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[2021] ZACAC 1
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Aranda Textile Mills (Pty) Ltd and Another v The Competition Commission of South Africa (190/CAC/DEC20) [2021] ZACAC 1; 2023 (2) SA 182 (CAC); [2023] 1 CPLR 3 (CAC) (17 December 2021)
IN
THE COMPETITION APPEAL COURT OF SOUTH AFRICA
CAC
CASE NO: 190/CAC/DEC20
In
the matter between:
ARANDA
TEXTILE MILLS (PTY)
LTD
First appellant
MZANSI
BLANKET SUPPLIES
(PTY)
LTD
Second appellant
And
THE
COMPETITION
COMMISSION
OF SOUTH AFRICA
Respondent
Heard
Remotely by the late Acting Judge President BJ Mnguni, Judge of
Appeal M Victor and Acting Judge of Appeal F. Kathree-Setiloane
Judgment
handed down by M Victor JA and F Kathree-Setiloane AJA concurring.
JUDGMENT
Victor
JA (Mnguni AJP and Kathree-Setiloane AJA
Introduction
[1]
This appeal concerns a finding by the Competition
Tribunal (Tribunal)
of a contravention of s 4(1)(b)(i) and (iii) of the Competition Act,
No 89 of 1998 (the Act) based on inferential
reasoning in the absence
of direct evidence of an agreement or collusive tendering and with no
characterisation analysis.
[2]
The appeal also raises the question whether
communication between
manufacturer and retail distributor automatically casts it in a
horizontal net. In a commercial society such
as ours, discussions
between manufacturer and retail distributor on price is routine when
giving or obtaining prices between them.
In modern commerce is there
room to force a manufacturer to give a uniform price to its different
customers?
The
parties
[3]
The first appellant is Aranda Textile Mills
Pty Ltd (Aranda) a
manufacturer of inter alia blankets. The second appellant is Mzansi
Blanket Supplies Ltd. (Mzansi) which trades
as a supplier of blankets
and sources these from Aranda.
[4]
The respondent is the Competition Commission
(the Commission) a
statutory body established in terms of the section 19(1) of the Act.
The
Referral
[5]
On 10 April 2019 the Commission referred
a complaint to the Tribunal
alleging that, “in response to this tender, the [appellants]
agreed to coordinate their pricing
for the tender”. Under the
Heading “
Conduct in Contravention of Section 4(1)(B)(i) And
(ii) of the Act”
the Commission alleged that “[o]n or
about March 2015, the Respondents discussed and agreed how to bid for
tender number:
RT26-2015T. In terms of the agreement, Aranda would
provide Mzansi with its tender documents including pricing schedule
which Mzansi
will use to prepare its own tender including pricing.”
The Commission also alleged that “[t]he agreement further
provided
that Mzansi will add 7.25% from Aranda’s prices to its
prices of the blankets to be submitted to National Treasury when
bidding
for this tender.”
[6]
The Commission presented a table in which
different columns reflected
the blanket item number, Aranda’s price and then Mzansi’s,
and a further column reflected
the percentage price difference
between the two tenders. This column reflected the consistent 7.25%
mark-up. The complaint referral
concluded that the collusive
agreement entered into by the Aranda and Mzansi was egregious and a
serious contravention of the Act
and that it “would destroy the
basis of competitive bidding and is particularly harmful to the
public because it often distorts
the market for procurement. The
Commission argued that the above conduct by the Respondents
constitutes price fixing and collusive
tendering in contravention of
sections 4(1)(b)(i)
and (iii) of the
Competition Act.
Issues
[7]
The central issue in the appeal is whether
the Commission has proved
the
s 4(1)(b)(i)
and (iii) contravention of the Act on a balance of
probabilities. This inquiry requires a consideration of the role of
inferential
reasoning in competition law to prove a per se
prohibition.
[8]
Further in the absence of a characterisation
evaluation, can a proper
finding of horizontality in terms of section 4(1)(b) of the Act be
made where Aranda and Mzansi stood
in a supplier-customer
relationship prior to them submitting bids in response to the same
tender? In the absence of direct evidence
on how Aranda and Mzansi
had agreed and coordinated their bids, did the Commission discharge
its onus of proof?
[9]
A further issue is whether the Tribunal had
failed to consider the
communications between Aranda and Mzansi and their economic
relationship in its appropriate context as between
manufacturer and
distributor.
[10]
To what extent can the Tribunal depart from the case made out by
the
Competition Commission to make up for the deficiencies in evidence
and, in particular where the Commission had not pleaded
a collusive
scheme and there was no witness testimony of such a scheme.
Relevant
background facts
[11]
On 6 February 2015, the Treasury invited prospective bidders to
participate in the tender for supply of blankets, household textiles,
tablecloths, sheets, and face towels to the State under Tender
RT26-2015 for the period 1 April 2015 to 31 March 2016 The tender
comprised some 20 contracts but at issue here are the six blanket
contracts (the blanket tender). The Treasury received eight different
tenders in response to the blanket tender. Aranda and Mzansi
scored
first and second out of the six tenderers for the blanket contracts.
Although the Aranda tender was lower in price, Mzansi
was awarded the
tender on the basis of its BBBEE credentials.
[12]
The bid
requirements included that a participant disclose from whom they
sourced their products and the details of their sources
and make
various declarations and sign the Certificate of Independent Bid
Determination Form (the SBD9 form).
[1]
Aranda was the only manufacture that could supply the blankets in
accordance with the
tender
specifications. The supporting documents also required moth-proof
tests which
had to be
in accordance with the South African Bureau of Standard.
[13]
Among those tendering was Aranda represented by Mr Magni, Ms Paruk
of
Mzansi and Mr Mandla Vilikazi of Vilankosi Enterprises CC. As the
only manufacturer and supplier of blankets, Aranda imposed
the
following credit terms on tenderers (other than Mzansi) who sought
the supply of blankets from it: (a) the provision of an
irrevocable
letter of credit; (b) payment of 50% deposit prior to the
commencement of production; and (c) for the full duration
of the
tender, Aranda be a joint signatory on the tenderer’s bank
account into which payment was to made by Treasury for
the blankets.
