
guilty of.’
[30] In support of this charge she relied on the following examples
emanating from the factual witness statements:
(a) That the capped tariff was not available to traders, but only to
farmers.
(b) That the capped storage tariff was only available to farmers who
sold to Senwes ─ an allegation which the Tribunal found
not to
have been established.
(c) The levying of administrative fees by Senwes for information
which ‘are so much that it often makes a trade unprofitable’
─ a complaint originally made by CTH but not referred to the
Tribunal.
(d) That Senwes provided finance to farmers on condition that they
sell their crops to Senwes ─ again a complaint originally
made
by CTH but not referred to the Tribunal.
Objections by Senwes
[31] Upon receipt of the witness statements, Senwes prepared a
document entitled ‘A Schedule of Objections’. The
schedule
recited the alleged objectionable conduct by Senwes referred
to the Tribunal and then proceeded, with reference to each witness
statement, to identify those paragraphs that contained evidence of
conduct or practices that did not form part of the referral.
Thus it
started by pointing out that the only alleged practices of Senwes
referred to the Tribunal were:
‘
(a)
differentiating between traders and producers of grain in respect of
silo costs for grain stored in excess of 100 days; and
(b) differentiating silo costs
for producers who sell to Senwes from those who do not.’
[32] Traversing the factual witness statements, the schedule
pertinently raised objections to the introduction of evidence
relating
to a comparison between how Senwes treated its own trading
arm, on the one hand, and competing traders on the other. With regard
to the expert witness statement by Dr Theron, Senwes objected to her
expressing an opinion based on alleged abuses that had not
been
referred. The schedule was conveyed to the Commission prior to the
hearing.
[33] At the commencement of the hearing, Senwes formerly presented
its schedule of objections to the Tribunal. In the course of
going
through the schedule, counsel for Senwes requested that the
objections be treated as being raised against all evidence tendered
in despite the objections and that he would not burden the Tribunal
by raising an objection each time evidence was presented outside
the
referral. In response to the objections, both the Commission and the
Tribunal remained passive. In particular, the Tribunal
gave no
indication that it would be willing to entertain complaints outside
the referral.
[34] The factual evidence presented by the Commission followed the
course predicted in its witness statements. Despite the general
nature of the objection raised at the outset, counsel for Senwes from
time to time pertinently objected to evidence relating to
discrimination by Senwes against other traders in favour of its own
trading arm. The views expressed by Dr Theron as an expert
were
likewise in line with those formulated in her witness statement.
Under cross-examination, she admitted that the thesis of
a margin
squeeze rested squarely on an assumption of discrimination by Senwes
against competing traders in favour of its own trading
arm. At the
same time she conceded, however, that she had no knowledge of what
charges Senwes imposed on its trading arm.
[35] The gap in the factual basis of the Commission’s case thus
exposed was closed in cross-examination of the factual witnesses
on
behalf of Senwes. In short they were compelled to concede that Senwes
did not charge its trading arm any storage costs at all.
The expert
witness called on behalf of Senwes refused to take issue with Dr
Theron on the matter of margin squeeze, because, so
he testified, he
was advised by Senwes’ legal representatives that it fell
outside the ambit of the referral and was therefore
irrelevant.
Margin squeeze covered by the referral
[36] The Commission’s primary argument which found favour with
both the Tribunal and the CAC was that Senwes’ conduct
which
the Commission eventually held to be in contravention of the Act, was
indeed covered by the referral. Though the concept
of a margin
squeeze in itself was not specifically mentioned in the referral, so
the Commission argued, Senwes’ conduct which
attracted that
label was part of the complaint referred. In this regard the
Commission inter alia relied on the following allegation
in the
referral:
‘
Senwes’
practice of charging differential tariff fees for storage is
exclusionary and has an anti-competitive effect, as it
impedes or
prevents CTH and other grain traders who compete with Senwes from
expanding within the downstream market for grain trading
and is thus
a contravention of s 8(c) of the Act.’
[37] These allegations, so the Commission’s argument proceeded,
are borne out by the evidence of one of its factual witnesses,
Mr
Herbert Keyser. What Keyser testified, amongst other things, is that,
although his firm can compete with Senwes during the first
100 days
of storage, the charges it had to pay for storage after that period
rendered further competition with the trading arm
of Senwes
impossible. Had his firm been allowed the same benefit of a capped
tariff afforded to farmers, it would have been able
to compete with
Senwes after 100 days as well. This evidence shows, so the
Commission’s argument concluded, that it is Senwes’
conduct of charging a differential tariff which had properly been
pleaded, which constituted the marginal squeeze.
