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[2017] ZACAC 3
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Isipani Construction (Pty) Ltd v Competition Commission (144/CAC/Aug16CT, 019950) [2017] ZACAC 3; [2017] 2 CPLR 542 (CAC) (14 September 2017)
REPUBLIC
OF SOUTH AFRICA
IN
THE COMPETITION APPEAL COURT OF SOUTH AFRICA
CAC
Case No.: 144/CAC/Aug16CT
CT
Case No.: 019950
REPORTABLE:
Yes
OF
INTEREST TO OTHER JUDGES: Yes
DATE:
14/9/2017
In
the matter between:
lsipani
Construction (Pty)
Ltd Appellant
and
The
Competition
Commission
Respondent
JUDGMENT
Vally
AJA
Introduction
[1]
lsipani Construction (Pty) Ltd (lsipani) appeals against a decision
of the Competition Tribunal (Tribunal) imposing a single
penalty of
R21 783 153.40 on it for contravening s 4(1)(b) of the Competition
Act 89 of 1998 (the Act). The contravention
took the form of
the appellant providing another firm, one of its competitors,
with a cover price. This constitutes unlawful
collusion. It is often
described as
"
collusive tendering"
or
"
bid-rigging".
A cover price is a
price that a firm desiring to win a tender provides to another firm
that does not. The firm that is provided
with a cover price would bid
for the tender at a price higher than the cover price, thus ensuring
that it would fail in its bid
and, hopefully, the bid of the firm
that provided the cover price would succeed. Firms that provide and
receive cover prices succeed
in deceiving the entity issuing the
tender into believing that the tender process was free, fair and
honestly competitive.
[2]
lsipani and another firm, Neil Muller Construction (Pty) Ltd (NMC)
both operate in the construction industry. They compete with
each
other in the open market. At least that is what they are supposed to
do. But they found that colluding with each other could
at times be
more useful, less problematic, more certain and a more profitable way
of doing business. After all, who needs the untidy,
cumbersome,
painful and anxiety-filled uncertainties that are part of doing
business in a free market where all are supposed to
compete fairly
and equally? The promotion and development of such a market may be
aimed at preventing corruption but unfortunately
not all businesses,
as the evidence in the case illustrated, have inoculated themselves
from engaging in collusive practices. These
practices, in my view,
are a form of corruption. They, like those engaged in by members of
cartels, or firms engaged in predatory
pricing, or those electing to
charge excessive prices, ultimately distort markets to the detriment
of the public interest.
The harm these practices
cause is often not insignificant. The law takes a dim view of
such practices precisely
because of the harm it causes and because it
erodes the moral fabric of our society.
[3]
In this case, lsipani was found to have engaged in unlawful practices
on two occasions. In terms of the Act it should be accountable
for
both. The Tribunal recognised this and took it into account when
considering the punitive action that should be taken. However,
the
punishment it imposed was a consolidated one. This provoked a
cross-appeal by the respondent, the Competition Commission
(Commission).
It asked that this Court set aside the decision of the
Tribunal and refer the matter back to the Tribunal for a fresh
consideration
of the punishment - one that does not consolidate
the two punitive measures into a single one.
Facts
of the case
[4]
The Commission accused lsipani of unlawfully providing two cover
prices to NMC in relation to construction projects in Stellenbosch.
The first concerned the construction of a private building, and the
second involved alterations and additions to a multi-storey
building
at the University of Stellenbosch's (University) Faculty of
Engineering. The cover prices were provided in August
2010 and
November 2010. The Commission invited lsipani to settle the matter
with itself. lsipani admitted that it acted wrongfully
by
contravening s 4(1)(b) of the Act on two occasions. It agreed to
engage the Commission on the possibility of concluding a settlement
agreement wherein it would accept responsibility for its unlawful
conduct and pay a fine for each of the contraventions.
Unfortunately, it was unable to agree with the Commission that it
should pay an administrative penalty for each of the contraventions,
or to accept the Commission's proposal on the amount it should pay in
administrative penalties, which it found to be excessive.
This
prompted the Commission to refer the matter to the Tribunal where it
could be dealt with through the adversarial process catered
for by
the Tribunal's rules.
[5]
At the Tribunal, lsipani, through its managing director, Mr Jandre
Arangies (Arangies), admitted that during the period August
to
November 2010 it provided two cover prices to NMC. Despite its
admission lsipani initially attempted to escape liability for
its
conduct by pleading that the complaint initiated by the Competition
Commissioner (Commissioner) did not mention it by name
and therefore
was not a complaint against it. But this plea was eventually
abandoned and it elected to challenge only the quantum
of the
combined administrative penalty that the Commission sought to impose
upon it. To understand its challenge, it is necessary
to have regard
to the details of the conduct to which it admitted.
[6]
The details are uncomplicated. During August 2010 a Mr Paul Symington
(Symington) of NMC asked a Mr Weyers Willemse (Willemse)
of lsipani
to provide him with a cover price for a private building project in
Stellenbosch. Willemse obliged. However, lsipani,
which was desirous
of winning the bid, did not succeed in doing so as there were other
competitors who bid independently of lsipani
and NMC and one of them
succeeded. During November 2010 a Mr Barend Badenhorst (Badenhorst)
of NMC contacted Willemse to provide
him with a cover price for the
project at the Engineering Faculty of the University. Again, Willemse
obliged. This time, too, lsipani
failed to secure the contract as
another firm won the bid.
[7]
At the Tribunal lsipani elected to present
viva voce
testimony
focussing on the quantum of the administrative penalty for which it
should be liable. Arangies presented the testimony.
He stated that
the practice of providing a cover price was so pervasive in the
industry that lsipani did not see itself as acting
wrongfully by
engaging in it. However, since lsipani has learnt that it acted
unlawfully, and given that it did no more than
furnish NMC with "a
simple cover price" ,
ultimately gaining nothing from so
doing save that NMC was retained on the client's tender list, it
asked that the administrative
penalty be one that was not unduly
harsh. By remaining on the tender list NMC was able to secure a right
to participate in any
tenders the two clients may in future issue.
[8]
Arangies drew the attention of the Tribunal to the following data
which he extrapolated fr
2009
2010
2011
2012
2013
Average
Turnove
r
345834474
270406394
255714620
232725998
355805942
292097486
Cos
t
of
sales
-
295017700
-23667
402
7
-
2309828
44
-207713338
-3
18809399
-
257839462
Gross
Profit
59816774
33732367
24731776
25012660
36996543
34258024
Gross
Profit
%
14,69%
12
,
47
%
9
,
67%
10
,
75
%
10,40
%
11,73%
P
rofit
for
year
18
923
45
0
9037216
3711479
5921832
13195648
10157925
Nett
Profit
%
5,47
%
3
,
34
%
1
,
45
%
2,54
%
3,71%
3
,
48
%
Dividends
declared
1794908
901083
69
410
0
531341
Current
Assets
37605583
51907629
40
256493
96939495
om the accounting records of lsipani:
Current
liabilities
47368624
5117
3631
34455521
79
2341 95
Current
Ratio
0.79
1.0
1
1.17
1.22
[9]
It
is to be noted that while the 2014 turnover of lsipani was not
included in this extrapolation it was furnished in the record
[1]
,
as it is certainly relevant for the determination of an appropriate
penalty. The above table does not reflect
that
lsipani declared a dividend in the 2009 financial year. However,
Arangies admitted that lsipani had declared a dividend of
R9m in that
financial year. He said this was done in a quest to meet its BBBEE
(Broad Based Black Economic Empowerment) targets.
Some part of this
dividend went into a Special Purpose Vehicle so that it could improve
lsipani's BBBEE status. The monies from
the dividend were intended to
benefit its employees as well as some community based groups. In
this regard it has allowed
for its Employees' Trust and Foundation to
acquire a 25% ownership stake in the company. He did, however,
acknowledge that one
of the objectives of upgrading its BBBEE
standing was to improve its chances of acquiring work from, amongst
others, government-based
projects.
[10]
Arangies further claimed that lsipani's average profit for the five
years 2009 - 2013 was only R10 157 925.00. This represented
a profit
margin of 3.48% of turnover. This is to be compared with the average
profit margins in various related industries during
this period.
These were:
[10.1]
mining and quarrying
16%
[10.2]
manufacturing
5%
[10.3]
electricity, gas and water supply
25%
[10.4]
trade
5%
[10.5]
transport, storage and communication
7%
[10.6]
real estate and other business services
12%
[10.7]
community social and personal services
11.5%
[11]
lsipani also drew attention to the dividends it declared over the
five-year period as well as to its current ratio during the
same
period. A current ratio is the ratio of current assets to current
liabilities, arrived at by dividing the current assets by
the current
liabilities. A current ratio below one indicates that the firm will
not be immediately able to pay all its current
liabilities from the
current assets. The current ratio, lsipani contended, is important
for it provides a guiding measure
of a firm's ability to secure
and perform future work. It reveals the liquidity of the firm and
provides an insight into the ability
of the firm to carry the
expenses necessary to provide the work while awaiting payment-
payment always following completion of
all or part of the work.
Rarely, if ever, does payment in construction projects precede
performance by a contractor.
