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[2011] ZACAC 6
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Southern Pipeline Contractors and Another v Competition Commission (105/CAC/Dec10, 106/CAC/Dec10) [2011] ZACAC 6; [2011] 2 CPLR 239 (CAC) (1 August 2011)
REPUBLIC OF SOUTH AFRICA
IN
THE COMPETITION APPEAL COURT OF SOUTH AFRICA
HELD IN CAPE TOWN
CASE
NO: 105/CAC/Dec10
106/CAC/Dec10
In
the matter between:-
SOUTHERN
PIPELINE CONTRACTORS
…...............................................................
First
Appellant
CONRITE
WALLS (PTY) LTD
…...........................................................
Second
Appellant
and
THE
COMPETITION COMMISSION
…...........................................................
Respondent
JUDGMENT
DAVIS JP
Introduction
[1]
This
appeal concerns two separate but interrelated disputes between
respondent and first and second appellants respectively. Briefly,
on
29 November 2010 the Competition Tribunal (‘the Tribunal’)
held that first appellant, after admitting to contraventions
of the
Competition Act 89 of 1998 (‘the Act’) had contravened ss
4(1)(b)(i), (ii) and (iii) of the Act. It imposed
an administrative
penalty on first appellant of R16 882 597.00, calculated on the basis
of 10% of first appellant’s turnover
for its 2008 financial
year, that turnover being in the amount of R 168 825 969. 00.
[2] Second appellant also
admitted to contraventions of the Act, in its case, a contravention
of s 4(1)(b)(i) and (ii). The Tribunal
imposed an administrative
penalty of 8% of its total turnover, amounting to R 6 192 457, its
turnover being in the amount of R
77 405 715. Both appellants have
approached this court on appeal on the basis that the administrative
penalty imposed on them respectively
was calculated in contravention
of the framework laid out in section 59 of the Act and as a result is
excessive.
[3] For the purposes of
this judgment, the factual disputes raised in the two cases need to
be dealt with separately, although the
legislative framework is
equally applicable to both appeals. Accordingly, it is necessary to
deal firstly with the proper approach
to s 59.
The legislative
framework
[4]
Section 59 provides, insofar as it is relevant to the present
dispute, that:
“
(
1)
The Competition Tribunal may impose an administrative penalty only-
(a) for a prohibited
practice in terms of section 4(1)(b)…;
…
(2) An administrative
penalty imposed in terms of subsection (1) may not exceed 10% of the
firm’s annual turnover in the Republic
and its exports from the
Republic during the firm’s preceding financial year.
(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 or damage
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
profits derived from the contravention;
(f) the degree to
which the respondent has cooperated with the Competition Commission
and the Competition Tribunal; and
(g) whether the
respondent has previously been found in contravention of this Act.”
[5]
The wording of this section is indicative of a clear structure to be
followed in the determination of an administrative penalty,
albeit
that the numerical numbering of the section appears to have caused
some confusion, in that the considerations set out in
s59(3) should
precede the application of s59(2)
[6] In terms of
subsection (1), the Tribunal may impose an administrative penalty,
once a prohibited practice in terms of section
4 has been determined.
[7] The Tribunal, having
then been empowered to impose an administrative penalty, is enjoined
to take account of the factors which
are set out in subsection (3).
Mr Bhana, who appeared together with Mr Mooki on behalf of
respondent, noted the ‘must’
in subsection (3) does not
mean that each of these factors must be considered in all cases
because one or some of these factors
may not be present within the
context of the particular dispute. However, in a case which presents
the kind of facts contained
in this dispute, all of the factors
listed from (a) to (g) in subsection (3) become relevant and must be
taken into account in
the process of the determination of an
appropriate penalty.
[8]
Once a determination has
been
made of the proposed penalty, the Tribunal is then required to
determine whether the amount so proposed falls within the cap,
as
provided in subsection (2).
[9]
Given the constitutional dispensation in terms of which the Act is
located, and the further injunction of section 39(2) of the
Constitution of the Republic of South Africa 108 of 1996 that, in
interpreting any legislation, a court must promote the spirit,
purport and object of the Bill of Rights, it is clear that the
doctrine of proportionality constitutes a further applicable factor
in the determination of an appropriate constitutional penalty in the
circumstances of a dispute such as that before this Court.
This
conclusion is fortified by a
dictum
of
Harms DP in
Woodlands
Dairy v Competition Commission
2010
(6) SA 108
(SCA) at para 10 where the learned Deputy President says:
“
The
so-called ‘administrative penalties’ (more appropriately
referred to as ‘fines’ in s 59(2)) bear a close
resemblance to criminal penalties.”
This
equation of the penalties, which may be imposed in terms of s 59 of
the Act, to criminal fines did not appear to take any cognisance
of
the judgment of this Court in
Federal-Mogul
Southern Africa v Competition Commissio
n
[2005] 1 CPLR 50
CPAC at 67 nor to comparative authority cited in
that judgment. Nonetheless, the approach adopted by the Supreme Court
of Appeal
compels, at the very least, the conclusion that a penalty
which is of a criminal nature should 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. It was noted in
Federal-Mogul
supra
at 72
that the imposition of an administrative penalty should not only
promote the important objective of deterrence but that sight
should
not be lost of fairness to the offending party. In particular, a
penalty should not be imposed in order to destroy the business
of the
offending party, a point confirmed by s59(2) which places a cap on
the amount of a penalty which may be imposed; that is
it cannot
exceed 10% of the offending firm’s annual turnover in the
Republic and its exports during that firm’s preceeding
financial year.
[10]
To emphasise, the cap described in s59(2) is exactly that which it
purports to be; it is the determination of the maximum penalty
that
can possibly be imposed. It becomes operative
only
after
the Tribunal has taken account of the factors set out in s59(3) and
decided upon a penalty. It is then required to determine
whether that
proposed penalty falls within the maximum allowable penalty as
provided for in s59(2).