In relation to Mzansi the terms of supply were different. Aranda
confirmed in the tender letter that a “
firm supply
arrangement
” was in place. Aranda and Mzansi had done
business over a number of years and there was an established business
relationship
in place. In fact, the sole shareholder of Mzansi, Ms
Paruk was the daughter in law of Mr Paruk who owned Africhoice, a
company
which had also done business with Aranda over many years.
[14]
Sometime after the award of the blanket tender, Mr Vilikazi a member
of Vilankosi Marketing Enterprises CC (Vilankosi) found out that the
prices Mzansi received from Aranda were below those that he
had
received from Aranda. He became suspicious and reported this to Ms
Yvette van Niekerk the deputy director of procurement at
Treasury.
She invited Mr Vilikazi to lodge a complaint with Treasury which he
did. She then on-referred the complaint for investigation
into
possible collusion in respect of the blanket tender by Aranda and
Mzansi to an internal specialized audit services committee
(SAS).
[15]
SAS issued a report suggesting that there could be collusive bidding
based on the letter between Aranda and Mzansi dated 2 March 2015.
This letter, according to the report, was in conflict with the
declarations and the SBD9 form.
[16]
The Tenderer was required to declare that there was no consultation,
communication, agreement or arrangement with any competitor regarding
prices or formulas to calculate prices with the aim of winning
or not
winning the bid.
[17]
SAS found
that Aranda tendered with the intention not to win the bid in
conflict
with the
Form SBD9. It suggested that the Aranda prices were marginally below
those
of
Mzansi and way above those quoted to Vilankosi. It found that there
were potential
contraventions
of sections 4(1) (b) (i) and (iii) and or 9(1)(c ) of the Act and the
matter
was
referred to the Commission.
[2]
[18]
The tender was ultimately awarded to Mzansi and implemented.
Aranda’s
case on appeal
[19]
Aranda’s case on appeal is broadly that the Tribunal erred
in
concluding that there was cooperation between Mzansi and itself. It
failed to take into account that the relationship was one
between
supplier and distributor that did not involve any engagement on their
respective tender prices. The Tribunal hypothesised
about the alleged
collusive scheme in circumstances where the Commission had not
pleaded such a scheme, and presented no
viva voce
evidence at
the Tribunal proceedings about such a scheme. The Tribunal made these
findings notwithstanding the direct evidence of
Mr Magni of Aranda
and Ms Paruk of Mzansi that there was no agreement or collusion or
pricing information exchanged. The Tribunal
gave no reasons for
rejecting the evidence of Mr Magni and Ms Paruk and failed to
characterise the alleged contravening conduct.
Mzansi’s
case on appeal
[20]
Mzansi also highlighted several aspects on which it contended the
Tribunal erred. In particular, it argued that there was no evidence
of an agreement or concerted practice relating to pricing.
The
communication between Aranda and Mzansi on the courtesy check list as
to what documentation had to accompany the tender was
neutral, as
Aranda had also advised other tenderers of this. The analysis of the
SBD9 form and the “lets get it done email”
was not proof
of collusion as it was properly explained. Mzansi also asserted that
there was neither the theory of harm applied,
nor horizontality and
verticality characterisation applied. There was also no rationale for
the impugned conduct. Mzansi also made
common cause with Aranda on
the appeal issues.
The
Commission’s case
[21]
The Commission relied for its case on the bid prices because Mzansi
added a consistent 7, 25% price mark up on the price that Aranda gave
it. It also relied on Aranda’s close historic relationship
with
Mzansi and Africhoice, the latter company belonging to Ms Paruk’s
father-in-law. Aranda had a previous commercial relationship
with
Africhoice.
[22]
The Commission contended that Aranda treated Mzansi and Africhoice
interchangeably. Aranda and Mzansi’s knowledge that they were
both bidding for the annual blanket tenders prior to their
tender
submission date on 9 March 2015 was a factor. So too was the
checklist of documents for submission which Aranda provided
to Mzansi
during the bid preparation stage. This was aimed at ensuring that
Mzansi submits a responsive tender.
[23]
The Commission also highlighted the assistance which Mzansi provided
to Aranda’s bid at the bid preparation stage by reminding it,
in an email, to include an additional test report to its (Aranda’s)
bid documents otherwise “both” their bids would be
disqualified. The Commission submitted that the communication between
Aranda and Mzansi and the “let’s get it done” email
was indicative of an agreement or collusion. A further aspect
relied
upon by the Commission to support its case, was Aranda’s
pricing out of the running for the tender of every single
other
competitor, by providing them with prices about 56% more than
Mzansi’s eventual bid price. They also contended that
the
annual, predictable nature of Treasury’s blanket tenders and
Aranda’s historic relationship with Mzansi and Africhoice
led
to some cooperation.
[24]
The Commission was also concerned with two key drivers of the bid
price. These were the cost price of the blankets and the B-BBEE
scores. The tender specifications confirmed, in this regard, that
the
tender was to be assessed on a “90/10” basis in favour of
BBBEE and Mzansi was thus a convenient vessel to reach
the maximum
number of points.
The
statutory overview
[25]
Aranda and Mzansi had to meet a case based on a contravention of
s
4(1)(b)(i) and/or (iii) of the
Competition Act, which
provides in
relevant part:
“
An agreement
between, or concerted practice by, firms, or a decision by an
association of firms, is prohibited if it is between
parties in a
horizontal relationship and if – […]
(b)
it involves any of the following restrictive horizontal practices:
(i)
directly or indirectly fixing a purchase or selling
price or any
other trading condition;
(ii)
[…]
(iii)
collusive tendering.
[26]
Cartels have long been understood to be
prohibited conduct which attracts a per
se prohibition
and
constitutes one of the most pernicious forms of anti-competitive
conduct that results in harm to consumers and the economy.
The
consequences of a contravention are wide ranging and attract heavy
penalties of a dissuasive nature that serve as a deterrent.
Whilst I
accept that it may not always be easy for the Competition
authorities to secure direct evidence,
thereby forcing them to rely on inferences and probabilities,
nonetheless the rigours of
judicially accepted rules pertaining to
reasoning
by
inference must apply.
[27]
Reasoning by inference is also recognised in the European
Court of Justice. In
Aalborg Portland v Commission,
it
recognised that there must be careful and rigorous analysis of a
complaint and it must be subject to a fair hearing. Although
the case
involved a merger, the
business subject to
proceedings, had to be "afforded the
opportunity, during the administrative
procedure, to make known its views on the truth
and relevance of the facts and
circumstances alleged and, on the documents, used by the Commission
to support its claim. Its
right to a
fair hearing must be respected even
if
the communication is fragmentary and sparse and details are
reconstituted by
deduction.