[12]
In these circumstances, contended lsipani, it would be inappropriate
for the Tribunal to impose an administrative penalty equivalent
to
10% of its average turnover for the period 2009 - 2013. Such a
penalty would be burdensome to the point of being seriously
debilitating on its future business. It would result in the current
ratio reverting
"to
a
figure probably around the 0.79
mark of 2010" ,
which would make it difficult for it to
carry out a large project. It would not have sufficient running
capital to maintain the
project bearing in mind that current
liabilities have to be settled on a regular basis.
[13]
lsipani went on to point out that the practice of cover pricing,
pernicious as it may have been, was restricted to contracts
where the
construction companies were invited to tender for the contract
(tender-based contracts). The practice was not to be found
in
negotiated contracts. The latter contracts simply provided no scope
for parties to defeat the system of free competition and
undermine
the value and benefits that accrue therefrom. For this reason it
would be only correct to utilise the turnover it acquired
from
tender-based contracts in order to determine what a fair and
appropriate administrative penalty should be. The breakdown of
its
turnover during the three years of 2009-2011 was:
Turnover
2009
2010
2011
Tender-based
contracts
163,925,155.15
180,162,052.50
205,695,883.55
Negotiated
contracts
181,909,318.67
90,244,341.50
50,018,736.14
TOTAL
345,834,473.82
270,406,394.00
255,714,619.69
Percentage
Tender-based
47
%
67%
80%
Negotiated
53%
33%
20%
[14]
It is not clear why it supplied the breakdown of its turnover figures
for these three years only. Nevertheless, the average
of its total
turnover for the three years was R290 651 829.17, whereas the average
of its turnover acquired from tender-based projects
for the same
period was R183 261 013.74. If the penalty is to be based on the
average turnover of this three-year period, then
according to the
logic propounded by lsipani it is the latter and not the former
average that should be the benchmark for its determination.
[15]
It argued that the two contraventions
for which it is being held accountable did not subvert
or
undermine the public interest as lsipani did not acquire any benefit
from the two cover prices having lost both bids. This,
lsipani
argued, must militate towards a lower penalty than that sought by the
Commission. Finally, it argued that a penalty of
10% of turnover for
the 2014 financial year as specified in s 59 of the Act as the upper
limit is one that should only be imposed
in cases where the unlawful
conduct was egregious. This is not so in this case, it
contended. In essence, lsipani submitted
that there were a number of
mitigatory factors that bore significant weight to propel the
administrative penalty away from the
upper limit of 10% of total
turnover for 2014 as sought by the Commission.
[16]
In contrast, the Commission took the view that the profitability as
well as the motives of lsipani were irrelevant for purposes
of
determining the administrative penalty. It took the view that there
is sufficient protection in the upper limit to prevent it
from asking
for, or the Tribunal from imposing, a penalty that is overbearing.
Accordingly, the focus for determining an appropriate
penalty should
be the turnover in the year 2014. As far as the mitigating factors
are concerned, these are not to be found in the
financial data
released and relied upon by lsipani but in the considerations
highlighted in s 59(3) of the Act.
The
approach of the Tribunal
[17]
The first issue the Tribunal focussed on was whether it should impose
two penalties rather than one as lsipani has admitted
to two
contraventions. It recognised that it could impose two penalties but,
as mentioned above, it decided to consolidate the
two into a single
one. It reasoned thus:
"[19]
We agree with the Commission that each instance of a cover price
constitutes a separate self-standing infringement of
the Act. This is
consistent with the approach followed by the Office of Fair Trading
and the Competition Appeal Tribunal in
Kier
Group
PLC
and
others
v
Office of Fair Trading
where each of the Appellants were
fined separately for each cover pricing infringement.
[20]
However, we have the discretion based on the facts of
each case in the interest of fairness and the doctrine
of
proportionality to decide how to levy an appropriate administrative
penalty pursuant to s 59(3) of the Act. In this case we
have decided
to levy a single administrative penalty in respect of two separate
incidences of cover pricing. In our decision we
were cognizant of.
the fact that there was a second, separate contravention of the Act
in our final calculation of the
single penalty amount."
[18]
In addressing the issue of an appropriate penalty the Tribunal took
guidance from its approach in an earlier case, which approach
was
sanctioned by this Court. The earlier case was
The
Competition Commission v Aveng (Africa) Limited t/a Steeledale and
others.
[2]
In that case the Tribunal came to
the
conclusion that the approaches adopted in previous cases by itself
and by this Court,
especially
in
Southern
Pipeline
Contractors
v
Competition
Commissio
n
[3]
had
evolved into a single approach consisting of six steps. The six steps
to
be
followed in terms of this approach are:
1.
Determine the affected turnover in the relevant year of assessment.
2.
Calculate the base amount, which is the proportion of the turnover
referred to in 1.
3.
If the contravention exceeded one year, the amount
obtained in 2 should
be multiplied by the duration of the
contravention.
4.
If the amount obtained in 3 exceeds the upper limit prescribed in
section 59(2) of the Act, then
it should be rounded-off.
5.
Take aggravating and mitigating factors to either increase or
decrease the amount acquired
at the end of 4.
6.
Round the amount off so that it does not exceed the upper limit
prescribed in s 59(2) of the Act.
[19]
According
to
Aveng
the
affected turnover
"
is based on sales of the products or services that can be said to
have been affected by the contravention."
[4]
The
year would be the last financial year of the period during which the
contravention occurred, or to put it differently it would
be
"the
most recent financial year in which there is evidence that the firm
participated in the contravention.''
[5]
On the face of it, it would appear that performing the task required
in step 1 would be fairly simple and straightforward. However,
in
this case there was a controversy between lsipani and the Commission
as to which year should be regarded as the base year. lsipani
contended that it should be 2011 as the contraventions took place
August and November of 2010 and its Tribunal to hold that it
be 2012,
i.e. the financial year, which according to lsispani's own version,
is when the contravening practice ceased.
[20]
Upon carefully scrutinising the evidence, the Tribunal found that the
Commission's submission was correct and held that it
would have to
take 2012 to be the base year.
[21]
The
Tribunal proceeded to consider which turnover of 2012 should form the
foundation of the ultimate penalty imposed. lsipani claimed
that it
was only the turnover resulting from tenders that should be taken
into account, as opposed to turnover arising from negotiated
contracts. The Commission maintained that it should be total turnover
as that is what the legislature intended. The Tribunal agreed
with
the Commission. It drew from this Court's approach in
Southern
Pipeline Contractors.
It
was also the approach
adopted
by the Tribunal
in
its
own
judgment
in
Southern
Pipeline
Contractor
s
.
[6]
On this logic it concluded that the foundation should be the
total turnover for 2012, which was R232 725 998.00. This, according
to it, was the affected turnover.
[22]
Having
established the affected turnover (or the foundation amount), it
turned its attention to the base amount (Step 2). The task
required
of it here is to calculate a proportion of the affected turnover,
between 0% and 30%. On this issue, the Commission called
for a base
amount of 17%
for
each contravention, while lsipani suggested that it
be 10% for both contraventions. In terms of
Aveng
[7]
the Tribunal was required to consider three principal factors: (i)
the nature, gravity and extent of the contravention; (ii) the
loss or
damage that resulted from the contraventions; and, (iii) the market
circumstances in which the contraventions occurred.
These
factors are taken verbatim from s 59(3)(a), (b) and (c)
of the Act.
[23]
On this aspect of its task, the Tribunal commenced by noting that
cover pricing is a form of bid rigging. Bid rigging, because
of its
uncomplicated nature, is particularly harmful. Offenders can engage
in it without much effort and with a reasonable
amount of
confidence that it would not be detected or exposed. It will only be
eradicated, if ever, if the deterrence factor is
sufficiently
weighty. For this to be so, the possibility of facing a heavy penalty
if caught is necessary to match the benefit
of potential gain from
the unlawful practice. This should make it very risky to engage in
the practice. It must have a deterrent
effect. Only then can the
practice be eliminated.
[24]
The Tribunal reasoned that as the practice was pervasive in the
industry and caused a great deal of damage to the interests
of
society as a whole, the base amount should have been 30%. However,
because lsipani did not benefit from the conduct (as it lost
the
bid), it would be appropriate to apply a base amount of 12%. Doing
the arithmetic (12% of R232 725 998.00) the Tribunal came
to a figure
of R27 927 119.76 as the base amount.
[25]
Executing the task in Step 3, the Tribunal came to the conclusion
that a multiplier of 1.3 should be applied. This finding
was based on
the acceptance of the evidence of Arangies that the actual
contraventions occurred during August 2010 and November
2010, but
lsipani only ceased engaging in the practice of giving or receiving
cover prices in November 2011. If this evidence is
accepted it
means that factually the contravention exceeded one year, i.e. August
2010 - November 2011. The contravention
lasted longer than a year -
one year and three months to be exact. Therefore, according to the
Tribunal, the multiplier to be applied
should be 1.3. Multiplying 1.3
to R27 927 119.76, an amount of R36 305 255.68.