The
Tribunal’s approach to s59
[11]
From the record, it appears that Tribunal was invited by counsel for
the second appellant to follow the approach which I have
set out.
Unfortunately, the Tribunal refused this invitation by concluding
that a legislative framework ‘ought not to be
conflated with a
formulaic methodology’. See para 47.
[12] The Tribunal then
engaged in a brief examination of the approach adopted by the
European Commission, the Office of Fair Trading
in the United Kingdom
and the approach developed by courts in the United States of America.
The purpose of this investigation appears
to have been designed to
illustrate the ‘arithmetic’ approach which is set out in
the applicable legislation and which
governs the powers of these
authorities. Take, for example the guidelines on the method of
setting fines imposed in terms of article
23(2)(a) of Regulation
1/2003 of the European Union (2006/C210/02). In paragraph 10 of these
guidelines the European Commission
is enjoined to determine a basic
amount of a penalty to be imposed on an undertaking or association
which intentionally or negligently
infringes articles 101 or 102 of
the Treaty. The basic amount is determined by reference to the value
of sales, by applying the
following methodology: the Commission
considers the value of the undertaking’s sale of goods or
services to which the infringement
directly or indirectly relates in
the relevant geographical area within the European Union. Paragraph
10 provides further that
the Commission should normally take the
sales made by the undertaking during the last full year of business
of its participation
in the infringement.
[13]
In determining the value of sales by the undertaking, the European
Commission will take that undertaking’s best available
figures.
The basic amount of the fine will then be related to a proportion of
the value of sales, depending on the degree of gravity
of the
infringement multiplied by the number of years of infringement. As a
general rule, the proportion of the value of sales
taken into account
will be set at a level of up to 30% of the value of sales. In order
to decide whether the proportion of the
value of sales to be
considered in a particular case should be at the low or high end of
the scale, the Commission is enjoined
to have regard to a number of
factors, such as the nature of the infringement, the combined market
share of all undertakings concerned,
the geographical scope of the
infringement or whether or not the infringement has been implemented.
In terms of paragraph 25 of
these guidelines, the Commission, in
addition to the determination set out will include in the basic
amount a sum of between 15%
to 25% of the value of sales, so defined,
in order to deter undertakings from even entering into horizontal
price fixing, market
sharing and output limitation agreements. Once
the basic amount has been set, paragraphs 28
et
seq
provide
for a consideration of both aggravating and mitigating circumstances
which would result either in an increase or a decrease
in the basic
amount of the penalty. In a similar fashion to s59(2), para 32 of the
guidelines provides that the final amount of
the fine shall not, in
any event, exceed 10% of the total turnover in the preceeding
business year of the undertaking or association
of undertakings which
participated in the infringement.
[14]
Although not canvassed by the Tribunal, Mr Bhana also referred to the
Competition and Consumer Act 2010 of Australia. Section
76(1)A of
this Act provides for a penalty which shall not exceed for each act
or omission to which the section applies the greatest
of the
following:
“
(i)
$10,000,000;
(ii)
if the court can determine the total value of the benefits that have
been obtained (within the meaning of Division 1 of Part
IV) by one or
more persons and that are reasonably attributed to the act or
omission- 3 times that total value;
(iii)
if the Court cannot determine the total value of those benefits –
10% of the annual turnover (within the meaning of
Division 1 of Part
IV) of the body corporate during the period (the turnover period) of
12 months ending at the end of the month
in which the act or omission
occurred.
”
[15]
The provision in (iii) refers to total turnover as opposed to the
affected turnover, whereas in (ii), the concept employed
is the total
value of the benefits that have been obtained’ which would
appear to be a figure which is lower than that of
affected turnover.
[16]
This examination of the applicable legislative framework of the
European Union and Australia shows that these countries provide
numerical guidelines to the relevant authorities in the determination
of the appropriate penalty. Significantly, no set of guidelines
has
been provided in this country which does compound the problem of a
consistent determination of fines.
[17]
The Tribunal then proceeded to apply the arithmetical approach, which
it averred formed the basis of the EU methodology, as
well as that of
the Office of Fair Trading, in order to illustrate that, were a
penalty in terms of s59 to be based on similar
calculations, the
penalty would far exceed the 10% cap provided for in terms of s59(2)
of the Act. Therefore, in its view, this
method could not be
considered to be an appropriate mechanism for the purposes of
determining a penalty to be imposed in terms
of s59(1).
[18]
Depending on whether, for example, the European Union takes a factor
of 30% which it employs for very serious cartel offences
and where
the penalty is also based upon the full duration of the cartel
period, the fine can be extremely high. See, for example,
the
analysis of
Veljonovski
“Cartel fines in Europe: Law, practice and deterrence
”
2007
(30)
World
Competition
65
.
[19]
But an examination of the extreme fines imposed by the EU authority
does not of itself justify the Tribunal in refusing to
formulate the
appropriate fine after a careful application of s59(3) and then, only
after such a determination, to assess whether
the cap in terms of
s59(2) has been exceeded. In summary, the invocation of the
comparative approach does not justify a failure
to separate the
initial inquiry under s59(3) from the secondary inquiry in terms of
s59(2). That the application of s59(3), absent
clear guidelines, may
prove to be difficult is no justification for eschewing its mandate.
As with calculations of damages in civil
cases and fines in criminal
cases courts need to adopt the most plausible and justifiable means
to substantiate their determination,
in this case after an
examination of the factors set out in s59(3).
[20]
Having set out the framework which must be applied in general, a
further consideration which derives from para 72 of the judgment
in
Federal-Mogul
supra
needs
to be taken into account, namely that:
“
This
court does not enjoy unfettered discretion to interfere with the
Tribunal’s assessment and imposition of an administrative
penalty. Even if we decided that a different penalty was appropriate
we are not merely at large to substitute a finding for that
of the
Tribunal. This approach is consistent with general principle that an
appeal against the exercise of its discretion by a
court or a
statutory body, the court on appeal has limited power to interfere.