“
if the Commission
discovers evidence explicitly showing unlawful conduct between
traders, such as the minutes of a meeting, it will
normally only be
fragmentary and sparse, so that it is often necessary to reconstitute
certain details by deduction”.
[3]
[28]
To this we would add an important feature that is specific to South
Africa.
Section 1(2)(a)
of the
Competition Act provides
expressly
that the Act ‘must be interpreted – ‘in a manner
that is consistent with the Constitution’.
[29]
The Constitution governs the entire Act and each of its provisions
must be interpreted through a constitutional lens which includes that
proper consideration must be given to evidence presented
by the
parties in their defence.
[30]
The Tribunal in this case adopted a model of reasoning that relied
through-out on inferences, applied inferential reasoning to the 2
March 2015, “let’s get it done” email between
Aranda and Mzansi, where Dr Mansoor, the spouse of Ms Paruk,
apparently instructed a secretary of Aranda to make sure that all
the
necessary specification reports were attached to its bid.
[31]
The Tribunal also adopted the inferential model of reasoning to
the
pricing evidence, when it concluded that the pricing arrived at by
Aranda and Mzansi was consistent with collusive tendering.
The
inference drawn was based entirely on the fact Aranda gave Mzansi a
better price per blanket than it gave to other tenderers,
and that it
imposed more stringent payment conditions on the other tenderers.
Inferential
reasoning in competition law
[32]
It is necessary to consider the role of inferential reasoning in
competition law and whether the inferential reasoning principle
should be applied differently from that established in our current
jurisprudence in other areas of the law. It is trite that a party may
prove a fact in issue in legal proceedings through adducing
direct
evidence on the primary or secondary facts; or with circumstantial
evidence; or by leading evidence of one or more other
facts from
which a court may be invited to infer the particular fact in issue.
Is it any different from that required in other
areas of the law
which requires proper proof of the primary facts before the question
of drawing an inference properly can arise?
[33]
In a case of prohibited cartel conduct which is a per se prohibition
as provided in s 4(1)(b) of the Act and where there is no direct
evidence of an agreement or collusive tendering, there may be
instances where it is permissible for the court to infer that the
agreement or the collusive conduct took place by considering
circumstantial evidence. There are however stringent checks and
balances. In circumstances where it is evident that a hypothesis
has
been formulated of prohibited conducted, and reliance is placed on
the best possible explanation based on circumstantial evidence
for
the prohibited conduct, it may well serve as a blinker and undermine
any direct evidence which is provided by an alleged contravening
party to prove a primary fact. The best possible explanation as a
yardstick in per se contraventions is subjective in nature often
overlooking glaringly objective facts.
[34]
In this case, the direct evidence of Aranda and Mzansi was largely
ignored by the Tribunal save that it cherry picked bits of their
direct evidence which it adopted to support its mosaic hypothesis.
A
cautious and fact sensitive approach must be adopted when relying
wholly on circumstantial evidence in order to conclude that
there has
been a contravention. This approach may also be warranted in the
context that we have here, where the Commission was
unable to lead
direct evidence of the contravening conduct.
[35]
In cartel cases, it may well be difficult to find direct evidence
which means a combination of direct and circumstantial may be
necessary or only circumstantial evidence. As stated, often cartels
are clever and avoid traces of evidence thereby concealing their
conduct. Arrangements are made on a nod and nothing is noted on
paper; leaving the court to rely on the best evidence which may be
circumstantial. Although this could lead to a finding of a
contravention based solely on a mosaic of postulations and
inferences, such a finding can only be made based on sound legal
principles
and reasoning.
[36]
There are
different types of circumstantial evidence that may be of assistance
to
a
court in competition law cases. In a cartel case, for example, the
circumstantial evidence may generally be divided into communication
evidence and economic evidence.
[4]
Circumstantial communication evidence is evidence that communications
between competitors took place. In this case Aranda and Mzansi
were
in a vertical relationship as manufacturer and distributor and
communication would of necessity taken place. Circumstantial
economic
evidence, on the other hand, includes conduct evidence of an economic
nature.
[5]
This requires cogent
economic reasoning, and often
this is
where the evidence of an expert can assist. There was, however, no
expert evidence produced in this case on the effect of
the alleged
pricing contravention despite
its
relevance to the circumstantial economic evidence.
[37]
Conduct
evidence is evidence that competitors behaved consistently with the
existence of the alleged cartel agreement.
Conduct
evidence will be most persuasive if
it cannot
be explained by ordinary market forces or competitive business
behaviour. A
judge
should consider whether particular behaviour would have occurred in
the absence
of a
cartel, having regard to unilateral commercial and economic interests
of the competitors. Conduct evidence can include evidence
of bidding
patterns, information exchanges between competitors, abnormally high
sustainable profits and past violations
of
competition laws.
[6]
It could
also include structural evidence which is evidence that explains why
certain structural features make a particular market
more susceptible
to cartel conduct.
[7]
In fact,
the cross examination of Mrs Paruk on profitability, showed that
Mzansi’s profits were very modest.
[38]
Evidence
has to be assessed holistically and not in a vacuum. No one piece of
circumstantial evidence would provide a sufficient
basis on its own
to infer an agreement or collusion. Where a piece of circumstantial
evidence may be capable of supporting a number
of inferences, it has
to be the most plausible.
[8]
It must be
assessed
contextually.
The reasoning should not be aimed at using the inferences to answer a
question which the adjudicator has an inclination
for.
[39]
The process
of inferential reasoning calls for an evaluation of all the evidence
and not merely selected parts.
[9]
The inference that is sought to be drawn must be consistent with all
the proven facts.
If it is
not, then the inference cannot be drawn or it must be the 'more
natural, or plausible, conclusion from amongst several
conceivable
ones when
measured against the probabilities.
[40]
The inference or inferences to be drawn from circumstantial evidence
should be assessed by a judge holistically. If the Commission’s
version is to prevail, its version must be the best explanation
having regard to all the evidence. However, in this case, the
Tribunal simply ignored key aspects of Ms Paruk and Mr Magni
testimony
in its evaluation of the evidence.