[26]
Moving on the Step 4, the Tribunal found that the turnover for
the year of 2014 should be taken into account to determine the 10%
limit prescribed in section 59(2) of the Act. This is in stark
contrast to the submission of lsipani, which was that the turnover
of
2011 should be taken into account. lsipani was particularly concerned
that since the transgressions of August and November 2010
it had
increased its turnover substantially. Nevertheless, the Tribunal
chose the 2014 turnover because it was the financial year
that
preceded the finalisation of the matter before it. There is logic to
this choice. It derives from the application of the
stare decisis
principle. This Court pronounced that the 10% limit
on the turnover of a firm's local and
international sales of
" the
preceding
year'
prescribed
in s 59(2) of the Act refers to the year
"preceding
that in which the penalties are imposed.
"
[8]
[27]
As for the mitigating and aggravating factors that need to be
examined in Step 5, the Tribunal looked at the issues identified
in s
59(3)(e), (f) and (g) of the Act - i.e. the level of profit
derived from the contravention; the degree to which the
lsipani had
co-operated with the Commission and with itself; and whether lsipani
had previously been found in contravention of
this Act. It found as
mitigating factors the fact that lsipani was a first offender; that
it did not directly profit from the two
contraventions; that lsipani
had admitted to acting unlawfully; that an undiscounted penalty would
undermine lsipani's attempt
to improve its BBBEE status and that such
a penalty would diminish lsipani 's chances of future work. It
weighed these against
the aggravating factors, which were that a high
level employee (a procurements director) was involved in the
transgressions and
that there were two separate transgressions. After
"
weighing up"
all these factors it
decided to grant a discount of 40% to lsipani. The 40% reduction
resulted in the penalty decreasing from R36
305 255.68 to
R21 783
153.40.
As this is less than 10% of lsipani's 2014 turnover there was no need
for a further rounding-off.
[28]
The cross appeal
[29]
The decision to consolidate the two contraventions into one for
purposes of calculating an appropriate administrative penalty
provoked an appeal from the Commission. It is referred to as a
cross-appeal as it was delivered (filed and served) after
lsipani had already delivered its
notice of appeal. It is the
Commission's case that the Tribunal should have imposed two instead
of a single administrative penalty.
[30]
The
power of the Tribunal to impose a penalty on an errant party is one
that lies within its discretion. It is a discretion that
is wide and
cannot be fettered even by its own Guidelines or
policies.
[9]
[31]
The
Commission had asked the Tribunal to declare that lsipani had
contravened s 4(1)(b) of the Act by engaging in collusive tendering
"during
the period August to November 2010"
[10]
,
and
that the Tribunal declare further that lsipani
"
is liable for payment of an administrative penalty
equal to 10% of
its
turnover in terms of
s
58(1)(a)(iii)
read with section 59(2) of the Act.
"
[11]
[32]
We know that lsipani confessed to two contraventions, one in August
2010 and one in November 2010. However, the call for a
penalty of 10%
of lsipani's turnover does not specify that it should be 10% of the
turnover for each of the contraventions. Mr
Ngalwana for the
Commission pressed us to read this call for "a
penalty
equivalent to 10%"
to mean a call
"for a penalty
equivalent to 10% for each contravention".
He pointedly
informed us that even if we were unwilling to read paragraph 2 of the
motion as he encouraged, we nevertheless should
bear in mind that in
law the Tribunal was obliged to impose a separate penalty for each
infraction by lsipani. Its failure to do
so was a misdirection so
severe that it was actually an error of law. The only way to remedy
this error was to refer the matter
back to the Tribunal for it to
properly apply its mind to issue of an appropriate penalty for each
of the infractions. Should the
Commission succeed on this that would
be end of the matter. It would be neither necessary nor
appropriate for this Court
to highlight its view on the
appropriateness of the quantum of any penalty that should be imposed
lest it unduly influenced the
decision of the Tribunal. The Tribunal
should be allowed to consider the matter free of any constraints,
direct or indirect.
[33]
We
know from [20] of the Tribunal's decision
[12]
that it understood its unfettered discretion to include the power to
consolidate more than one penalty, in this case two, into
a single
one. From the Tribunal's perspective, as long as the ultimate penalty
fell within the scope of s 59 of the Act, it would
have acted within
its statutorily conferred powers. It is empowered, in terms of s
59(1)(a)
[13]
to impose a
penalty for a contravention of s 4(1)(b); the penalty must take
into
account the factors and circumstances listed in s 59(3)
[14]
and must comply with the restriction set in s 59(2)
[15]
of the Act. As long as the performance of its task was consistent
with the provisions of these sub-sections, its manoeuvrability
was
elastic enough for it to combine two or more penalties into one.
Viewed from a different angle, as long as the single penalty
took
account of all the contraventions and as long as the penalty took
full account of everything said
in
s 59 of the Act it acted
intra
vires.
[34]
The Commission, however, contended that embedded in the logic of the
Tribunal lays an error of law. The error, according to
the
Commission, is this: the text of s 59(1) clearly refers to the power
to impose
"an administrative penalty only for
a
prohibited practice''.
The reference to the prohibited
practice is in the singular and not in the plural - it does
not say that
the Tribunal may impose a
penalty for
"prohibited practices".
Thus, on a
literal interpretation of the section, there can only be one penalty
for a single prohibited practice. This is a legal
requirement. By
extension, if there are two prohibited practices there has to be one
penalty for each, as each prohibited practice
stands alone and must
be accorded its own weight and value. By failing to recognise this
legal requirement the Tribunal erred in
law.
Did
the Commission follow the correct procedure by claiming relief on
the grounds of an error of law through a cross appeal?
[35]
At the hearing Mr Fagan for lsipani contended that there was no error
of law committed by the Tribunal, but even if there was
the
Commission was not entitled to bring its complaint in the form of a
cross-appeal. It should have brought this complaint
by way of
review proceedings, citing the Tribunal as a party so that the
Tribunal could be given an opportunity to explain its
reasoning. This
contention was not raised or foreshadowed in lsipani's heads of
argument. As a result the Commission was given
no opportunity to deal
with it prior to the hearing. The Court too was taken by
surprise. lsipani's written submissions
were submitted on 3
March 2017, while those of the Commission were submitted on 20
March 2017. The hearing was on 29 March
2017. lsipani did
not file supplementary written submissions. Yet it raised the
contention during
its oral submissions and expected this
Court to accept and deal with it. I am firmly of the view that
it is not acceptable
for parties to ambush each other and the Court
in this way. It makes for poor administration of
justice. Mr
Fagan having raised the issue did not refer
us to any authority that lays down a
principle that a challenge
to a decision of an administrative body,
bearing the same power and status as the Tribunal, on the basis that
it erred in law cannot
be brought by way of an appeal, or why a
challenge of this nature can only be brought by way of review
proceedings. Consequently,
it is left to this Court to undertake the
necessary research in order to justly determine whether the
Commission should be non-suited
for electing to follow an
inappropriate procedure.
[36]
There are many errors of law that have been brought to appellate
courts by way of appeal. This is natural. After all, an incorrect
inference (adverse or otherwise) drawn from established facts is an
error of law. Similarly, an incorrect legal conclusion drawn
from
established facts, from an admission of inadmissible evidence or a
failure to admit relevant admissible evidence are all errors
of law.
This list is not exhaustive. The law reports are replete with
examples of such errors and most of them enter the portal
of a higher
(appellate) court by way of an appeal. In this case, the contention
of error of law flows directly from the decision
of the Tribunal and
from the papers. No extraneous evidence is relied upon or required.
Hence, I am of the view that the submission
of Mr Fagan that the
Commission approached this Court through an incorrect and
inappropriate procedural route is without merit.
[37]
Furthermore,
having been taken by surprise, Mr Ngalwana for the Commission decided
to provide supplementary written submissions
after the hearing.
Unfortunately, Mr Fagan did not do the same. Mr Ngalwana submitted
that the Commission is entitled to approach
this Court by way of
cross-appeal as its complaint against the Tribunal is a legal issue
not requiring any further evidence. However,
he submitted that if it
was wrong on this then this Court should take the approach adopted in
a majority judgment of the Constitutional
Court. The approach adopted
was one that moved away from deciding a dispute through the narrow
lens of
"formalism".
The
judgment he drew attention was that of Cameron J, with the
concurrence of Moseneke DCJ, Froneman
J,
Khampepe J, Yacoob J, (the majority judgment) in
KwaZulu-Natal
Joint Liaison Committee.
[16]
[38]
In
KwaZulu-Natal
Joint Liaison Committee,
the
applicant sought relief to compel the MEC for Education in
KwaZulu-Natal (the MEC) to pay subsidies to each of its members,
who
were all independent schools, on the basis that there was a bilateral
agreement between it and the MEC obliging him to pay
these subsidies.
Cameron J found that no bilateral agreement was proved. However the
obligation to pay the subsidies arose from
"broader
public law and regulatory grounds rather than bilateral
agreement.
"
[17]
The learned judge came to this conclusion despite the fact that the
pleaded case was that a
bilateral
agreement had come into effect. The
"public
Jaw and regulatory grounds"
that
provided the
ratio
decidendi
for
the decision were not pleaded at all. The Court had this to say about
that:
"[67]
The applicant concedes that it did not specifically argue for relief
on the basis of the obligation created by the regulation.
However,
its founding affidavit expressly invoked item 195 of the Norms, and
reliance on statutory obligations was foreshadowed
in its papers."