It can only do so on a certain well recognised grounds
namely the
court a quo exercises its discretion capriciously or upon a wrong
principle or it has not brought its unbiased judgment
in the question
or it does not act for substantial reasons.
”
[21]
Both appellants contend that the Tribunal has failed to apply the
correct approach to s59 and, on the evidence, committed a
number of
serious misdirections which justify interference by this Court. For
this reason, it is necessary, in the light of the
legislative context
outlined above, to turn to the facts of each case.
Southern
Pipeline Contractors
[22]
It appears that a national cartel was established by Rocla (Pty)
Limited and Infraset, which now conducts business as Aveng
Africa
Limited. Apart from this national cartel, regional cartels were
established in Gauteng, the Western Cape and Kwazulu-Natal.
Cartel
activities included price fixing and the allocation of
contract/tenders in connection with the supply of pipes and culverts
to construction companies and other customers.
[23]
It appears that meetings took place in secret with venues being
changed on a regular basis to avoid detection. Further measures
were
put in place to ensure secrecy, including cartel members being
identified by a number rather than by their trade name. First
appellant agreed that it would not participate in the market for
manholes and culverts and, further, that it would only produce
storm
water and sewer pipes with a 300mm to 1800 mm diameter in Gauteng.
[24]
The cartel was voluntarily terminated in October 2007. On 7 December
2007 Rocla, as a leniency applicant, furnished the Commission
with
information of the existence of the cartel. Pursuant to this
information, the Commission initiated a complaint on 18 March
2008,
alleging that Rocla, Infraset (Aveng), Cape Concrete (Pty) Ltd,
Grallio (Pty) Ltd, D&D (Pty) Ltd, first appellant, second
appellant, Cobro (Pty) Ltd Concrete Units and Craig’s Concrete
Products (Pty) Ltd had operated a cartel in the pre-cast concrete
industry within South Africa. For the purposes of this judgment, it
is relevant to note that second appellant’s activities
took
place only within the Durban area.
[25] On 15 October 2008,
first appellant delivered a comprehensive statement in which it
detailed its participation in the cartel
and furnished relevant
documents to the Commission.
[26]
On 13 February 2009, the Commission initiated proceedings against the
ten respondents for orders couched in the following terms:
“
1.
an order declaring that the respondents have contravened s
4(1)(b)(i), 4(1)(b)(ii) and 4(1)(b)(iii) of the Act.
an order directing
the respondents to desist from such conduct.
an
order directing the second (the first appellant), third, fourth,
fifth, sixth, seventh, eighth and ninth respondents to pay
an
administrative penalty equivalent to 10% of each of the respondents’
annual turnover for the preceding financial year
.”
[27]
On 12 March 2009, the general manager of first appellant, Mr Stephane
Riot, admitted that first appellant, together with Rocla,
Concrete
Units, Infraset and Craig Concrete had contravened ss4(1)(b)(i), (ii)
and (iii) of the Act. Mr Riot admitted that first
appellant joined
the cartel in October 1994, at a time that it operated in a 150
kilometre radius around Johannesburg. When it
joined, the members of
the cartel included Craig Concrete, Infraset and Rocla. Mr Riot
admitted that first appellant’s involvement
in the cartel had
been limited to a supply of concrete piping in this area and that, at
no stage during its membership had it engaged
in the manufacturing
and supply of culverts. After first appellant joined the cartel, it
was allocated a 12.5% share which appeared
to have been reduced to
11,75% from April 2001 when Concrete Units joined the cartel. In
October 2001, first appellant acquired
the assets of Craig Concrete
and accordingly its percentage of the allocated market was increased
to 27%.
[28]
First appellant and the Commission could not reach agreement on the
appropriate penalty to be imposed, as a consequence of
which a
hearing took place before the Tribunal on 2 and 3 August 2010. It
appears that the essence of this dispute centred on the
basis of the
calculation of an administrative penalty and, in particular, a
disagreement of what constituted first appellant’s
affected
turnover for the 2008 financial year.
The Tribunal’s
determination
[29]
The Tribunal noted that the approach that it had adopted to the
determination of an appropriate penalty in previous cases:
‘
Has
been to identify or connect the turnover of firm in the line of
business or the market in which the contravention has taken
place.
This has been described as the affected or relevant turnover. While
until now the Tribunal has calculated penalties based
on the notion
of relevant turnover, the Tribunal has never restricted itself to
this methodology nor has it held they would treat
all contraventions
of the Act in same manner in all circumstances
’
.
(paras 44 – 45)
[30]
This articulation of its previous approach notwithstanding, the
Tribunal proceeded to examine the dispute between the parties
regarding the correct figure for affected turnover.
[31]
It was common cause between first appellant and the Commission that
an amount of R 44 935 988, which was derived from civil
engineering
activities, should be deducted from the total turnover of R168 825
969 in the 2008 financial year. First appellant
submitted that a
further deduction from its total turnover was justified in respect of
concrete products it had supplied for the
Gautrain project in the
amount of R 42 834 295. In this case, the claim was resisted by the
Commission which argued that there
was a causal link between this
amount of turnover and an earlier bid rigging agreement. Accordingly,
this amount should be considered
to be part of the affected turnover.
[32]
A further figure of R 32 371 630, which was described in the
financial statements as ‘revenue from bought – in
goods
sold’, was the subject of dispute. In the view of first
appellant, this amount stood to be deducted from the figure
of total
turnover. Briefly, first appellant contended that these ‘bought
- in goods’ arose from an agreement that had
been concluded
between first appellant and the Department of Water Affairs, (‘the
department’) in terms of which first
appellant undertook
certain rehabilitative services on behalf of the department. For the
purposes of this project, certain steel
piping which was not produced
by appellant was to be supplied to the department by an independent
party. First appellant was required
only to effect the installation.