[41]
Whilst the
existence of the alleged agreement or collusion may be inferred from
circumstantial
communication and conduct evidence, proving an agreement or concerted
practice with indirect or circumstantial evidence
remains
problematic.
Of the
two,
communication evidence is considered to be the more important as
economic evidence is invariably ambiguous unless supported
by expert
evidence.
[10]
As much is clear
from this case, where the Tribunal found that the economic evidence
regarding pricing was a compelling factor
in support of a
contravention, yet no expert evidence of
the
economic structure was presented by the Commission.
[42]
The nature of the present proceedings is therefore not conducive
to
resolving the factual issues underlying the alleged contravention by
way of inferential reasoning as the Commission has failed
to provide
proof of primary facts regarding an agreement or collusive tendering.
[43]
This much
is settled law. In
Knoop
NO
[11]
Wallis
JA
stated
that:
“
Only if there is
proper proof of the primary facts can the question of drawing an
inference properly arise. The drawing of inferences
from the facts
must be based on proven facts and not matters of speculation. As Lord
Wright said in his speech in Caswell v Powell
Duffryn Associated
Collieries Ltd:
'Inference must be
carefully distinguished from conjecture or speculation. There can be
no inference unless there are objective
facts from which to infer the
other facts which
it is
sought to establish
But if
there are no positive proved facts from which the inference can be
made, the method of inference fails and what is left is
mere
speculation
or
conjecture.”
[12]
[44]
In
Gralio v Competition Commission,
Dambuza JA stated the
following
“
In my view, even
in Tribunal hearings, inferences and probabilities must be
distinguished from conjecture and speculation. There
can be no proper
inferences drawn unless there are objective facts from which to infer
the facts sought to be established. If there
are no positively proved
facts from which the inference can be drawn, the method of inference
fails and what is left is mere speculation.
Tribunal hearings need to
adhere to the principles of legality and its decisions must be
founded on
credible evidence. The flexibility allowed in its proceedings is not
intended
to
permit abuse of the process.”
[13]
[45]
In my view, the approach to inferential reasoning in competition
law
is the same as in other areas of the law. Where inferential reasoning
is adopted, the proper analytic rigours must be applied
to ensure a
fair hearing and comply with our constitutional imperatives. The
current case is not suitable to inferential reasoning
as there is
simply no evidence contradicting that of Mr Magni of Aranda and Ms
Paruk of Mzansi.
Has
the Commission proved its case on a balance of probabilities?
[46]
For the
conduct of Aranda and Mzansi to fall within the provisions of section
4(1)(b) of the Act, there must be an agreement or
a concerted
practice. In
Netstar
Wallace
JA emphasised that a concerted practice is distinct from an
agreement. An agreement
when
used
in
relation
to
a
prohibited
practice
“includes
a
contract,
arrangement or understanding, whether or not legally enforceable,”
whilst a concerted practice means “co-operative,
or
co-ordinated conduct between firms, achieved through direct or
indirect contact, that replaces their independent action, but
which
does
not
amount to an agreement”.
[14]
[47]
The Commission’s case was pleaded on the basis of a section
4(1)(b) of the Act. It suffices for present purposes to say that the
emphasis was on horizontality. Section 5 being a restrictive
vertical
practice was not pleaded. It is clear therefore that the Commission
must prove an
agreement
or
collusive tendering
on a
balance of probabilities.
[48]
It was
incumbent on the Tribunal to find that the Commission had proved on a
balance of probabilities that the conduct amounted
to prohibited
conduct under s 4(1)(b)
of the Act.
[15]
Two bids by a
manufacturer and distributor for the same tender does not
of itself
establish a per se contravention. In this matter there were two bids,
one by Aranda and one by Mzansi. In
A’Africa
Pest Prevention CC,
Boqwana
J stated as follows on the question of two separate bids by two
companies with overlapping directors:
“
Secondly,
the submission of the two separate bids without more cannot on its
own bring the conduct within the ambit of section 4
(1) (b),
something more is required. There must be an “agreement”
or “concerted practise” by competitors
to fix the price,
or of collusive tendering. That presupposes an involvement by more
than one firm, as we know behind “firms”
that are
corporations there are individuals.”
[16]
[49]
In this case neither of the two witnesses called by the Commission
had personal knowledge of an agreement or collusive conduct between
Aranda and Mzansi. The Commission’s witnesses were Ms
Van
Niekerk an employee of the Treasury who evaluated the bids on the
Tender, and Mr Vilikazi who had first raised his suspicion.
Their
speculation was based on the pricing. As submitted by Aranda, the
witnesses could do little more than read the contents of
their
witness statements into the record and offer their opinion that there
had been unfairness because Aranda had treated Mzansi
differently
from the other bidders. The Commission produced no evidence pointing
to an agreement on pricing. Their evidence was
intuitive, speculative
and based on a facial analysis of what was contained in the
documents.
[50]
Moreover, the Commission’s witnesses could not support core
averments in the Referral that: “[i]n terms of the agreement,
Aranda
would provide Mzansi with its tender
documents
including pricing schedule
which Mzansi
will use to prepare
its own tender
including pricing
.” and that
the agreement further entailed that Mzansi will add 7.25% “on
Aranda’s prices of the blankets to be
submitted to National
Treasury when bidding for this tender.” There was no evidence
supporting the terms of the Referral
save for the reference to the
7.5% pricing methodology which Mzansi added on to the prices Aranda
gave it.
[51]
No evidence could be gleaned from the testimony of Mr Magni and
Ms
Paruk to support the basis of the contravention as pleaded in the
Referral.
[52]
In addition, Mr Magni was adamant that he had no agreement with
Mzansi relating to pricing and nor had he colluded with Mzansi. It
was clear from his evidence that he favoured Mzansi, trusted
its
payment commitments and did not regard it as a payment risk. These
views were justifiably held, based on their long business
relationship and the previous relationship with Ms Paruk’s
father-in-law, the owner of Africhoice.
[53]
Mr Magni, under cross examination, confirmed the manufacturer and
distributor relationship between Aranda and Mzansi when he said that
Aranda would not contact customers including Mzansi, but it
is the
customer that contacts Aranda.
[54]
It is a flawed approach to square communication between manufacturer
and distributor into a horizontalist net without rigorous analysis.