"[68]
In support, the amicus submits that a claim arising from the Norms
read with the KZN regulations is adequately pleaded.
And, it says,
the evidence on record lays a sufficient basis to find the applicant
schools had a right to be paid the first-quarter
tranche due on 1
April 2009. Further, this court has previously adopted remedies for a
situation
where
a claim is apparent from the papers and the evidence, even if it was
not the cause of action expressly advanced or argued.
With this I
agree. As in the cases the amicus mentions, there is no prejudice to
the respondents
here."
[18]
[39]
Having found that the applicant had succeeded on
" broader
public law and regulatory grounds"
only, it was granted
relief that was consistent with this limited success. Had it
succeeded on the grounds of breach of a bilateral
agreement the
relief it would have secured would have been broader.
[40]
Froneman J, in a judgment that concurred in part and dissented in
part with the majority, elaborated on the theme eschewing
formalism
when deciding issues in a case:
"[79]
How important is the legal label one attaches to a set of facts upon
which a party relies for a remedy under the law?
Not decisively so, I
would suggest, in a matter where the facts are not essentially
disputed and no material prejudice to any party
flows from whatever
label is assigned to them by the formality of the law. This is that
kind of case, but the opposing parties
urged us to attach different
labels to the facts upon which relief was sought, and determine the
outcome according to the label.
The invitation should be resisted -
substance should count, not form.
[86]
The applicant brought its application by way of notice of motion.
Even if it chose review of administrative action as the formal
label
it was not obliged to use rule 53 - the procedural mechanism for a
review - for that purpose. The rule exists principally
in the
interests of an applicant, and an applicant can choose to waive a
procedural right. In this case, where a litigant brings
proceedings
against the state, 'the latter can always, in answer to an ordinary
application, supply the record of the proceedings
and the reasons for
its decision.' There was thus nothing in the form of the proceedings
in the high court that prevented the first
and second respondents
from producing the record of the budget allocation and
decision-making in regard thereto, or anything else
they considered
relevant. They could have done it whether the claim was based in
contract or in administrative law. The blame for
their failure to do
so cannot be laid at the applicant's door."
[19]
[41]
However,
for the sake of completeness it must be said that Froneman J came to
the conclusion that the applicant (KwaZulu-Natal Liaison
Committee)
had placed sufficient undisputed facts before the Court to show that
it was entitled to relief sought in the law of
contract. The learned
judge found that the MEC's conduct was such
that it resulted in
him assuming
a
contractual
obligation.
[20]
On this basis,
he dissented with the order, for according to him the order did
not
dispense complete justice.
[42]
It bears mentioning that there were three minority judgments in
Kwa-Zulu Natal Liaison Committee
- penned respectively by
Nkabinde J, Zondo J (with Mogoeng CJ and Jafta J concurring) and one
jointly by Mogoeng CJ and Jafta J.
Nkabinde
J
took the view
that a party is bound by its pleadings and if the relief sought is
not covered by its pleadings, it must fail.
[147]
The purpose of pleadings, as dealt with by the Supreme Court of
Appeal in Minister of Safety and Security v Slabbert, ([2010]
2 All
SA 474
(SCA)) albeit in action proceedings, is apposite. The court
remarked:
'The
purpose of the pleadings is to define the issues for the other party
and the court. A party has a duty to allege in the pleadings
the
material facts upon which it relies. It is impermissible for a
plaintiff to plead a particular case and seek to establish a
different case at the trial. It is equally not permissible for the
trial court to have recourse to issues falling outside the pleadings
when deciding a case.
There
are, however, circumstances in which a party may be allowed to rely
on an issue which was not covered by the pleadings. This
occurs where
the issue in question has been canvassed fully by both sides at the
trial.'
Notably,
in casu, the existence of a contract or quasi-contract was neither
pleaded nor agreed upon by the parties nor was the broader
public law
ground pleaded."
[21]
[43]
It bears reminding that there is a wealth of well-established
authority supporting this
dictum
of
Nkabinde J.
[22]
that a Court
is only entitled to decide
"the
case that the applicant brought the respondents to court to
answer'.
[23]
[44]
We are bound by the majority judgment in
KwaZulu-Natal Liaison
Committee
and have to agree with the Commission that its choice
of cross appeal as the procedure for its complaint of error of
law should
be entertained if we are to adopt a
"
non-formalistic"
approach. It has placed all the material
relevant to this issue before this Court and dealing with it by way
of cross appeal
causes no prejudice to lsipani. In any event, I
had already found that the procedure adopted by the Commission was
not inappropriate.
[45]
Furth
er, I must
emphasise that it was inappropriate for a party to raise its
objection in the manner that lsipani did. The fact that
I dealt with
the objection does not mean that in future such conduct will be
allowed. On the contrary, my firm view is that any
party which fails
to raise an objection in its written submissions (be they the initial
or the supplementary ones delivered before
the hearing) should not
ordinarily be allowed to raise the said objection or take the said
point in its oral submissions at the
hearing. It must show
exceptional circumstances to have the objection or point considered.
Is
the Commission correct that the Tribunal erred in law?
[46]
Based on the facts and arguments presented in this case, I am not
entirely convinced that the Commission is correct that
the Tribunal
erred in law. The one peg on which it hangs the argument is s
59(1)(a) of the Act. It is true this section is cast
in the singular
- "a
practice"
-
but this is not decisive of the issue. Section 6(b) of the
Interpretation
Act 33 of 1957
provides
that
"words
in
the
singular
number include the
plural,
and words in
the
plural number include the singular'.
[24]
There is no suggestion that s 6(b) of the Interpretation Act is
inapplicable in this case. Accordingly, the usage of phrase "a
practice"
may
well be there for no reason other than linguistic
consistency.
[47]
In my judgment this is an issue that does not need to be definitively
decided here as the facts of this case show that the
approach adopted
in evaluating the gravity of each of the two offences and the
attitude of lsipani in both instances is identical.
The result that
follows, whether one treats it as two smaller individually decided
penalties or a single large penalty, which in
effect is the sum of
the two penalties, is the same. I elaborate on this later when
dealing with the appeal of lsipani. For this
reason it is not
necessary to definitively decide whether the Tribunal is not entitled
at all to combine the two offences
into one for purposes of
determining an appropriate penalty or penalties. Perhaps the facts
that reveal themselves in other cases
will warrant the adoption of
the interpretation favoured by the Commission, and the establishment
of a principle that it is always
necessary to deal with each offence
on its own merits but this is not the case.
[48]
The Commission went on to say that in this case the Tribunal imposed
a single penalty for the August 2010 contravention and
used the
November 2010 penalty as an aggravating factor. Hence, to the extent
that it has discretion to impose a single penalty,
it exercised the
discretion injudiciously. In contrast, it should have imposed two
penalties and then adjusted the sum of the two
penalties in order to
meet the requirements of proportionality and fairness. But it is here
that the logic propounded by the Commission
becomes problematic. If
the end result of the combined penalty has to be one that is
proportionate and fair then there should be
no problem with imposing
a single penalty, as long as there is no absolution inherent in the
penalty for any contravention of which
the firm was found guilty.
There could be a legitimate argument to this effect if the single
penalty imposed was too low considering
that the firm is being
punished for more than one contravention. In other words, the
ultimate penalty must be fair and proportionate
to the number of
offences. In this case, the Tribunal asserted that it was. It said:
"In
our decision we were cognizant of, the fact that there was a second,
separate contravention of the Act in our final calculation
of the
single penalty amount."
[25]
[49]
The penalty in other words was a cumulative one. The penalty was R21
783 153.40. Given that the gravity of each offence was
of equal
weight and the time they were committed was in the same financial
year, the Tribunal could have decided to impose half
of this penalty
for each of the infringements and still have achieved what it
believed was a fair and proportionate penalty overall.
This is
demonstrated further below when I look at the question of what I
believe is a fair and appropriate penalty for both offences.
For the
moment it bears noting that the Commission does not say that the
penalty of R21 783 153.40 was inappropriate for both penalties.
It cannot ask, and is not asking, for A penalty of R21 783
153.40 for each offence. It is not even asking for a penalty higher
than R21 783 153.40 for both offences. It merely asks for the matter
to be referred back to the Tribunal to be re-considered
afresh
on the basis that it should impose a separate penalty for each
contravention. In other words, the error of law complained
of is one
on the merits and not one where the Tribunal failed to understand the
nature of its discretion. But, we would only refer
the matter back to
the Tribunal if we were to find that the error it is supposed to have
committed could be remedied with an instruction
to issue two
penalties and if the combined penalty would be different from the
present one. Then too, we would also only send it
back if the result
would be indeterminate. I deal with this later.
[50]
In
other words, even if there was an error of law as the Commission
contends, it must show that the error was material and resulted
in an
order (outcome) that is wrong. An appeal is directed at the order,
not the
reasoning
underlying the order. Hence, not every error of law is appealable or
reviewable.
[26]
The
appeal of lsipan
i
[51]
As the appeal of lsipani focussed on each of the steps followed by
the Tribunal in the process of calculating the appropriate
penalty it
is necessary to examine the Tribunal's approach in each step
and this is what I now propose to do.