[33]
First appellant contends that it proposed to the department that it
purchase the pipe, whereafter the department would reimburse
first
appellant for the costs. In other words, the pipes were to be
supplied directly to the department by an independent entity
(Group 5
Pipe) as a result of which first appellant would not make any profit
on this transaction.
[34] These disputes
relating to affected turnover notwithstanding, the Tribunal proceeded
on the following basis:
“
It
is necessary for us to decide on the dispute in respect of total
turnover as the imposition of the fine requires us to know what
the
maximum permissible fine is
.”
[35]
The Tribunal examined the basis for excluding the amount for the
‘in-out’ transaction so as to determine whether
the total
turnover for the 2006 financial year was R 168 825 969 or R 136 454
369; that is the amount after the deduction of R
32 371 630, pursuant
to ‘in-out’ transaction.
[36]
The Tribunal evaluated first appellant’s case with regard to
this amount as follows:
“
Mr
Riot under cross-examination conceded that they had agreed with DWAF
to this particular mechanism in question – namely
delivering
the pipes and passing risk ownership directly onto DWAF – in
order to obtain a direct benefit in its cash flow.
But for this
mechanism, DWAF would have retained a 10% retention fee. In
consequence of this arrangement DWAF would waive the 10%
retention
which was to SPC’s benefit
.”
Accordingly,
the Tribunal found that the amount of R 32 371 630 should have been
included in the total turnover of first appellant
because
‘
this
is how it was always treated in the ordinary course of the companies
business
’
.
(para 69)
[37]
The Tribunal turned to examine the factors included in s59(3) of the
Act. It concluded that, while appellant was not the leader
of the
cartel it was ‘
an
active and enthusiastic member for 13 years
’
:
(para 94). Among appellant’s major clients was the department,
Rand Water Board and various municipalities, all ‘
critical
sectors for the growth and development of our country’
.
Accordingly, the elevated prices caused by the cartel ‘
can
only have caused considerable harm to the public purse and ultimately
the South African taxpayer
’
.
(para 84) The Tribunal was thus of the view that the most weighty
factors which had to be considered in the determination of the
appropriate penalty were the duration, gravity and extent of the
cartel, and, in its assessment, the present case ‘
must
demand the highest sanction’
.
For these reasons, it held that the appropriate penalty would be a
fine equal to 10% of total turnover, being an amount of R 16
882 597.
First Appellant’s
case
[38]
Mr Brassey, who appeared together with Mr Mundell on behalf of first
appellant, submitted that the Tribunal had misdirected
itself in the
imposition of this penalty, essentially for three reasons:
1. It imposed a penalty
based on first appellant’s total turnover reflected in its 2008
financial statements.
2. It misdirected itself
by accepting the Commission’s calculations of first appellant’s
net affected turnover.
3.
It misdirected itself by imposing the maximum penalty of 10% provided
for in s59(2) of the Act and, in particular, failed to
find that
there existed mitigating factors in relation to first appellant
warranting a reduced percentage in the calculation of
the appropriate
administrative penalty.
[39]
It was common cause that, save for the amount of R32 371 630.00 which
was revenue from ‘bought – in’ transaction
the
other disputed amounts, that is from the civil engineering contract
and the Gautrain project, constituted part of first appellant’s
total turnover.
[40]
I therefore turn to deal with the ‘bought - in’
transaction. Mr Riot testified about first appellant’s contract
with the department as follows:
“
The
percentages of structuring of the pipe is more than 30% of the
contract. And in order to be able to be competitive as a contractor,
we proposed to DWAF not to put any mark up on the steel pipe which is
not at all our line of manufacturing. It is something we
purchase
from steel pipe companies such as Group 5 Pipe… And we
proposed to DWAF to supply these pipes at cost, which has
been
accepted, with some deviation to the contract, which we asked for
because supplying the pipe at cost was impossible for us
to have
retention on the price of the pipe. So they paid us the invoice of
the supplier was coming. There was the escalation formula
of the
contract was not applicable on the pipe but the escalation of the
supplier itself direct to DWAF on the contract as well.
”
Mr
Riot confirmed that there was no retention in respect of this
transaction. First appellant fee was charged solely for the
installation.
[41]
In support of first appellant’s case, evidence was provided by
Mr Louw, who was a partner in the firm that audited first
appellant
and prepared its financial statements. Mr Louw noted that an amount
of R 32 371 630 had been reflected as part of first
appellant’s
revenue for 2008 but this amount had also been included in the costs
of sales to produce a neutral return. In
a report dated 16 November
2009, Mr Louw contended that the amount of R 32 371 630 should not
have been so reflected in the financial
statements. He justified this
conclusion with reference to the South African Statements of
Generally Accepting Accounting Practice
(‘SAGAAP’) in
which revenue is defined to include ‘
only
the gross inflows of economic benefits received and receivable by the
entity on its own account. Amounts collected on behalf
of third
parties such as sales, taxes, goods and services taxes and value
added taxes are not economic benefits which flow to the
entity and do
not result in increases in equity. Therefore they are excluded from
revenue
’
.
[42] For this reason, Mr
Louw testified that the correct accounting procedure would not have
been to disclose the amount of R 32
371 630 as revenue. Hence it
should not have been considered to be part of first appellant’s
affected turnover.
[43]
Turning to the turnover relating to the Gautrain project, Mr Brassey
submitted that the two special contracts concluded in
2007 and 2008
were for the provision of tunnel lining segments and noise barriers
for the Gautrain project. The contracts had been
entered into with
Bombela Civils Joint Venture (Pty) Ltd and did not constitute a
supply of products which had previously been
governed by the cartel
agreement. Indeed, these particular contracts had nothing, in Mr
Brassey’s view, to do with the cartel
arrangement nor with a
proposed but aborted joint venture relating to the Gautrain project
which would have involved the establishment
of a joint venture with
other members of the cartel and which Mr Riot conceded in evidence
would have been ‘essentially an
extension of the cartel’.