Commerce is robust in our modern era and many discussions would
routinely take place between manufacturer and distributor and even
where they are competitors such as in this tender. Caution must
be
exercised when drawing inferences from communication that take place
simply because one is a manufacturer and the other a distributor
of
the product.
[55]
In light of the lack of evidence, that is of proven facts, the
Tribunal had no basis to draw the inferences it did in concluding
that Aranda and Mzansi directly or indirectly fixed a price for
the
tender or agreed any other trading condition or that there were
collusive dealings on a balance of probabilities between Aranda
and
Mzansi.
Is
the
2012 manufacturing agreement indicative of collusion?
[56]
The Tribunal found that the 2012 manufacturing agreement was of
concern and indicative of collusion. When cross examined on the
manufacturing agreement both Ms Paruk and Mr Magni understood that
a
manufacturing agreement would be as contained in the letters of 2015.
The manufacturing agreement in the 2015 letters would not
be the same
manufacturing agreement of 2012. In the November 2012 manufacturing
agreement, reference was made to Aranda accessing
Mzansi’s bank
account in “lieu of its agreed share of proceeds i.e. invoices
for the related blanket delivery.”
The 2012 agreement also
contained the words “should Mzansi succeed in securing the
tender, this business arrangement would
form the basis to establish a
platform for further cooperation into possible new ventures. The 2012
agreement also expressly provided
that it terminated on delivery of
all blankets for the tender unless extended through Board
resolution.” This was a reference
to the 2013 Tender. In cross
examination Ms Paruk of Mzansi was questioned about the agreement.
She had not seen the agreement
for many years and only select
paragraphs were put to her. There was also a non-disclosure
agreement. Her recollection of these
agreements was poor.
[57]
The Commission, in cross examination, put paragraph 1 of the 2012
Agreement to Ms Paruk: “a business arrangement has been agreed
to between Aranda and Mzansi for the fulfilment of tender
No
RT26-2013T, the tender, wherein Aranda and Mzansi assume the role of
B-BBEE distributor within the ambit of SBD 6.1 clause 2.2,
2.3 and
2.5”
Mr
Daniels: What exactly does that mean.”
Ms
Paruk explains BBBEE: “
it means that we fulfil the role of
BBBEE, a company that
fulfils the role of being a BBBEE
company. We had a certificate at that point, which grades us as a
BBEEE contributor.”
…
Mr
Daniels:
Now do the basic … well, do these two documents
still serve as the basis for your arrangements with Aranda going back
from
2012 forward? In other words, do
you and Aranda
still regard yourselves as being bound by these two agreements?
..
…
[58]
Ms Paruk was unable to recall the contents of the agreements but
stated that in 2012 it was a new business with Aranda and she wanted
to do online business with them and she assumed the document
was part
of that.
[59]
Not satisfied with the answer –
Mr
Daniels:
All I want to know is whether these two agreements signed
in 2012 still govern your relationship with Aranda today. In other
words,
when you tendered for the 2012 and the 2015 and the 2016 RT26
contracts, did these still apply to that relationship.
That’s
all want to know.
Ms
Paruk:
So at this point is doesn’t.
…
Mr
Daniels:
At this point.
Ms
Paruk:
I would have to read the document in full to see whether it
is applying.
Mr
Daniels
: okay no, I accept that. I’m happy to accept for the
purposes of my questioning that it does not apply today, but from
2012
onwards up to some point in the future, say 2013,2014,2015 and
2016 did these two agreements, the non-disclosure agreement, for
example, and the business agreement given your relationship with
Aranda? It’s a simple question, Ms Paruk, and I’m
really
not trying to trick you. I just
want to understand
these.
If you can’t answer, you are free to say
you can’t.
Ms
Paruk:
So, I guess they could hold me with this, if I were to
default on something or
other, because I did sign it,
but it has not come up.
Ms
Paruk
: It has not come up again. So, I’m finding it
difficult to answer, because it’s something that I had signed
at that
time with regards to not only RT26, but with regards
to other businesses that I’ve had with Aranda
,
Mr
Daniels:
I accept that
.
Ms
Paruk
: So I guess they could hold me with this, if I were to
default on something or
the other, because I did sign
it, but it has not come up.
…
…
Mr Daniels presses her
Mr
Daniels:
So won’t you listen to the question, please
?
Mr
Daniels
okay, now my question is a very simple one. Did you still
regard these two
agreements as still governing you
manufacturing arrangement with Aranda?
Ms
Paruk:
I forgot about these agreements, but technically yes, it
would be bound.
[60]
It is clear that Ms Paruk needed to peruse the agreement to refresh
her memory, but was not given the opportunity to do so. Ms Paruk had
forgotten about these agreements, but believed from what Mr
Daniels
put to her that technically yes, she would be bound.
[61]
Whilst Mr Daniels ultimately pressed her into conceding that the
2012
agreement applied going forward, she had not been given an
opportunity to read the agreement and could not have made a
considered
concession because, in any event, the agreement came to an
end once the 2013 tender had been awarded. That critical point that
the 2012 agreement had terminated was not put to her. Hence the
persistent questioning of Ms Paruk on a point where the agreement
had
self-evidently come to an end was nothing but an unfair form of
entrapment. The Tribunal considered the 2012 agreement read
with the
March 2015 letter as an important piece of circumstantial evidence.
The contents of the agreement were not properly traversed
with Ms.
Paruk in cross examination. Accordingly, the extent of the cross
examination on the 2012 agreement was insufficient to
draw an
inference that there was a contravention in 2015.
[62]
On deciding to give substantial weight to the 2012 agreement, the
Commission was under a duty to traverse its contents extensively
during cross examination of Ms. Paruk. This would have assisted
her
in understanding that she was required to deal with all aspects of
the agreement, and not a few select paragraphs that were
put to her.
The Tribunal erred in concluding that an agreement which had
terminated by the effluxion of time, could be juxtaposed
to two
letters of March 2015 as evidence of collusion. It was clear that the
2012 agreement was in furtherance of the 2013 tender.
Plucking
clauses from the agreement knowing that the 2012 agreement had come
to an end amounted to Ms Paruk being tricked into
agreeing that it
still applied. The Tribunal also drew an inference of collusion from
a clause in the 2012 agreement which indicated
that Aranda would have
viewing facilities of the Mzansi bank account. This was no different
from what Aranda imposed on the other
tenderers in 2015. The
Commission also failed to put to Ms Paruk that the agreement could
only be extended by the Board and in
any case it had not resolved
such an extension.