Which
turnover should be accepted as "affected turnover''? (step 1)
[52]
The Commission took account of the averment in the answering
affidavit of Arangies as well as of his
viva voce
evidence
before concluding that the base year should be 2012. In his answering
affidavit, Arangies avers:
"lsipani
ceased any involvement in cover pricing in response to the Commission
's letter of 23 November 2011.
[53]
Viva voce
he indicated that it was possible for lsipani to
have reciprocated the favour granted to it by NMC by engaging in
illegal conduct
to the benefit of NMC. However, he did not go so far
as to say that this actually happened. Even though there was no
evidence of
actual contraventions by lsipani post November 2010, it
has to be accepted that according to its own version lsipani saw
nothing
wrong with providing or receiving cover prices until 23
November 2011 and it was only as of that date that it ceased engaging
in
this practice.
[54]
In essence, the evidence is two-fold: there were actual
contraventions by lsipani in August and November 201O; and, there
were possible contraventions by lsipani between November 2010 and 23
November 2011. As regards the latter it is important to bear
in mind
that while there is no evidence of any other actual
contravention post this
period
there is an admission that the
contraventions only ceased as from 23 November
2011. Faced with this
evidence the Tribunal came to the following conclusion:
"Thus
given the evidence that the conduct took place in the year 2010, but
was only ceased in November
2011, the
turnover for the
2012
financial year should be used for calculating the penalty."
[27]
[55]
The Tribunal can hardly be faulted for taking Arangies at his word
when he said that lsipani only ceased engaging in providing
or
receiving cover prices on 23 November 2011. His
viva voce
testimony did not contradict this. At best for lsipani the
evidence was equivocal. He admitted that between November 201O and
November
2011 lsipani may have furnished NMC with a cover price or
received one from NMC. Arangies did not specifically and directly
aver
that the contravention ceased in November 2010, but he did aver
directly and specifically that it did cease as of 23 November 2011.
In my view, the Tribunal's assessment of the evidence is faultless.
In any event if the turnover of 2011 was
taken
into account as per the submission of lsipani it would ultimately
result in a higher penalty as the 2011 turnover was higher
than the
2012 turnover.
[28]
[56]
The question of whether only the turnover earned from tender-based
contracts should be taken into account does not arise as
the figure
for the 2012
turnover
is not split into tender based and non-tender based turnover.
[29]
The
calculation of the base amount (Step 2)
[57]
In
step 2 the Tribunal determined the base amount to be 12% of the
affected turnover. It came to this amount by holding that cover
pricing is a form of bid rigging and bid rigging is particularly
harmful to the public interest, which calls for an appropriate
deterrent-directed penalty. Whilst the Tribunal was not wrong to see
cover pricing as a form of bid rigging, it bears reminding
that not
all cases of
cover
pricing are actually directed at, or achieve, the rigging of a bid to
the extent that it affects the price that is eventually
paid by the
tenderer. Some of it, especially
"simple"
cover
pricing rarely does.
[30]
[58]
Thus,
while not all cover pricing is less serious than bid rigging
"
simple"
cover
pricing often is. In this case we are dealing with that only. The
cover price provided to NMC by lsipani did not result in
the rigging
of the bid. It could have, but as lsipani lost the bid it did not.
When I say it could have, I have in mind the situation
where
lsipani's bid was inflated because it believed that its only real
competitor was NMC, and as NMC was provided with a cover
price then
in effect it no longer faced any real competition, and it could,
without fear
of
losing the bid, inflate its price. Had it done so and had it won the
bid, the tenderer would be
no
wiser and
would
merely have suffered the prejudice. As that did not occur in this
case a base amount of 12% of the affected turnover, in my
view, is a
bit on the steep side. I think 10% would be more appropriate. This is
what lsipani argued for at the Tribunal.
[31]
Thus, I would reduce the base amount from R27 927 119.76 (12% of R232
725 998.00) to R23 272 599.80.
The
multiplier if the contravention exceeded one year (Step 3)
[59]
The Tribunal came to the conclusion that a multiplier of 1.3 should
be applied. This conclusion arose from its acceptance that
the
contraventions took place during August 2010 and November 2010, but
lsipani only ceased engaging in the practice of giving
or receiving
cover prices in November 2011 resulting in the contravention
exceeding one year, i.e. August 2010 - November 2011.
However, even
on the Tribunal's finding it erred in its calculations. The
multiplier of one year and three months is 1.25 and not
1.3 as
arrived at by the Tribunal. The Commission agrees that the Tribunal
erred in this step. Hence, applying the factor of 1.25
to the base
amount of R23 272 599.80, the amount should be R29 090 749. 75.
Rounding-off
(Step 4)
[60]
There is no need to round this amount-off (Step 4) as it is less than
10% of the 2014 turnover. The 2014 turnover is R378 807
544.00.
Mitigating
and aggravating factors (Step 5)
[61]
The Tribunal looked favourably at lsipani because: it was a first
offender; it did not directly profit from the two contraventions;
that it admitted to acting unlawfully; and, that an undiscounted
penalty would undermine lsipani's attempt to improve
it
BBBEE status. It was however disturbed by the fact that a high level
employee (a procurements director) was involved in the
transgressions
and that there were two separate transgressions. Taking all of this
into account, it reduced the penalty by 40%.
[62]
Arangies' evidence under cross-examination by Mr Quilliam for the
Commission revealed:
"
Quilliam
:
Now, when you say you were aware of the simple cover pricing
arrangement in the industry and it was so pervasive that one of your
colleagues actually studied it before the introduction of the
Competition Act, I
believe you mentioned a textbook in 1985, how else
did you become aware of this practice? When you entered the industry,
was this
practice explained to you by a colleague or did you just
observe it in the industry. How did you become aware of how this
practice
worked?
Arangies
:
Yes, I just experienced it.
Quilliam
:
just experienced it from observing other firms.
Arangies
:
No, but I didn't work for other firms. I've worked for lsipani since
I was in matric. So I just experienced it in our firm.
Quilliam:
Within lsipani itself?
Arangies
:
Yes, then called Van der Sluys
Quilliam
:
Then Van der Sluys, I understand. By observing it within
your firm, did you have a clear understanding
of who the other firms
were that specifically were involved in this practice and who have
decided not to be engaged in this practice?
Arangies
: No, I don't know.
Quilliam
:
No, so there was no meeting in your memory that all the
firms came together and decided the rules of the game
for cover
pricing, simple cover pricing in the construction industry?
Arangies
:
No, never.
Quilliam
:
To your mind was there any overarching agreements by any
other firms, which may or may not have
included lsipani, on how
simple cover pricing would work and how tenders would be allocated
... I beg your pardon, how tenders
would be dealt with in terms of
simple cover pricing arrangement?
Mr
Arangies
: It might have been. I've read in the newspapers, but
certainly us not.
Quilliam
:
So, you weren't aware of a single or a number of
agreements between any number of firms that set the rules for
simple cover pricing and how certain tenders would be dealt with
under the simple cover pricing arrangement.
Arangies
:
No, not at all. ..."
[63]
In his answering affidavit Arangies says this:
"There
are two reasons, I believe, why lsipani did not realise that it had
contravened the Act. The first is
because
the
practice
of
providing
cover
pricing
was
so
pervasive in
the
construction
industry
that it did not strike lsipani and (certainly not me) as being
possibly unlawful." (Emphasis added)
[64]
An analysis of the evidence
in toto
demonstrates that his
viva
voce
testimony was far from satisfactory.
Viva voce
he says
this: the practice of providing a cover price, though illegal, was
pervasive in the construction industry; he, himself had
experienced
it but he does not know of any firms that were engaged in the
practice. This at the very least is bewildering. He cannot
at once
say that the practice is
"so pervasive in the construction
industry"
and he has experienced it but he does not know of
any firms that engaged in it. For him to be able to confidently say
that the practice
is
"so pervasive in the
construction
industry''
he must know of other firms engaging, or having
engaged, in it. Moreover, he goes further and says he had experienced
it. In which
case he cannot avoid having to identify where, when and
how he had experienced it so that he can safely and fearlessly
conclude
that
"so pervasive in the construction industry'' .
Hence, when he asked to identify any other firms engaged in it he
cannot say he does not know of any and expect that answer to be
reconcilable with his earlier answers as well as his averment in his
answering affidavit. Put differently, if he wanted to hold
on to the
answer that he does not know of any firm other than
lsipani engaging in the
practice then
he had no basis for claiming that it is
"
pervasive in the construction industry''
and more importantly, he
could not say he has experienced it.
[65]
It may be that he intended to convey the fact that it was only
pervasive within lsipani (previously operating under the name
and
style of Van der Sluys). But if that is the case, then again he had
no basis for saying that the practice was
" pervasive in the
construction industry''
as lsipani was only one firm in the
industry. Furthermore, if the practice was a pervasive part of
lsipani's
modus operandi
then he should know of firms other
than NMC who colluded with lsipani in providing cover prices. Yet he
claimed that lsipani only
engaged in cover pricing on the two
occasions that the Commission was able to find out about - i.e. the
August and November 2010
tenders in Stellenbosch. The two occasions
do not make for a
" pervasive practice" .