[44]
For this reason, Mr Brassey submitted that the Tribunal had
completely misdirected itself by concluding that appellant had
remained a party to an arrangement between Rocla and Infraset as a
junior member of the Gautrain joint venture, as it never came
into
existence.
[45]
Mr Brassey also submitted that certain of the considerations taken
into account by the Tribunal in its assessment of aggravating
factors
were not justified on the evidence. The Tribunal held that first
appellant had joined the cartel for fear of being undercut
and hence
driven out of business. While that conclusion accorded with the
evidence of Mr Riot, it did not support the conclusion
that ‘
a
fear of competition can never be a justification for engaging in
contraventions of the Act
.’
[46]
Mr Brassey pointed out that Mr Riot’s explanation was to the
clear effect that, in the face of the cartel activity, a
business
such as appellants’ would have failed as a business entity and
it was therefore compelled to join. Mr Brassey also
attacked the
Tribunal’s finding that the cartel had come to an end in
October 2007, owing to the fear on the part of its
members of
exposure and sanction. He submitted, by contrast, that Mr Riot had
testified that first appellant gained limited financial
benefit or
profit from the cartel and that its membership was financially
unrewarding. This evidence had been supported by a graph
produced by
Mr Riot which reflected that the average increase in the selling
price of concrete price correlated closely with the
average increase
in the manufacturing costs, the implication being that the members of
the cartel had not derived excessive profits.
Mr Myburgh, who
testified on behalf of the Commission, confirmed, under cross
examination, that the cartel ‘
was
not producing result for the members that they would have hoped’
.
Evaluation
[47]
Although the Tribunal did consider certain of the factors which were
set out in s59(3), it never even commenced a process of
determination
of an appropriate penalty, pursuant to the criteria set out in s59(3)
which represent a framework within which its
discretion should be
exercised. Rather, its reasoning is confined to certain
considerations relating to the nature and duration
of the offence and
generalised comments about the harm caused ‘
to
the public purse and ultimately to the South African taxpayer
’
.
The Tribunal concluded that this was the most serious possible case
which could come before it, and thus it demanded ‘the
highest
sanction’. Without more, it then imposed a penalty, in effect,
based on the cap in terms of s59(2) of the Act.
[48]
This is manifestly an incorrect approach for the reasons which have
been set out in our analyses of s59. The architecture of
s59 does not
permit a substantive circumvention of s59(3) without any attempt by
the Tribunal to complete the comprehensive enquiry
mandated in terms
of this subsection before a penalty can be imposed. It is only after
such an inquiry has been completed that
the cap pursuant to s59(2)
becomes relevant.
[49]
Although the EU guidelines differ to a significant extent from the
strictures of s59(3), some initial calculation of affected
turnover
as is employed in the EU guidelines, together with a calculation of
the years in which the particular member of the cartel
has
participated therein, could present a promising basis to develop an
initial calculation of an appropriate penalty; that is
in terms of
s59(3).
[50]
It was common cause, however, that in this case, the affected
turnover for any period other than the 2008 financial year was
not
available. For this reason, this Court is compelled to work
exclusively with the 2008 figures.
[51]
The concept of ‘turnover’ is not defined in the Act and
is only referred to in s59(2), being annual turnover. There
is thus
some uncertainty as to the precise meaning of ‘turnover’.
However, s59(3) refers on more than one occasion
to ‘the
contravention’; in particular, in dealing with the nature,
duration, gravity and extent ‘of the contravention’,
the
loss or damage suffered as a result, of ‘the contravention’
the market circumstances in which ‘the contravention’
took place and the level of profit derived from ‘the
contravention’. Thus, there is a legislative link between the
damage caused and profits which accrue from the cartel activity. The
inquiry, in terms of s59(3), appears to envisage that consideration
be given to the benefits which accrue from the contravention; that is
to the amount of affected turnover. By using the base line
of
affected turnover, the implications of the doctrine of
proportionality that is between the nature of the offence and benefit
derived therefrom, the interests of the consumer community and the
legitimate interests of the offender can be taken more carefully
into
account and appropriately calibrated.
[52] Hence, it appears
that affected turnover can be used in the initial determination as to
a penalty to be formulated in terms
of s59(3). Significantly, an ICN
report (‘Cartels working Group: Selling of fines for cartels in
ICN jurisdiction (2008)’)
summarises the position thus:
“
As
regards fines imposed on companies, the measure quoted by most of the
responding agencies, as a basis for the determination of
the fine in
cartel cases, is related to the concept of turnover/volume of
commerce/affected sales in the cartelised product/service.
The
advantage of such data is that it is relatively easy to obtain,
normally collected and audited and kept as record by the companies
.”
[53]
Affected turnover should be employed in the initial formulation. In
my view, the Tribunal misdirected itself with regard to
the quantum
of the affected turnover. It may be that there are cases where a
transaction is employed as a ‘loss leader’
so as to
accrue a profit from a related transaction which would justify the
inclusion of the former transaction in the computation
of affected
turnover. Further, while the provisions of SA GAAP are not
definitive, they do provide a useful justification for what
should be
included in actual turnover. Even Mr Bhana on behalf of respondent,
contended that affected turnover meant total business
sales or gross
revenue. Viewed accordingly, the so called ‘in - out’
transaction should not have been included in the
affected turnover.
It was not correct, on the strength of the available evidence, for
the Tribunal to conclude that this is how
such a transaction ‘
was
always treated in the ordinary course of the companies business for
all purposes
’
.
[54]
The Tribunal also misdirected itself in its inclusion of the R 42 834
295 which flowed from the Gautrain contract. It did so
because it
conflated the work done independently by the appellant with a joint
venture that would have been part of the cartel
but which never came
to fruition.