[38] Unlike the Tribunal and the CAC I do not believe that the
Commission’s argument can be sustained. In formulating my
reasons for saying this, I refer, for the sake of brevity, to the
conduct complained of in the referral as ‘the charge’
and
to the conduct which the Tribunal found to be objectionable as ‘the
conviction’. The differential tariff referred
to in the charge
focussed on a comparison between traders and farmers. The margin
squeeze which formed the basis of the conviction,
on the other hand,
focussed on a discrimination by Senwes, as storage provider, against
other traders in favour of its own trading
arm. To have founded a
complaint of margin squeeze the Commission would have had to refer to
the discrimination as between it,
qua trader, and other traders, in
the downstream market, caused by its participation and dominance in
the upstream market. That,
as I see it, is the essential difference
between the conviction and the charge.
[39] The difference becomes more apparent once it is appreciated that
the complaint of a differential tariff, between traders and
farmers
could be removed by abolition of the 100 day cap for farmers as well.
That would place farmers and traders on the same
footing. Yet it
would not assist the traders in their competition with Senwes at all.
Conversely, if the trading arm of Senwes
was charged the same storage
fee as other traders after 100 days, the abolition of the 100 day cap
for traders would have no impact
on the ability of the latter to
compete with the former. All this is borne out by Keyser’s
concession in cross-examination
that his real complaint against the
abolition of the 100 day cap for traders was grounded on his
suspicion ─ which turned
out to be true ─ that the
abolition of the cap did not apply to the Senwes trading arm.
[40] But the difference between the charge and the conviction goes
deeper. Since the conviction is entirely dependent on the
discrimination
by Senwes against other traders, the abolition of the
100 day cap can be no less objectionable in principle than the
charges for
silo fees and information that Senwes levied against
other traders, but not against its own trading arm. That much appears
from
the evidence of Dr Theron. It is clear from her expert opinion
that all these charges contribute in equal measure to the consequence
of a margin squeeze. Yet, while the abolition of a cap was part of
the referral, the other charges were not. This goes to show,
in my
view, that the discrimination by Senwes against other traders was not
the subject of the referral.
[41] If the charges levied by Senwes qua storage owner against its
own trading arm was as vital to the charge as it was to the
conviction, one would have expected the Commission to have
investigated these charges prior to the referral, in terms of its
wide
powers under ss 46 - 49(A) of the Act. That would have rendered
it unnecessary for the witnesses called by the Commission to
speculate
and for the Commission to rely on concessions by Senwes’
witnesses with regard to these matters. This again seems to show
that
these matters, which turned out to be vital to the conviction, were
not even regarded as relevant at the time of the referral.
[42] In its judgment refusing leave to appeal to this court, the CAC
found support for its view that the conviction was covered
by the
charge in the following quotations from the referral:
‘
Senwes
abuses its dominance in the handling and storage of grain market by
charging in effect a lower storage fee to a producer
who agrees to
sell the grain stored in Senwes’ silos to Senwes. [This
statement is contrary to the actual finding by the
Tribunal with
which the CAC agreed.] Producers who sell their products through
third parties that compete with Senwes downstream
pay a higher fee
for the storage of grain. CTH alleges that this practice has made it
virtually impossible for it to compete with
Senwes in a trading
market within the relevant geographical area.’
[43] The answer to the reliance on these allegations, I think, is
that they were made in support of a charge which the Tribunal
found
not to have been established ─ ie that Senwes contravened s
8(d)(i) of the Act, which prohibits a dominant firm from
inducing a
customer not to deal with a competitor. They had nothing to do with
the discrimination by Senwes against other traders
in favour of its
own trading arm, which formed the basis of the conviction.
[44] Finally, I believe the difference between the charge and the
conviction is borne out by the Commission’s change of course
with regard to the remedies it sought against Senwes. Originally the
remedies sought were set out in the notice of motion. At the
commencement of the hearing, the Tribunal was asked, by agreement
between the parties, to decide the merits of the complaint first
while the issues pertaining to the appropriate remedies stood over
for later determination. The remedies originally sought were
in line
with the charge. In the main they comprised orders declaring the
practice of differential tariffs a prohibited practice,
an interdict
against its continuation and the imposition of an administrative
penalty under s 59(1) of the Act.