In
essence, there is clearly a rational disconnect in his evidence.
[66]
When pressed on this issue further with a direct and simple question
he claimed to be ignorant. The question and answer were:
"
Quilliam
:
What I'm trying to distil here is whether there was
any other instances where lsipani requested a cover price
from someone such as NMC or provided a cover price to anyone else"
Arangies
:
I'm not sure"
[67]
Unfortunately, this answer, too, is problematic. At the commencement
of his evidence and in his answering affidavit Arangies
adamantly
averred that the only two cases of illegal conduct that lsipani had
engaged in were those identified by the Commission
- the August 2010
and the November 2010 cases involving
NMC.
If this was the
case, then it is not clear why Arangies equivocated in his answer.
[68]
On balance then, either Arangies
was very confused or
he
was economical with the truth. It is difficult to see how a
person in his position, a managing director of a very
large firm
making a turnover of a quarter to a third of a billion
rands a year, could be confused about a simple matter
of whether his
firm was engaged in the illegal acts of providing, or receiving a
cover price in any case other than
the two identified by
the Commission. Moreover, he could not be confused about
whether the practice was pervasive in the
industry or not. He claimed
to have been in the industry his entire working life, which exceeds a
period of twenty-five years,
and that he was more than just familiar
with the operations and practices that endure in the industry. In
fact, he placed his reputation
and experience in the industry before
the Tribunal and asked that it take him at his word because these
were extensive. In these
circumstances , it cannot safely be
concluded or inferred that he was confused about whether the practice
of cover pricing was
pervasive in the industry or not. A factual
issue of this nature is too simple for him to have been confused
about.
[69]
In my judgment, the only conclusion to be drawn from this
contradictory and equivocal evidence is that Arangies was not candid
with the Tribunal. As a result, lsipani (as he was its sole witness,
and it based its entire case on his testimony) had relinquished
any
claim it may have had for leniency from the Tribunal.
Despite this, the Tribunal decided to show considerable
leniency by discounting the penalty by 40%. The Tribunal
was not parsimonious with the discount - 40% is no miserly
discount.
I am of the view that it falls within the margins of a fair and
reasonable discount given lsipani's lack of willingness
to expand on
its contention that the practice was pervasive for fear of revealing
names of other transgressors. By refusing to
do this, lsipani
essentially informed other firms in the industry that it could be
trusted never to reveal names of any of them
if it knew that they
have engaged in, or knows that they are engaging in, illegal conduct.
Its reticence to reveal names translated
into an unwillingness to
cooperate with the Commission.
[70]
Mr
Fagan placed substantial emphasis on the fact that no one suffered
any loss as a result of the unlawful conduct. This, he contended,
should result in lsipani receiving a hefty discount when determining
the final penalty in step 6. This issue however, has been
addressed
in Step 2 where the base amount has been reduced from 12% to 10%. In
fact. lsipani argued that the base amount should
be reduced to 10% of
the affected turnover precisely because the bid was not successful
and therefore no
harm
was suffered by the University. It was successful in this
argument.
[32]
It
should not be asking to benefit twice from a single fact.
[71J
Mr Fagan SC emphasised the fact that lsipani derived no
financial benefit from the illegal conduct. This, of course,
redounds
to the benefit of lsipani - it is a factor of some mitigatory
value. But this has been catered for in the
decision of the
Tribunal when it awarded a discount of 40% to lsipani. It is no mean
discount and I hold that it is appropriate
in this case. The discount
of 40% in my view is substantial and fair in the circumstances of
this case. While I am not insensitive
to the fact that lsipani did
not win the bid, I do not overlook the fact that its intention was to
win the bid and it was willing
to act unlawfully to do so. Its
failure to win the bid does not diminish its culpability. Hence, I
see no misdirection on the part
of the Tribunal in awarding a
discount of 40% to lsipani.
[72]
Applying a 40% discount to the amount of R29 090 749. 75 arrived at
in my calculation at the conclusion of step 3, the penalty
becomes
R17 454 449.76.
[73]
To return to the cross appeal: If
the penalty of R17 454 449.76
is
imposed for the first offence - August
2010 - only then the
process of
determining an appropriate penalty for the November 2010 offence has
to be resumed. This would be done by
repeating the 6-step approach
outlined above. In many respects the factors referred to in [52] –
[72] would be restated.
The outcome would, at best, be marginally
different. The two offences are closely related, if not identical, in
gravity. The period
in which they were committed is a single
financial year (so the affected turnover (step 1) would be the same;
the factors to be
taken into account in the rest of the steps would
be almost identical (there may a minor tweaking in the analysis of
the second
contravention), and finally the upper limit (step 6) would
be the same. Assuming for analysis purposes only that the penalty
for the second offence (November 2010) comes to the same amount as
arrived at for the first offence, i.e. R17 454 449.76. If each
is
imposed separately then the cumulative amount would be a penalty of
R34 908 899.52. Before the order is made it would, in terms
of s
59(2), be necessary to re-visit Step 6 to ensure that it does not
exceed 10% of lsipani's annual turnover for 2014.
[74]
The
Commission agreed that if
the
cumulative penalty were to be 10% of the 2014 turnover it would be
too high for these two offences as they simply do not constitute
"egregious
conduct."
The
10% upper limit “
is
reserved for
the
most egregious conduct”
where
there is an
"absence
of any mitigating factors."
[33]
The cumulative penalty of R34 908 899.52
translates into 9.2% of the 2014
turnover. This, too, would be
inordinately high. It would not
"
be proportional in severity to the degree of blameworthiness
of
the offending party, the nature of
the
offence and its effect on the
South
African economy in general and consumers in particular'
[34]
,
but
it must be high enough to have a deterrent effect. In this case, a
penalty of 5%, or thereabouts, of the 2014 turnover for both
of the
contraventions would be a fair and reasonable penalty. It would take
note of the gravity of the offences; it would satisfy
the need to
punish the offender sufficiently to
ensure
that the requirement of
deterrence
is
not
lost,
and
it would be fair to the offender. In
short,
it would serve the interests of justice.
[75]
The amount I have arrived at is R17 454 449.76. This constitutes 4.6%
of the 2014 turnover. Whether one divides this equally
into two to
take account of each contravention and then order lsipani to pay a
penalty of R8 727 224.88 for each contravention
or to a pay a total
of R17 454 449.76 for both contraventions is really of no moment.
[76]
Finally, the penalty of R17 454 449.76 that I have arrived at is
significantly lower than the one imposed
by
the Tribunal, which is R21 783 153.40. It is startlingly
different and allows for this Court to exercise its
very limited
powers on this issue and interfere with the Tribunal's discretion.
While the only difference between the approach
I adopt and the one
adopted by the Tribunal relates to the base amount (Step 2), however,
the end result is a difference of R4
328 703.64. This is a
substantial amount of money. In this circumstance referring the
matter back to the Tribunal would be costly,
time consuming and of no
benefit to the parties or the Tribunal.
Conclusive
remarks
[77]
At the hearing we received a stridently expressed submission from Mr
Fagan criticising the Tribunal for, according to him,
"mechanistically applying the six-step approach"
devised
by the Tribunal in
Aveng.
This
" mechanistic
application"
he contended resulted in a disproportionate
penalty. However, as the discourse between him and the Court
progressed the criticism
really melted away. When pressed to identify
what exactly the Tribunal did wrong he said its choice of 12% of
affected turnover
as a base amount (in Step 2) was too high, and its
discount of 40% (in Step 5) was too mean. Thus, the complaint was no
longer
that the six-step approach was
"mechanistically
applied'
in this case, or that it ought not to have been followed
in this case, it was that its application could have produced a more
favourable
result for lsipani had the Tribunal been slightly more
lenient towards it in taking into account the required factors in
Steps
2 and 5.
[78]
It needs to be stressed that the exercise of determining an
appropriate administrative penalty is, like sentencing in a criminal
matter, case-specific. It is not, and can never be, scientific. When
different penalties in different cases are compared, there
will at
times be surprise and even disbelief. Some of this will
be justified. In order to avoid arbitrariness and capriciousness
to
creep into the decision-making it is important that the Tribunal and
even this Court apply an objective approach to the matter.
The
six-step approach devised by the Tribunal in
Aveng
goes a long
way towards achieving this. It has built-in flexibility; its
application requires rigorous and comprehensive thought;
it requires
the full reasoning underlying the determination to be
articulated; it provides substantial material to the affected
parties
to challenge the decision on objective grounds should any of them be
aggrieved; it allows non-parties to understand the
approach and logic
of the Tribunal (and of this Court); it respects the legislature's
intention by heeding the factors outlined
in s 59 of the Act, and
finally, but most importantly, it advances that which is
central to our constitutional
order - the rule of law.
Applied carefully and rigorously the resulting penalty is bound to be
proportionate. Proportionality,
in my view, is not a self-standing
consideration. It is a function of the combined and duly weighted
factors referred to in s 59
of the Act. It is for these reasons, too,
that the Commission should take advantage of the six-step approach
when considering what
would be a fair and reasonable settlement with
parties who wish not to engage in a bruising adversarial tussle.