[55]
In addition, it was common cause between first appellant and
respondent that the civil engineering turnover of R 44 935 988
did
not form part of affected turnover. Accordingly, the total amount of
affected turnover was R 43 684 056. That figure should
have been
employed as a base line factor in the initial process employed to
calculate the appropriate penalty. Thereafter, consideration
could be
given to the 13 year period in which first appellant participated as
a member of the cartel in order to increase the initial
proposed
figure.
[56]
There are further considerations that require examination in the
assessment of the appropriate penalty. First appellant’s
participation in the cartel activities was limited to Gauteng and
further to the specific sale of concrete pipes. Unlike other
members
of the cartel, it did not actively engage in cartel activities in the
Western Cape, Kwazulu-Natal or any of the adjacent
countries. First
appellant did not derive the magnitude of business from the cartel as
was enjoyed by either Infraset or Rocla.
As to the benefits which
were enjoyed by first appellant pursuant to the cartel, Mr Riot was
vigorously cross-examined on his statement
‘that there is no
evidence of any direct loss to competitors, contractors or
consumers,” but, on the record, there
was very little evidence
to suggest that there had been significant consumer losses pursuant
to first appellant’s activity.
While it was fair to draw an
inference that competitive prices were not paid by consumers for
first appellant’s products,
little concrete evidence was placed
before the Tribunal to indicate the extent of any significant
increase in profit which flowed
to first appellant, which could, in
turn, have been determined by a ratio analysis based on figures
provided in the financial statements.
In an annexure to Mr Riot’s
witness statement, it was suggested that the increase of costs of the
manufacturer for the period
2002 - 2007 had been higher than the
increase in the return enjoyed by first appellant during that period.
No further evidence
was made available.
[57]
The Tribunal was not provided with adequate evidence regarding
significant considerations which it was mandated to take into
account, including loss or damages suffered as a result of the
contravention, the level of profit derived from the contravention
and
the effect on the market. However as a body which enjoys
inquisitorial powers, the Tribunal could have demanded that further
and better evidence be provided by the parties, particularly
respondent in order to assist it in its mandated determination. In
the result, the evidence which is available cannot sustain the
conclusion that this is the most egregious kind of cartel behaviour
envisaged by the Act. Furthermore, even in the case of parties who
had participated to a greater extent and within the context
of a
larger market in the cartel, penalties which, were lower than 10% of
turnover, were imposed. Infraset agreed to pay a penalty
of R46 277
000 which represented 8% of its turnover in the previous financial
year (it is not entirely certain whether this turnover
figure was
affected turnover or total turnover, excluding turnover attributable
to paving products). Although substantial fines,
were imposed on
other participants, the amounts charged were considerably less than
the maximum penalty which could have been so
imposed. This supports a
conclusion that the Tribunal was unjustified, in terms of the
evidence placed before it and without significant
and careful
justification, to rely on the default position in terms of s59(2) for
its determination of the penalty imposed upon
first appellant.
[58]
Nonetheless, penalties for participation in a cartel and,
particularly where the participation has inured for a lengthy period,
should be significant and certainly sufficiently onerous to act as a
deterrent. The achievement of an effective deterrence requires
careful consideration. Apart from the possibility of being
discovered, successful deterrence depends on the extent to which the
expected benefit of the conduct can be significantly reduced by a
penalty which is so imposed. As Motta has noted (2008 (29)
European
Competition Law Review
209)
a successful fine depends on a consideration of the expected benefit
of the conduct and the possibility of being so discovered.
In turn,
the possibility of being discovered depends on the work of the
enforcement authority, in this case the Commission.
[59]
A calculation of the expected benefit will, of course, have to take
into account not only the problem of discovery of the relevant
documentation to support a justifiable finding but also the extent to
which the competition institutions, in this case the Tribunal
and
ultimately this Court, are prepared to ensure that the benefit which
flows directly or indirectly from participation in cartel
activity
will have to be disgorged by the appellant.
[60]
In summary, s59(3) provides for seven factors, of which account must
be taken in the determination of an appropriate penalty.
While s59(2)
refers to ‘annual turnover’, that is total turnover, this
concept does not appear in s59(3). However,
the linkage contained in
s59(3) between certain of the listed factors and ‘the
contravention’ indicates that turnover
in the relevant product
market which is affected by the anti-competitive conduct should form
the basis of the initial formulation
of the penalty; that is prior to
the final determination as to whether the proposed penalty falls
within the cap as provided in
s59(2). If the consideration of the
seven factors leads to a conclusion that the conduct of the offending
party constitutes a particularly
egregious case, then a higher
percentage of affected turnover can be employed as a relevant factor
to increase the proposed penalty.
To illustrate by way of a simple
example: Affected turnover of the cartel member amounts to R400.
Total turnover is R1000. After
a consideration of all the factors
contained in s59(3), a factor of 30% is employed on affected turnover
to produce a penalty of
R120. That must be reduced to R100 by virtue
of the cap in terms of s59(2).
[61]
Although not strictly necessary for determination in this case, I
tend to accept the approach adopted by Sutherland and Kemp
Competition
Law of South Africa
at
12 – 11 that a plain reading of s59(2) supports a conclusion
that the base year for the determination of the cap is the
financial
year preceeding that in which the penalties are imposed. This
conclusion therefore illuminates the animating idea that
the
legislature was concerned that the penalty, although severe, should
not, on its own, be destructive of the offending party’s
business; hence the restraint of the cap.
[62] In my view, a fine
equal to 20% of the nett affected turnover is appropriate in the
present circumstances to meet both the
objectives of the Act and the
overriding considerations of proportionality, in turn determined
after a careful consideration of
the factors envisaged in s59(3). In
sum therefore, the penalty of R 8 720 000 is an appropriate penalty,
given the circumstances
of this case.