[45] But the Commission must have realised that the remedies
originally sought would not prevent the conduct constituting the
margin queeze of which Senwes was convicted. Compliance would require
no more from Senwes than to abolish the 100 day cap with reference
to
farmers. After the decision of the Tribunal and the CAC in its
favour, the Commission therefore applied for a drastic amendment
to
the remedies it proposed to seek at the resumed hearing before the
Tribunal. These would include:
(a) An order against Senwes to sell either its grain trading division
or its storage division to a separate registered company.
(b) Directing that all parties who store grain with Senwes would be
charged for such storage on the same terms and conditions.
[46] In the affidavit supporting the amendment application (p 196)
the deponent on behalf of the Commission explained that, in
order to
remove the margin squeeze, it is necessary to ensure that the price
paid to Senwes by other traders for storage facilities
must be equal
to what Senwes’ own trading division has to pay. This result
can only be attained, so the deponent continued,
by a full business
separation of Senwes’ different business entities. From all
this it is clear, in my view, that the conduct
constituting a margin
squeeze was so far removed from the referral that it was not even
contemplated in the relief originally sought.
Was the Tribunal entitled to go beyond the terms of the referral?
[47] The further contention advanced by the Commission, which also
found favour with both the Tribunal and the CAC, was that even
if
Senwes’ conduct which led to its conviction was not covered by
the terms of the referral, the Tribunal was entitled to
go beyond its
terms in the circumstances of this case. As to why the Tribunal was
entitled to do so, the Commission relied on the
following arguments.
(a) Tribunal proceedings should not be equated with a civil dispute
between parties. Consequently the Tribunal is entitled to adopt
a
more flexible approach to pleadings than a court does in civil
proceedings.
(b) On Senwes’ own admission it became aware that the
Commission intended to rely on conduct constituting a margin squeeze,
prior to the hearing, when witness statements were exchanged. Despite
ample opportunity to do so, Senwes however deliberately elected,
in
the implementation of a conscious strategy, not to deal with that
part of the Commission’s case. In the words of the Commission,
Senwes took this high risk gamble because it had no answer to these
allegations. A party who conducts litigation in a manner which
amounts to a high risk gamble, so the Commission contended, cannot be
heard to complain when the strategy fails.
(c) Senwes had no answer to the charge of a margin squeeze because
Senwes’ witnesses conceded that its own trading division
did
not incur the storage costs that other traders had to pay; that in
consequence other traders could not compete with it; and
thus
conceded, for all practicable purposes, that Senwes was guilty of
margin squeeze conduct.
(d) Senwes had failed to seek a ruling from the Tribunal that conduct
constituting a margin squeeze was not part of the complaint
referred
nor did it properly object to the introduction of evidence to that
effect.
[48] Again I do not agree with the Tribunal and the CAC in their
acceptance of the contentions by the Commission. In motivating
my
conclusion I propose to deal with the arguments advanced in support
of the contention, individually.
[49] Elaborating on its argument based on the difference between the
Tribunal and civil courts, the Commission pointed out that
proceedings before the Tribunal are not aimed at resolving civil
disputes between parties, but at the protection of the public
from
anti-competitive behaviour. Hence the Tribunal should not be
constrained by the ambit of pleadings to the extent of a civil
court.
Rules of procedure, the Commission contended, are for the convenience
of the Tribunal and are not to stand in the way of
its endeavour to
fulfil the purposes of the Act.
[50] This approach, so the Commission continued, is borne out by the
provisions of ss 52 and 55 of the Act. Thus, for example,
s 52
provides that the Tribunal must adhere to the principles of natural
justice but that it may conduct its hearings informally
or in an
inquisitorial manner. And, in terms of s 55, the Tribunal is
authorised to accept as evidence any relevant oral testimony,
document or other thing, whether or not it is given or proven under
oath or affirmation and whether or not it would be admissible
as
evidence in a court. What is apparent from these provisions, so the
Commission contended, is that the Tribunal has unique procedural
powers which differ from those of a court in adversarial civil
proceedings.