[79]
No doubt in time the approach will be refined or even modified, but
for now it provides a good working basis. There may
at some
future point be cases where it cannot or ought not to be followed as
its application, or the outcome of its application,
would not serve
the interests of justice. In that case it should not be followed, but
full reasons for adopting this course must
be provided and the
approach that is followed must strive to achieve all the benefits of
the approach referred to in the previous
paragraph.
Costs
[80]
ls
ipani
has been successful in the appeal. The Commission has not
been
successful in the cross-appeal. However, the Commission's opposition
to the appeal was not without merit, nor was its cross-appeal.
As
with lsipani, the Commission brought helpful written and oral
submissions that were of great assistance in
the
formulation of the ideas expressed in
this
judgment. Both legal teams are thanked for this. It is important not
to mulct a statutory body which opposes an appeal and
stands by or
defends
"
honest
and reasonable decisions made in the public interests."
[35]
In the circumstances, I believe that it would be just and fair for
each party to pay its own costs of both the appeal and the
cross-appeal.
[81]
I had completed this judgment on 10 April 2017. It is unfortunate
that it took so long to be handed down. The judgment
and the
order I propose dissents from that of the majority. This is
regrettable. It is my view that the penalty imposed by the
majority
is too low given the conduct of lsipani. I also hold that it is too
low to have any dissuasive force. In my view the penalty
I propose
takes account of all the considerations that need to be taken into
account and that it balances all the interests and
the relevant
factors, such as the interests of lsipani. the conduct of lsipani,
the gravity of lsipani's offence, the interests
of the Commission and
the public interest in general, especially its interest in a
corrupt-free market.
Order
[82]
This is a minority judgment. However, I would have made the following
order:
1.
The order of the Tribunal is set aside.
2.
The appellant is found to be guilty of two counts of contravening
section 4(1)(b)(iii)
of the
Competition Act 98 of 1998
.
3.
The appellant is ordered to pay an administrative penalty in the sum
of Seventeen million four hundred and
fifty-four thousand four
hundred and forty-nine rands and seventy-six cents (R17 454 449.76).
4.
The cross-appeal is dismissed.
5.
Each party is to pay its own costs.
Victor
AJA (with Davis JP concurring)
[83]
I have had the pleasure of reading the judgment of my colleague Vally
AJA. Regrettably I cannot agree with our brother.
[84]
The issues for determination in this appeal is whether the penalty
was too high and in the cross appeal whether the infringements
should
be considered as two separate infringements thus affecting the
penalty imposed.
Cover
pricing in the context of the Construction Industry at the time of
the infringement
[85]
The cover price infringements occurred in 2010. Mr Arrangies conceded
in cross examination that it only became clear to him
after receipt
of the Commission's letter of 23 November 2011 that cover pricing was
a problem. According to his testimony had he
been approached to
provide a cover price up to that point he would have found nothing
legally untoward about cover pricing. This
acknowledgement must be
considered in context before adverse inferences can be drawn. At that
time cover pricing was endemic, regarded
as legitimate in
the industry and was pervasive
throughout the industry.
This perception was pervasive in
the United Kingdom as well as confirmed in
Kier Group pie
&
another v Office of Fair Trading
[2011] CAT.
[86]
At the time the cover price was a reciprocal ad hoe favour extended
to a competitor. In this case there was no central control
or
orchestration by companies in respect of tenders as to amount price
fixing and other cartel activities. There was no form of
compensation
for providing the cover price. Despite extensive cross examination at
no stage was the Commission able to establish
that the infringement
was intentional and made in order to distort competition. At the time
companies were fearful of being taken
off the tender list if
they did not submit a tender. This was the same position for lsipani.
This led to a situation where
companies would supply a tender price
even if they would not have been able to take on the work.
[87]
The evidence of Mr Arrainges can be characterised as amounting to a
general ignorance that cover pricing was an infringement.
This was
consistent with so many others in the construction industry not only
in South Africa but also in the UK. As is described
in
Keir,
supra,
as recently as 2006 cover pricing was included in
textbooks as anything other than a normal practice. Whilst cover
pricing is clearly
an infringement its level of egregiousness in the
hierarchy of infringements has to be taken into account: that
is made clear
in Keir: 'simple cover pricing the respondent has
already made its own unilateral decision not to compete in the work
before
the request for a cover price is made'.
[88]
In
considering an appropriate penalty it is necessary to see whether the
end result is proportional. The analysis in
Kier
is
helpful in order to assess the proportionality of the ultimate
outcome. Cover pricing may deceive the customer about the extent
of
the competition and could have anticompetitive effects. It
is
clear from the decision in Keir, that it ranks low in the pantheon of
anti competitive offences.
[36]
[89]
The facts do not support a conclusion that lsipani was aware of the
illegality and
intentionally
engaged in the infringement
resulting in a restriction or distortion of competition. There are a
number of other reasons why the
penalty imposed is startlingly
inappropriate. In this case the high point of the evidence
established that the conduct of the lsipani
was committed
negligently
and not
intentionally.
It is negligent because lsipani
ought to have known that the conduct would result in a restriction or
distortion of competition.
[90]
This court can interfere with an administrative penalty on appeal if
the discretion was exercised on the wrong principle See
MacNeil
Agencies v Competition Commission
121.CACJul12. That having been
said, it is obviously necessary to impose a fine sufficient to deter
lsipani and other companies
to refrain from the cover price
infringement.
[91]
Regard
ought to be had to comparative penalties in cases of cover pricing.
The test is whether the
result is
fair and proportional. In
Stanley's
Removals
[37]
,
for
eight infringements of cover pricing the Tribunal imposed a penalty
of 3.5% of its turnover. In cases where the infringer consented
to a
penalty in terms of the fast track process, the following fines were
imposed:
Competition
Commission v Civcon Construction
1%
of its turnover payable in six instalments;
Competition
Commission vs Giuricich Coastal Projects Pty Ltd
1.25%
of annual turnover payable in six monthly instalments. The Tribunal
imposed a penalty 9.4% of lsipani's turnover thereby characterising
it as close to the most egregious infringement and out of line with
the other penalties for infringements which were more
serious.
[92]
Once the indication is that the penalty is not proportional, it is
necessary to consider where the Tribunal erred. The appropriate
starting point would be to consider each of the indicated steps.
Step
One
[93]
lsipani raises two issues in relation to Step One. The
first is whether 2011 or 2012 should be the appropriate
year of
assessment. The second issue raised in step one is the failure by the
Tribunal to take into account the difference between
negotiated and
non-negotiated turnover. In relation to the appropriate year issue,
Mr Arrangies conceded that he would have assisted
NMC with a cover
price until the Notice of Infringement. Clearly his intention to
continue to participate in cover pricing continued
until the notice
of infringement of 23 November 2011. It is undisputed that there was
no further infringement.
[94]
The
second issue raised in Step One was the failure by the Tribunal to
differentiate between negotiated and non-negotiated tenders.
In
Omnico (Pty) Ltd & another v Competition Commission and others
[38]
this court made it clear
that
affected
turnover was to
be
taken
into
account when imposing
a
penalty. In this case the affected turnover must be the
non-negotiated tenders. The schedule
shows
that
the
non-negotiated
tenders
amounted
to
R205,
605,883.55
for the year 2011. The interpretation of affected turnover is also
applied in UK construction companies which switch
between non
negotiated and negotiated tenders. In this case there was no evidence
that lsipani could switch from a non-negotiated
to negotiated tender.
In G
F
Tomlinson Group Ltd
&
another
v Office of Fair Trading and similar
cases
[39]
dealing with negotiated and non
negotiated tenders, affected turnover was not taken into
account
where an entity could switch from a non-negotiated tender to
negotiated tender. I agree with lsipani's submission that
in this
case there can be no switching within the same project and therefore
affected turnover must be taken into account. The
affected turnover
principle has also been established in
Omnico.
[40]
Step
Two
[95]
The Tribunal used 12% as it base amount. It is unclear how it arrived
at this percentage. Clearly cover pricing is at the lowest
end of
egregious conduct. The Tribunal applied a percentage of 12% of the
30% it could have applied. lsipani's conduct falls to
be assessed at
most at one third of the 30%. 12% is too high a starting point
when considering the nature of this infringement.
If the starting
point is too high in step two then the end result will result in a
distortion of the end result.
Step
3
[96]
The Tribunal erred in using a multiplier of one year and four months
(1.3). The actual duration was from August 2010 to 23
November 2011.
This is one year three months which should be a multiplier of 1.25 of
the affected turnover.
Step
Four.
[97]
lsipani submitted that the
appropriate year to decide the
'preceding
financial year 'for purposes of Step 4' is 2013. The
fine was imposed on 18 July 2016. There is no evidence to suggest
that the
lsipani engaged in cover pricing for a long duration.
It is also not lsipani's fault that the matter was finally
adjudicated
5 years after the infringement. There is no
suggestion that the lsipani delayed matters save that it
failed to
agree to a consent order. In this case
the failure to agree a consent order should not result in unduly
punishing
lsipani. Its right to test whether cover pricing was an
infringement was not opportunistic in the light of the wide spread
practice
and it being taught at University level. In considering
whether the statutory cap had been exceeded the
Tribunal chose 2014 which
is a year with
a
higher turnover of R378 807
544. Notwithstanding the factors submitted
by lsipani
justifying the relevant year to be 2013 ultimately there is no
reason to disregard the choice of 2014 by
the Tribunal.