[63]
There was also the question of Mzansi’s banking password which
had to be given to Aranda. There was nothing unusual about this
requirement as Aranda had also imposed it on the other tenderers.
The
2012 agreement does not confirm a commercial relationship which is
inappropriate and suggestive of collusion.
Analysis
of the findings of the Tribunal
[64]
The Tribunal in essence found that the 56% price difference which
Aranda gave to Mzansi to be staggeringly high and that it put a
tenderer like Vilankosi at a significant disadvantage. There was
no
evidence to suggest that despite Aranda giving Mzansi a good price it
was left at a loss. Price discrimination cannot of itself
indicate
collusion. Insufficient economic evidence was led on this. There are
too many variables involved in pricing. In the absence
of a proper
analysis this fact of alleged price discrimination found by the
Tribunal is wrong.
[65]
The Tribunal also found the checklist to be consistent with a
contravention.
Ms Bell testified on behalf of Aranda and described
that many bidders would request information, the letter of
authorisation, moth
protection certificates, SABS specifications and
the like. This was not a courtesy extended only to Mzansi but also to
others.
The check list is a neutral fact in the light of Ms Bell’s
evidence.
[66]
The Tribunal sought to draw an inference from the fact that Mr Magni
would personally give prices to Mzansi. This too is a neutral fact.
It does not corroborate prohibited conduct. Ms Paruk attributed
this
to a long standing relationship and nothing in my view turns on this.
If one business person elects to talk directly to a
particular
customer and not through his or her secretary, no inference can be
drawn from this. Mr Magni had known Ms Paruk’
s family for
years. Nothing turns on this personal communication between Ms Paruk
and Mr Magni. The Tribunal thought it sinister
that original
documents were given to Mzansi in the evening. In the absence of more
comprehensive evidence on this aspect, it is
not a probability one
way or the other.
[67]
Even the Commission’s witness Ms van Niekerk saw nothing wrong
with Aranda providing Mzansi (as well as other tenderers) with a
check list. Mr Vilikazi did not ask for a check list because Aranda
had supplied it with all the necessary documentation. The Tribunal
found Ms Paruk’ s explanation to be improbable because
documents could be submitted late after the submission of the Tender.
Ms Paruk’s evidence was clear. Her direct evidence
was that
Mzansi lost the 2014 tender because it omitted to attach a certain
document. The Tribunal rejected her explanation simply
because she
was an experienced businesswoman who should have known better.
“
Let’s
get it done” email
[68]
The Tribunal found it significant that Dr Mansoor, Ms Paruk’s
husband, reminded Ms Bell in an email that Mzansi failed to submit a
test report and was disqualified. He reminded her to include
them in
Aranda’s bid, lest they both get disqualified from their 2015
bid. He was anxious about the test report as was Ms
Paruk. It was,
therefore, not untoward for Dr Mansoor to try and speed up the
process. The words “so let’s get this
done” is not
the only inference to be drawn as one being consistent with more than
just a normal business relationship as
the Tribunal found. It could
also plausibly be consistent with friendliness on the part of Dr
Mansoor and motivating her to get
the report out as soon as possible.
Aranda submitted that Aranda as the manufacturer and Mzansi as the
distributor had bid for
these tenders historically. It was not
implausible for Dr Mansoor to have assumed that Aranda was going to
put up a bid for 2015.
Aranda also submitted that if he wished to
prompt Ms Bell into action, it was not strange for Dr Mansoor to have
copied her boss
Mr Magni on the email.
Change
of its case by the Commission.
[69]
Although the Commission’s referral affidavit made no mention
of
the 2012 agreement between Mzansi and Aranda, the Tribunal found the
agreement to be a proven fact of an agreement determining
their
conduct going forward from date of signature of that agreement being
30 November 2012 to at least the year 2015 (the date
of the
complaint). This became a central consideration by the Tribunal in
finding a contravention. It was submitted by Aranda that
it clearly
understood the Commission’s case as one concerned with
collusion on price which it denied. The Tribunal observed
the price
trends between Aranda and Mzansi being the 7.25% mark up and
concluded that there had been collusion in particular, because
far
higher prices had been given to the other tenderers by Aranda. Aranda
submitted, that the dual position of Aranda as manufacturer/bidder
and supplier of quotes to other would-be bidders was fully explained
and reliance was placed on the following evidence of Mr Magni:
“
Aranda has no
control over, and has never sought to dictate to [Mzansi] the prices
quoted by it. The prices reflected in the Tender
were most certainly
not the consequence of any anti-competitive agreement reached between
Aranda and Mzansi”
.
Aranda denied that it had
“
agreed to coordinate its pricing for the Tender with
Mzansi, or indeed with any other party”
. In particular,
Aranda pleaded that “
No
discussion was held
and no agreement was reached on ‘how to bid’ for the
Tender”
and “
There was no agreement for Aranda to
supply its ‘tender documents including pricing schedule’,
or for Mzansi to use
Aranda’s tender documents to prepare its
own tender, including pricing”
.
Aranda pleaded directly
that its representatives had no knowledge of the prices that were to
be quoted by Mzansi in the tender,
nor of the “
percentage
profit that
Mzansi would seek to take when ‘on-selling’
the blankets obtained from Aranda”
. Mr Magni asserted that
“
I have no knowledge of why [Mzansi] might have elected to
add the margins in the manner that it did”
.
[70]
This direct and undisputed explanation by Mr Magni’s is
relevant
and material. It was, however, ignored by the Tribunal
without giving reasons for rejecting it. The Tribunal used the now
terminated
2012 agreement as an anchor on which to make its findings.
[71]
Aranda pointed out that the Commission’s referral affidavit
made no mention of the price differential quoted by Aranda to other
prospective bidders when compared with the favourable price
quoted to
Mzansi. The referral also did not make mention of the imposition of
more stringent payment terms to the other customers,
yet the Tribunal
relied on these differences as a proven fact from which to draw the
inferences of the contravention. Aranda argued
that the pleading and
referring to Mzansi, it pleaded that “
Savings to Aranda in
the supply chain management are reflected in quotes to this customer”
and that Aranda had “
no knowledge of the manner in which
Mzansi tenders.