[51] While all this may be true, the starting
point of an enquiry into the scope of the Tribunal’s authority,
is that we are
dealing with a creature of the Act. It has no inherent
powers. In accordance with the constitutional principle of legality,
it
has to act within the powers conferred upon it by the Act.
8
In terms of s 52(1) the Tribunal must conduct a
hearing, subject to its rules, into any matter referred to it. The
reverse side
of this must be that the Tribunal has no power to
enquire into and to decide any matter not referred to it. I therefore
agree with
the following statement by the CAC in
Netstar
:
9
‘
. . .
. [I]t
is
necessary once again to emphasize that the Tribunal is not at large
to decide whether conduct is anti-competitive and then to
formulate
reasons for that finding. It is . . . . bound to apply the Act and
engage with the issues as they arise from a proper
construction of
the Act’s provisions. It does so in the light of a specific
complaint that has been referred to it for determination
and its only
function is to determine whether in the light of the Act’s
provisions and the evidence placed before it or obtained
by it
pursuant to the exercise of its inquisitorial powers, that complaint
is made out.’
[52] Thus understood, all the provisions of the
Act and the rules pertaining to the Tribunal’s conduct of its
hearings are
subject to the overriding limitation that the hearing
must be confined to matters set out in the referral. Of course these
matters
can be extended by an amendment of the referral.
10
Moreover, I accept for the sake of argument that,
as in the case of civil matters before the courts, the referral can
be extended
by agreement (expressed or implied) between the parties
11
but the principle remains that the referral, with
or without extension, constitutes the boundaries beyond which the
Tribunal may
not legitimately travel.
[53] In terms of s 55 of the Act the Tribunal’s power to
receive evidence in an informal way is limited by the section to
evidence that is relevant. Irrelevant evidence may not be allowed in
any way, whether formal or informal. That, of course, includes
evidence introduced by cross-examination. Relevance is determined by
the subject matter of the hearing which, in turn, is determined
by
the referral. The same goes for the Tribunal’s power to gather
information in an inquisitorial manner. In doing so it
may not stray
beyond matters circumscribed by the referral. That would offend the
principle of legality.
[54] As to the argument that Senwes had been forewarned by the
contents of the witness statements that the Commission intended
to
rely on conduct constituting a margin squeeze, the answer is that the
Commission could not render irrelevant evidence relevant
by
incorporating it into witness statements. Whether Senwes had
sufficient opportunity to deal with this irrelevant evidence is
neither here nor there. I accept that if Senwes had decided to
confront the new case, it could have done so. Presumably the referral
would then have been extended by implied agreement. But Senwes was
under no obligation to so do. It was entitled to do what it
did,
namely to adopt the stance that the evidence pertaining to a margin
squeeze was irrelevant.
[55] With regard to the argument based on Senwes’ failure to
seek a ruling from the Tribunal as to whether the conduct
constituting
a margin squeeze was part of the referral before it
adopted the stance that it did, I believe the answer is this: in
doing so Senwes
took a gamble that it might be wrong in its
interpretation of the referral. If it turned out that as an objective
fact the conduct
constituting a margin squeeze was indeed covered by
the referral, that gamble would have been lost. But the converse is
equally
true. In the light of Senwes’ consistent attitude first
in its exception and then in its objections, the Commission was aware
of the contention that its case based on margin squeeze fell outside
the referral. By refusing to seek an amendment of the referral
so as
to incorporate the complaint of a margin squeeze, it is the
Commission which took the gamble and lost.
[56] This brings me to the Commission’s argument that Senwes
took the technical stance because it had no defence against
the
charge of a margin squeeze. I believe there is more than one answer
to this argument. The first is that since Senwes’
stance had
been found to be properly taken, its motive for doing so is of no
consequence. Secondly, the concessions by Senwes’
witnesses
which proved to be a vital part of the Commission’s case were
elicited through cross-examination aimed at irrelevant
issues and
therefore inadmissible. Of far greater consequence, however, is that
Senwes, in the light of its stance, steadfastly
refused to engage
with a charge of a margin squeeze. Whether or not it has a defence to
that charge we simply do not know.