Conrite Walls (Pty)
Ltd
[63]
Second appellant commenced business in 1967 in Durban. It appears to
have focussed its business activities almost exclusively
within this
geographical area. It currently manufactures and sells pre-cast
concrete toilets which comprised
⅔
(two
thirds) of its turnover in its most recent financial year ending
February 2010, as well as steel palisades, concrete palisades,
gates
and wire fencing. It never produced or sold pipes, culverts or
pre-cast concrete sleepers which are the products relevant
to the
other members of the cartel.
[64] In 1999 second
appellant entered the market for the manufacture and sale of pre-cast
concrete manhole rings. It appears that
this is the only product
market which is relevant to its admitted contravention of the Act and
further to the issues which had
been raised in these proceedings.
[65]
In or about the end of 2000 or early 2001, D&D (Pty) Ltd, Cobro
(Pty) Ltd and second appellant agreed to divide the Durban
market for
manhole rings on the basis of the respective firms productive
capacity. According to this agreement, second appellant
was allocated
15% of the market. In July 2005 second appellant announced its
intention to exit the manhole rings market. In response,
Cobro and
D&D suggested that it manufacture manhole rings for them.
However, second appellant had already decided to focus
its core
business on the manufacturing of walls and fencing and expanding into
the market for pre-cast toilets. In 2005 and 2006
second appellant
sold its existing stock of manhole rings to Cobro and D&D. At
this time it was agreed between the parties
that they would split
Conrite’s erstwhile 15% market allocation and, upon Cobro and
D&D’s suggestion both firms
would pay second appellant a
monthly amount for mould rental or usage in the amount of R 30 000
plus VAT and R 10 000 plus VAT
respectively. These payments were made
from August 2005 until February 2008 and were reflected in second
appellant’s financial
statements. It appears that Cobro and D&D
sought to ensure that second appellant would not return to the
manhole ring market,
and it was for this reason that these payments
were made. The total amount of payments which were made according to
second appellant’s
audited annual financial statements amounted
to R 1 456 033. The total turnover from manhole rings, inclusive of
these payments,
was in the amount of R 3 637 626.54, for the period
2002 – 2008.
[66]
The proceedings before the Tribunal were concerned with the
imposition of an administrative penalty on second appellant.
Respondent
sought a penalty of 10% of second appellant’s annual
turnover in its preceding financial year. Second appellant tendered
payment of the receipt of R 1 456 033 together with a 25% premium on
this amount.
The Tribunal’s
determination
[67]
The Tribunal acknowledged that second appellant’s total
turnover for the 2008 financial year amounted to R77 405 710.
It then
turned to the determination of affected turnover. It noted that
certain turnover was unrelated to concrete products and
‘
this
amount should be deducted from total turnover’
.
It considered whether all concrete products should constitute the
affected turnover or ‘
only
that which formed which formed the expressed subject matter of the
cartel agreemen
t’.
On the basis that affected turnover was limited to manhole covers,
the total amount would be R440 000.
[68]
Working with an affected turnover of R 440 000 and applying both the
approach adopted by EU and the UK’s Office of Fair
Trading, the
Tribunal concluded that penalties of R 792 000 or R 264 000 would
have represented the product of the EU or the OFT
calculations
respectively. Either amount, in the Tribunal’s view, ‘seems
wholly under deterrent’. (sic)
[69]
The Tribunal then sought to apply its ‘broad discretionary
approach’ to the facts as they related to second appellant.
It
placed considerable emphasis on the evidence of the managing director
of second appellant, Mr Robert Speirs, and, in particular,
his
alleged inability to explain why competitors to second appellant
would have been willing to pay it some R 40 000 per month
to stay out
of the market, in circumstances where he had averred that second
appellant had enjoyed little success.
[70]
The Tribunal examined the ‘phenomenal growth of approximately
635% over the period of 2006-2008’ in second appellant’s
participation in the toilet seat market. It noted that second
appellant had commenced producing toilet seats at approximately the
same time that it exited the ‘manhole rings’ market. It
therefore drew the conclusion that second appellant’s
exit from
this market permitted it to focus its productive activities on the
‘toilet seat’ market where it achieved
great success.
[71]
The Tribunal described the second appellant’s contravention as
‘the most egregious’ which had persisted from
2001 to
2007. It then took account of the fact that ‘
that
a collusion related only to the toilet seat/manhole market in KZN and
was not as extensive as the cartel in Gauteng or the
national
cartel
.’
On the basis mainly of duration and the extent of the cartel, it then
imposed a penalty of 8% of second appellant’s
total turnover of
R 77 405 710, which amounted to a penalty of R 6 192 457.
Conrite’s
submissions
[72]
Mr van der Nest, who appeared together with Ms Le Roux on behalf of
second appellant, submitted that the Tribunal had misdirected
itself
by not taking careful account of the fact that second appellant was
only part of a smaller cartel and specifically in the
area of Durban.
It was neither part of the national cartel nor a regional cartel and
accordingly the more extensive activities
of the national or regional
cartels could not be imputed to second appellant. The reasoning
employed by the Tribunal however did
not distinguish this more
limited role sufficiently from the conduct of the national cartel.
For example, the Tribunal describes
second appellant as part of a KZN
cartel and the nature of its participation as follows:
“
In
this case we do not see Conrite’s participation as misguided as
it purported to be. The nature of the contravention has
already been
described as the most egregious
.”
The description employed
to describe the national cartel is used, without explanation, to
categorise the conduct of second appellant.
[73]
Second appellant contended that critical evidence given by Mr Speirs
was ignored by the Tribunal. In particular, Mr Speirs
testified in
his answering affidavit that, although second appellant had been
allocated 15% of the Durban market, ‘
there
was no guarantee of any work in this market cause Rocla, first
appellant, Infraset, Grallio and Grinaker Ltd were not parties
to the
verbal agreement and consequently Conrite still had to compete with
them.