All
that I know is that Aranda supplies to Mzansi such documents as are
required by the Department of Trade and Industry in tenders
issued by
it and where the tendering party relies on supply from a third
party”
.
[72]
Mzansi filed its answer on 10 May 2018. Ms Paruk explained that
Mzansi “adopts a simple cost plus pricing strategy” which
“entails the addition of a percentage mark-up on the
cost
prices of the goods to determine the prices for purposes of onward
sale”. She explained further that this was also its
pricing
strategy in the Tender, with the “percentage mark-up on its
cost prices that [Mzansi] settled upon, after long and
careful
deliberation informed by the objective of keeping its pricing to
levels that were as keen and competitive as possible,
was a fixed
7,25%.” Ms Paruk denied any collusion with Aranda, asserting
that her interactions between Mzansi and Aranda
were “in
pursuance of bona fide and arm’s length business transactions
honestly concluded between them”. The
Commission elected not to
file a reply.
[73]
The pleadings fully alerted the Commission to the case of Mzansi
and
Aranda yet it stuck to the case made out in the referral. The change
in case from the pricing methodology between themselves
transformed
into price and trading terms discrimination by the end of the case.
Clearly there was a change in the Commission’s
case.
Pricing
discrimination by Aranda
[74]
The Tribunal found that in the 2015 tender preparation, Aranda had
supplied Mzansi with prices way below that supplied to Vilankosi and
this triggered suspicion. There was also a consistent percentage
mark
up by Mzansi. This too was suspicious. It found that the 56% pricing
difference in relation to Vilankosi put it at a significant
disadvantage. This pricing differential also placed the pricing issue
in a “different light.”
[75]
The Tribunal concluded that pricing evidence on its own was
insufficient
an inference to draw a conclusion of bid rigging. The
Tribunal found however that the
pricing
evidence and the context of all the other inferences placed the
pricing in a “different light.” The Commission
failed to
establish that the alleged price discrimination was of such a nature
that the only plausible inference that could be
drawn was one of
collusion.
[76]
Aranda and Mzansi submitted that rigour was required in the analysis
and characterisation of the alleged cartel conduct required.
Characterisation
[77]
Both Aranda and Mzansi submitted that characterization of cartel
conduct required that the conduct be characterised as to whether, on
the face of it, it fell within the ambit of Section 4(1)(b)
of the
Act as well as within the
objects
of section 4(1)(b) of the
Act. Because it is per se prohibited conduct, it was necessary for
the Tribunal to characterise the conduct
in order to explain the real
character of the conduct.
[78]
Characterisation
is an analysis that must take place in assessing the conduct of the
parties. There may be instances where a firm’s
conduct will, on
the face of it, fall within the ambit of section 4(1)(b), but their
conduct will not be found to fall within the
object
of the
section 4(1)(b) in which case no contravention will be established.
[17]
[79]
Both Aranda and Mzansi submitted that because the prohibitions are
per se
prohibitions the real character of the conduct must be
analysed. The question of characterisation was settled in
American
Natural Soda Ash Corporation
where Cameron JA and Nugent JA
stated:
“
Whichever approach
is adopted; the essential enquiry remains the same. It is to
establish whether the character of the conduct complained
of
coincides with the character of the prohibited conduct: and this
process necessarily embodies two elements. One is the scope
of the
prohibition:
a
matter
of
statutory
construction.
The
other
is
the
nature
of
the
conduct
complained
of:
this
is
a
factual
enquiry. In
ordinary
language
this
can
be
termed
‘characterising’
the conduct – the term used in the United States, which Ansac
has adopted.”
[18]
[80]
In the
Competition Commission v South African Breweries
, Davis
JP and Rogers J described characterisation as this:
Thus, the
‘characterisation’ that is required under our legislation
is to determine (i) whether the parties are in a
horizontal
relationship, and if so (ii) whether the case involves direct or
indirect fixing of a purchase or selling price, the
division of
markets or collusive tendering within the meaning of s 4(1)(b).
However, since characterisation in this sense involves
statutory
interpretation, the bodies entrusted with interpreting and applying
the Act (principally the Tribunal
and this
court) must inevitably shape the scope of the prohibition, drawing on
their legal and economic expertise and on the experience
and wisdom
of other legal systems which have grappled
with
similar issues for longer than we have. “
[19]
[81]
In a
further exposition on the importance of characterisation Rogers JA in
Dawn
Holdings
explained
that “the existence of a horizontal relationship and the
characterisation of the impugned conduct – involve
factual
matters .. “In addition conduct, which on its face may seem to
contravene the prohibition, may be found not to do
so pursuant to a
proper process of characterisation.”
[20]
[82]
In other words, the absence of a characterisation enquiry could
well
produce a false positive, meaning that a contravention is found when
upon a proper analysis by way of characterisation the
true object of
s 4(1)(b) will not be found. A characterisation enquiry into the
conduct should be made irrespective of whether
it is a s 4 (1) (a) or
(b) contravention as this makes for a constitutionally compliant
approach.
[83]
Whilst some
writers
[21]
and even the case
of
Northern
Pacific Railway
[22]
may suggest that a per se contravention has no redeeming value
because of the egregious nature of the conduct, prolonged economic
enquiry is unnecessary .
[84]
The Tribunal accepted that Aranda and Mzansi were in a vertical
relationship but, notably, so were all the other bidders as Aranda
was the only manufacturer. All bidders would have had to engage
with
Aranda. The Tribunal however found that it did not matter much, as
their relationship in relation to the 2015 tender was of
importance.
They were competing against each other and because they were vying
for the same business, this amounted to a “specific
horizontal
relationship”.
[85]
The
Tribunal also found that “it was therefore not axiomatic to
confine themselves to that concept of horizontality but could
view
the conduct through section
5 of the
Act”. The Tribunal did not explain how it concluded that
restrictive verticality
could apply
in the absence of it being pleaded by the Commission. The only
explanation provided by the Tribunal was the reliance
placed on the
case of
Berg
River.
[23]
It simply
asserted
that properly characterised it was conduct designed to restrict
competition. It found that characterisation did not assist
them as
both Aranda and Mzansi had submitted competitive bids. The failure by
the Tribunal to properly characterise the conduct
was
fatal to
their finding of a contravention.