Step
Five
[98]
Within the context of cover pricing being an infringement it was
necessary for the Tribunal to take all factors into account
and
attribute fair weight to all the factors. The Tribunal found the
aggravating factors included the role of the procurement director
and
that Mr Arrangies was aware of the fast track settlement process. As
stated earlier this contravention was not done intentionally.
Although senior personnel were involved there is no evidence to
suggest that they did so with the intention to distort competition.
The weight attached to the second infringement as an aggravating
feature must be considered in the light of the continuous belief
(although incorrect) that cover pricing was not illegal. The tribunal
reduced the penalty by 40%. There are a wide range of mitigating
factors some of which go to the core of what ought to be taken into
account for mitigation. In considering that only 40% was allowed
for
mitigation , it means that the aggravating factors played a far more
significant role for the Tribunal. Less weight was attached
to the
mitigating factors. In my view this is inconsistent with arriving at
a proportional result.
[99]
There are many mitigating factors of a
substantial nature. Significantly this would
include the
successful continuation of the business and the preservation of
jobs. lsipani cooperated. It has
a very low level
of profit margin to turnover. The profit margin was lower than
the industry norm for that period.
In 2011 it was 1.45 %. In
Mac
Neil Agencies
(Pty) Ltd [2013] 2CPLR 416(CAC) this court found
that a low profit margin to turnover was relevant. This approach was
also adopted
in the cases of Kier
Group, Barrett
and
Tomlinson,
supra.
[100]
The BBBEE initiative would be set back as no dividends could be
declared to repay the loan of the BBBEE participants. A high
penalty
would impact negatively on the future of contracting opportunities
especially with Government projects. lsipani must have
sufficient
capital to retain future work. It wanted to achieve a certain current
asset level so as to be registered as a CIDB grade
9. It had to have
at least R40 000 000 capital available. An overly harsh penalty
would set back the goal of moving to a CIBD
9 level. It would set
back the BBBEE initiative. In my view this is an important
consideration. There is no evidence to support
the conclusion that
lsipani could receive sponsorship to reach CIBD level 9
classification.
[101]
In summary, this court has previously cautioned against the trap of
applying a mechanical interpretation to the six steps.
The six step
is a framework. Cognisance must be taken of the context in which the
contravention took place, the nature of the infringement
and the
nature of the product and its effect on consumers. The scheme was not
part of a scheme centrally controlled over a period
of time. There
was no evidence of lsipani's conduct inflating the level of the
winning bids. There were no compensation payments.
lsipani was not a
repeat offender in the true sense. In all probability the cover
pricing would result in a losing bid.
[102]
From my analysis it follows that cover pricing does not stand to be
regarded as equivalent to hard core bid rigging. Cover
pricing was
widespread and endemic throughout industry. Ultimately the penalty
must have a deterrent effect and yet be proportional.
A
deduction of 60% is fair in the circumstances.
Summary
on the penalty
[103]
The affected turnover is R205, 605,883.55. In applying a base amount
of 10% this equals R20 560 588. The correct multiplier
should be
1.25% which produces a figure of R25 700 735.
Rounding off the 2014 turnover
of R378
807 544 by 10% amounts to R37 880 754. There is no need to round off
in this step. A discount of 60% applied to R25 700
735 means that R15
420 440 stands to be deducted from R25 700 735. The
appropriate penalty is thus
R10 280 295 which in my
view is sufficiently severe without being disproportional.
The
Cross Appeal
[104]
The Commission sought a single penalty in its Notice of Motion. The
Tribunal does have a discretion to impose a single penalty
for more
than one infringement. The imposition of a single penalty for
multiple infringements has been applied in other cases.
See
Stanleys
supra. In my view there is no basis to overturn the Tribunal's
finding that the two infringements must be considered separately for
the purpose of imposing the penalty.
In
the result the following order is made
1.
The appeal is upheld
2.
The fine is changed to R10 280 295.
3.
The Competition Commission is ordered to pay the costs.
4.
The cross appeal is dismissed with costs
_________________
DAVIS
JP
_________________
VICTOR
AJA
_________________
VALLY
AJA
Date
of hearing:
30 March 2017
Date
of judgment:
14 September 2017
For
the Appellant:
Adv E Fagan SC
Instructed
by:
Werksmans Attorneys
For
the Commission:
Adv V Ngalwana SC with Adv A Bodliani and Adv L Quilliam
Instructed
by:
Ndzabandzaba Attorneys
[1]
lsipani's 2014 turnover was R378 807 540.00
[2]
(84/CR/DEC 09)
[3]
[2011] 2 CPLR 239 (CAC)
[4]
Aveng,
n2
at [37]
[5]
Guidelines
for the Determination of Administrative Penalties for Prohibited
Practices, published Nov 2014
(GG
323/2015)
[6]
The
Competition Commission v Southern Pipeline Contractors and another
[2015]
1 CPLR 316
(CT) at [44] - [45].
[7]
Aveng,
n2
at [39]
[8]
Southern
Pipeline,
n6,
at (61]
[9]
Section 59(1) of the Act; See further:
Macniel
Agencies (Pty) Ltd v The Competition Commission [
2013]
2 CPLR 416
(CAC) at [78] and the case cited therein
[10]
Notice of motion , para 1.
[11]
Notice of motion, para 2.
[12]
Quoted in [17] above.
[13]
The empowering section is s 58(1)(a)(iii) of the Act which provides:
"58(1)
In addition to its other powers in terms of this Act, the
Competition Tribunal may
(a)
make an appropriate order in relation to a prohibited practice,
including-
(i)
...
(ii)
imposing an administrative penalty, in terms of section 59, with or
without the addition of any other order in terms of this
section."
The
relevant portion of s 59(1)(a) provides:
"59(1)(a)
The Competition Tribunal may impose an administrative penalty only
for a prohibited practice in terms of section
4(1)(b), .. . "
[14]
Section 59(3) provides:
"59(3)
When determining an appropriate penalty, the Competition Tribunal
must consider the following factors:
(a)
the nature, duration, gravity and extent of the contravention; (b}
any loss suffered as a result of the contravention;
(c)
the behaviour of the respondent;
(d)
the market circumstances in which the contravention took place;
(e)
the level of profit derived from the contravention;
(f)
the degree to which the respondent has co-operated with the
Competition Commission and the Competition
Tribunal: and,
(g)
whether the respondent has previously been found in contravention of
this Act.
[15]
Section 59(2)_of the Act provides:
"59(2)
An administrative penalty imposed in terms of subsection (1) may not
exceed 1O per cent of the firm's annual turnover
in the Republic and
its exports from the Republic during the firm's preceding financial
year.
[16]
KwaZulu-Natal
Joint Liaison Committee v MEG for Education, KwaZulu-Natal and
Others
2013
(4)
SA
262
(CC) .
[17]
Id.
at
[58].
[18]
Id.
at
[67] - [68]
[19]
Id.
at
[79] and [86] references omitted.
[20]
Id.
at
[105] - [106] See also (94] - [100]
[21]
Id.
at
[147]
[22]
The learned judge mentions only two of them:
Gusha
v Road Accident Fund
2012
(2) SA 371
(SCA) in para 7; and
South
British Insurance
Co
Ltd
v Uni corn Shipping Lines (Pty) Ltd
1976
(1) SA 708
(A)
at
714G. No purpose would be served by burdening this judgment with
further annotations on this issue.
[23]
Id.
at
[150]
[24]
See
Dodd
v Multilateral Motor Vehicle Accidents Fund
1997
(2) 763 (SCA) Dodd v RAF at 767A
[25]
Decision of Tribunal at [20]
[26]
Johannesburg
Metropolitan Municipality v Gauteng Development Tribunal and Others
2010
(6) SA 182
(CC) at (91]. See also, the
locus
classicus
on
this issue:
Hira
and Another v Booysen and Another
1992
(4) SA 69
(A) at 93G -
H.
[27]
Decision of Tribunal, at [33].
[28]
See Row 1, Columns 4 and 5 in the Table found in [8] above
[29]
See Table at [13] above.
[30]
Kier
Gr
o
up
PLC
and
others
v
Office
of
Fair
Trading
[20
11]
CAT 3 at [94
]
[31]
Decision of Tribunal at [10]
[32]
See [45] above
[33]
Federal-Mogul
Southern Africa v Competition Commission
[2005]
1 CPLR 50
(CAC) at 720
[34]
Southern
Pipeline Contractors and Another v Competition Commission
[2011]
2 CPLR 239
(CAC) at [9]
[35]
Competition
Commission of South Africa v Pioneer Hi-Bred International Inc and
others
2014
(2) SA 480
(CC) at [24]. See the supporting authorities cited
therein, one of which includes a case from this Court.
[36]
Kier paras 99 and 100
[37]
The Competition Commission v Stanley’s Removals CC &
another C R/030/Jun 1 5
[38]
142 and 143 /CA C/June 2016
[39]
201 1 CAT77
[40]
Omnico Pty Ltd & another v The Competition Commission &
others I 42,14 3/CAC /Jun J 6