[57] The Commission’s argument that Senwes had failed to object
properly is primarily based on the fact that it did not raise
a
pertinent objection every time evidence was presented by the
Commission in support of a margin squeeze. This objection comes
as
somewhat surprising in the light of the statement by counsel for
Senwes at the commencement of the hearing that the objections
raised
in the document entitled ‘Schedule of Objections’ should
be treated as being raised against all evidence tendered
in spite of
them. But be that as it may, the argument shows a lack of
appreciation as to the role of an objection. A failure to
object does
not render irrelevant evidence tendered by the opposing party
relevant. But in the absence of an objection it might
be argued that
the issues had been extended by implied agreement. In the light of
Senwes’ persistent attitude throughout
the proceedings that the
complaint of a margin squeeze was not part of the case against it,
any suggestion of an implied agreement
to incorporate that complaint
is clearly unsustainable.
Compliance with the requirements of special leave.
[58] As to the requirement of reasonable prospects of success, it
should be clear by now that in my view Senwes not only succeeded
in
satisfying this requirement, but that the appeal should in fact
succeed. In criminal law parlance, Senwes was acquitted of the
charges brought against it and convicted on one which was not.
[59] As to the requirements of ‘special circumstances’ it
bears no denial that the matter is of vital importance to
Senwes,
particularly in the light of the remedies the Commission now proposes
to seek at the resumed hearing of the Tribunal. After
all, what the
Commission will now seek is that Senwes be broken up as a business
entity with all the ramifications that that might
entail. Moreover,
it is clearly in the public interest that the Tribunal should not, in
the exercise of its far-reaching powers,
stray beyond the authority
bestowed upon it by the Act. Although it probably did so with the
best of intentions, it exceeded its
powers and thereby contravened
the principle of legality which is an aspect of the rule of law
itself and therefore admits of no
exception.
Relief
For these reasons it is ordered:
1 The application for leave to appeal is granted with costs,
including the costs of two counsel.
2 The appeal is upheld with costs including the costs of two counsel.
3 The order of the Competition Appeal Court is set aside and replaced
with the following:
‘
(a) The appeal is upheld with costs,
including the costs of two counsel.
(b) The order of the Competition Tribunal is set aside and replaced
with the following:
“
The application is dismissed.”’
_____________________
F D J Brand
Judge of Appeal
APPEARANCES:
M S M Brassey SC (with him W G Engelbrecht)
Instructed by Cliffe Dekker Hofmeyr Inc, Sandton
Symington & De Kok, Bloemfontein
A R Bhana SC (with him T Dalrymple)
Instructed by The State Attorney, Pretoria
The State Attorney, Bloemfontein
1
National
Union of Metal Workers of South Africa v Fry’s Metals (Pty)
Ltd
2005 (5) SA 433 (SCA).
2
Originally
with the Marketing Act 26 of 1937 which was then consolidated and
redrafted in the Marketing Act 59 of 1968.
3
Which
is part of the Johannesburg Securities Exchange.
4
See
rules 14 and 15 of the Rules for the Conduct of Proceedings in the
Competition Tribunal which were promulgated in terms of
s 27(2)
of the Act.
5
The
full text of s 8(c) provides:
‘
It
is prohibited for a dominant firm to –
(c)
engage in an exclusionary act, other than an
act listed in paragraph
(d)
, if the anti-competitive effect
of that act outweighs its technological, efficiency or other
pro-competitive, gain; or . . .‘
6
In
terms of Tribunal Rule 16.
7
Though
the rules of the Tribunal do not provide for exception procedure,
Senwes contended that the Tribunal could entertain an
exception on
the basis of s 27(1)(d) of the Act which authorizes it ‘to
make any ruling or order necessary or incidental
to the performance
of its functions in terms of the Act’.
8
See
eg
Fedsure Life Assurance Ltd v Greater Johannesburg Transitional
Metropolitan Council
[1998] ZACC 17
;
1999 (1) SA 374
(CC) paras 56-59.
9
Netstar
(Pty) Ltd v Competition Commission SA
(99/CAC/May 10)
[2011]
ZACAC 1
(15 February 2011) para 61.
10
In
terms of rule 18 of the Rules of the Tribunal.
11
See
eg
Shill v Milner
1937 AD 101
at 105;
Fourway Haulage SA
(Pty) Ltd v SA National Roads Agency Ltd
[2008] ZASCA 134
;
2009 (2) SA 150
(SCA)
para 14.