[86]
In sum,
characterisation is important as it ensures that competition law does
not
unnecessarily
hamper or obstruct pro-competitive and genuine commercial
transactions
from
occurring.
[24]
Conclusion
[87]
A substantive problem facing the Commission is that it based its
argument on the communication between parties in a vertical
relationship without proving this to be improper, and simply argued
that it was a horizontal relationship because both of them tendered
on the same tender and this necessarily restrains competition.
There
was no significant attempt to illustrate how the effects of this
alleged relationship harms competition.
[88]
Although the existence of an anti-competitive practice or agreement
can be inferred from circumstantial evidence and other coincidences
which, taken together, may
apparently
support a mosaic
hypothesis. In the absence of proven facts and the exclusion of
another plausible explanation, an infringement
cannot be made by way
of inferential reasoning. The Commission ought to have put up a case
on a balance of probabilities drawn
from proven primary facts thereby
excluding other plausible alternative explanations.
[89]
I find that the Commission has not discharged its burden of proof
and
that the Tribunal erred in this regard. The Tribunal omitted to take
into account that the Commission had failed to indicate
with any
certainty or probability precisely how Aranda and Mzansi had
co-ordinated their bids.
[90]
The Tribunal amplified the case stating that the conduct was a
specific form of horizontality and that in any event the conduct also
amounted to a prohibited vertical practice. This was never
the
Commission’s case. It is also a conflation as the case was one
of a horizontal contravention not a tangential case of
verticality. I
also find that that the communications between Aranda and Mzansi was
not communication consistent with a contravention
in terms of Section
4 of the Competitions Act as found by the Tribunal. Principles
relating to a model of reasoning relying wholly
on inferential
reasoning must nonetheless follow the rules of evidence as
established in our jurisprudence. The Tribunal selected
various
pieces of evidence such as communication and economic details which
had not been proven, whilst ignoring the direct evidence
of the Ms
Paruk and Mr Magni. It did this without providing a reasoned
explanation for rejecting their evidence.
[91]
For these reasons, the appeal must be upheld with costs.
Order
1. The
appeal is upheld.
2. The
Tribunal’s order of 4 December 2020 is set aside and replaced
by the following order:
“
The Competition
Commission’s Complaint Referral against Aranda Textile Mills
(Pty) Ltd and Mzansi Blanket Supplies (Pty) Ltd
is dismissed.”
3. The
Commission is ordered to pay the first and second appellants costs
including the cost of two counsel
M
Victor Judge of Appeal
Competition
Appeal Court
of
South Africa
Counsel
for first Appellant:
Adv MJ Engelbrecht SC
Instructed
by:
Nochumsohn and Teper Attorneys
Counsel
for second Appellant:
Adv
Aadil Mohamed - Salim Mayet
Instructed
by:
Mayet Attorneys Incorporated
Counsel
for Respondent
Adv H Drake
Instructed
by:
Ndzabandzaba Attorneys Inc.
Date
of hearing:
17 June 2021
Date
of judgment:
17 December 2021
[1]
The SBD9 form is a declaration that must be signed by a tenderer. It
is aimed at preventing any form of bid rigging.
[2]
S 9(1) ( c) of the Act provides that Price discrimination by
dominant firm prohibited
(1)
An action by a dominant firm, as the seller of goods or services, is
prohibited
price discrimination, if—
(a)
… (b) … 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; (iii) the provision of services
in respect of the goods or services; or
(iv)
payment for services provided in respect of the goods or services.
[3]
Cases C-204/00 P etc EU:C:2004:6.
[4]
OECD Policy Roundtables: Prosecuting Cartels without direct
evidence. 2006 page 10
[5]
Competition Primer for ASEAN judges September 2018
[6]
ibid
[7]
Ibid
[8]
Ocean Accident and Guarantee Corporation Ltd v Koch
1963 (4) SA 147
(A) at 159B - D, citing Wigmore on Evidence 3 ed para 32.
[9]
South African Post Office v De Lacy 2009 (5) SA 255 (SCA)
[10]
Ibid note 4
[11]
In Knoop No and another v Gupta and another 2021 (3) SA 88 (SCA
[12]
[1939] 3 All ER 722
(HL) ([1940] AC 152) at 733E – F, cited in
Motor Vehicle Assurance Fund v Dubuzane
1984 (1) SA 700
(A) at 706B
– D; MV Pasquale della Gatta; MV Filippo Lembo; Imperial
Marine Co v Deiulemar Compagnia di Navigazione Spa
2012 (1) SA 58
(SCA) ([2011] ZASCA 131) para 24. See also Great River Shipping Inc
v Sunnyface Marine Ltd
1994 (1) SA 65
(C) at 75I – 76C and
particularly the statement that 'evidence does not include
contention, submission or conjecture'.
[13]
Competition Commission of SA v Gralio (Pty) Ltd
[2011] 2 CPLR 225
(CAC) (Gralio CAC)
[14]
Netstar (Pty) Limited& Others vs Competition Commission South
Africa &another
2011 (3) SA 164
(CAC) para 25-26
[15]
also Competition Commission v Roadspan Services (Pty) Ltd and
another, Case Number: Cr163nov16 onus to prove the existence of
an
agreement rests with the Commission to sustain a contravention of
section 4(1) (b) (ii) of the Act.”
[16]
A’Africa Pest Prevention CC& 1other v Competition
Commission of South Africa 168/CAC Oct 18
[17]
The Development of Characterisation in South African Competition Law
by Stuart Strachan. Competition Chronicle 4 October 2019
[18]
American Natural Soda Ash Corporation and Another v Competition
Commission of South Africa (554/2003)
[2005] ZASCA 42
;
[2005] 1 CPLR
1
(SCA);
[2005] 3 All SA 1
(SCA) (13 May 2005) para 47
[19]
the Competition Commission v South African Breweries Ltd and Others
2015 (3) SA 329
(CAC) at para 37
[20]
Dawn Consolidated Holdings (Pty) Ltd and Others v Competition
Commission (155/CACOct2017)
[2018] ZACAC 2
(4 May 2018) paras 13 and
14
[21]
Lusunga Matonga A discussion of the characterisation doctrine as
applied in South Africa
[22]
Northern Pacific railway v United States 330 US 1(1958)
[23]
Id note 17
[24]