’
[74] Mr Speirs testified
further that second appellant did not enjoy considerable benefit from
the cartel. As he stated:
“
In
the middle of 2005 we were at our meeting and it had been boiling up
where we had been slipping behind in our market allocation
in terms
of tonnage and we got so far behind that they would have had to have
stopped production for 6 months and given us all
the work and we
didn’t have the capacity to do it. By this time we had lost
interest in the manhole market. It wasn’t
producing the results
that we had hoped and we had moved into the pre-cast concrete toilet
market by that stage
.”
[75]
In answer to a question from the chair of the Tribunal as to why it
was so difficult for second appellant to break into this
market, Mr
Speirs said that second appellant was known as a fencing contractor
and ‘
the
manhole is a very small part of the pipes and the culverts, and the
various other things they would need on these particular
projects
’
.
[76]
In second appellant’s view, the Tribunal did not appear to take
sufficient cognisance of the evidence of Mr Speirs, under
cross
examination when asked specifically as to why the second appellant
insisted on being paid rent for the moulds. Mr Speirs
replied:
“
I
never insisted on it. They made the suggestion and if somebody was
going to pay me some money for doing nothing, I was quite happy
to
receive it, because in the discussion and the meetings it was rental
for moulds as such and to me I didn’t … again,
I realise
now I’m in contravention, but I did not believe that we were
doing anything wrong at the time
.”
Had
the respondent wanted to contest this evidence, it could have called
representatives of the D&D or Cobro to probe the motivation
for
the payments to second respondent. In particular, as Mr Speirs
mentioned, the person who could have provided further and better
evidence was Mr Ted Brown of Cobro but he was never called as a
witness.
[77]
Mr Speirs was asked by the chair of the Tribunal about second
appellant’s toilet seat business which had commenced in
2006,
and in particular the reasons also why other firms had not entered
‘such a lucrative market’. To this question
Mr Speirs
answered thus:
“
I
think that the reason for our success, and I know we’ve got
Rocla and various other people in the room here, but I think
that the
reason for our success there has been that we’ve been prepared
to go and set up many factories and create work in
the rural areas
where these toilets are actually required and we have job creation
and we purchase. Our purchasing power goes into
the local area in
terms of aggregates, sand and so on. Cement comes from a basic
source, but we purchase local and we employ local
people, i.e. in
Kaserne, we have a factory in Kaserne. We have a factory in
Empangeni. We have a factory down on the south coast.
We have a
factory down in East London and this has been our business model,
that if an area is prepared to give us a big enough
order, we are
prepared to come and invest and put a factory in their thing and of
late we have started to joint venture with a
lot of municipalities
.”
[78]
Mr Speirs testified further that there had been no agreement with any
other firm that second appellant would exit the manhole
market in
order to enter the toilet market. Further, given the machinery
possessed by Cobro and D&D, they would have been entitled
and
able to have entered the same market, had they so chosen. In Mr van
der Nest’s view, this represented a complete answer
to the
attempt to link the exit from the cartel with the success in the
toilet market.
Evaluation
[79]
Unlike the approach adopted by the Tribunal to first appellant, it
appears that when it came to determine the penalty to be
imposed upon
second appellant, it inexplicably relied solely on a concept of
affected turnover. Its major concern was whether this
figure should
include all concrete products. Much of its assessment of the penalty
turned on the reasons for why second appellant
had been paid by Cobro
and D&D and for its success in the toilet market subsequent to
its exiting the cartel. Absent clear
evidence to support these
findings, the conclusion reached was, in effect, the product of
speculation which was not grounded in
the evidence placed before the
Tribunal. Indeed, in the case against second appellant, there was no
clear evidence of the amount
of affected turnover, save for the
payments made to it by D&D and Cobro. These amounts represented
affected turnover and, absent
further evidence from respondent, had
to form the basis upon which the s59(3) calculation was to be
undertaken.
[80]
As in the case of first appellant, the Tribunal failed to begin its
determination of an appropriate penalty by a careful recourse
to the
factors set out in s59(3). Had it done so, it would have concluded
that second appellant was part of a small cartel which
serviced a
relatively small market for a fairly short period of time. It would
have taken into account, for example, the fact that,
in the 2008
year, of a total turnover of R 74 977 039. 03, only R 440 000.00
related to manhole rings and ancillary products. Indeed,
during the
period 2006 – 2008, second appellant’s turnover for
manhole rings constituted 1.9%, 0.9% and 0.6% respectively
of its
total turnover.
[81]
A careful consideration of the factors set out in s59(3), which were
required to be taken into account in order to arrive at
an
appropriate penalty, could never justify a penalty which appears to
have been based on a small reduction from the maximum penalty
which
could be imposed, pursuant to the cap in terms of s59(2).
[82]
This is a case where the approach adopted by the EU affords helpful
guidance. The turnover from the manhole rings for the period
2002 -
2008 was in the amount of R2 181 593.41 to which must be added the
payments of R 1 456 033 made by Cobro and D&D which
gives a total
amount of R 3 637 626.54. This represents the total affected turnover
for the entire period in which second appellant
participated in the
cartel.
[83]
If this figure is multiplied by 8, being the years of participation
in the cartel, the base figure becomes R 29, 101m. Given
that second
appellant operated for a relatively short period in the cartel and
that it did not enjoy huge benefits, and further
that a significant
portion of the benefits flowed from payments it received from its two
competitors and that the overwhelming
portion of its total turnover
related to businesses which could not be imputed directly or
indirectly to its cartel activities,
a figure of 7% of R29 101m would
constitute an appropriate factor by which to determine the penalty.
This gives rise to an amount
of R2 037 070.00.
[84] This amount is
slightly higher than that which was tendered by second appellant,
being an offer to disgorge itself of the payments
received by Cobro
and D&D of R 1 456 033.15, together with a further penalty of
25%, thus constituting a total penalty of R
1 820 041.43. However,
the penalty imposed, in terms of the approach that I have adopted,
follows more carefully upon a framework
which could be usefully
employed in the future, given the kind of evidence available and
achieves a more justifiable balance in
terms of the factors set out
in s59(3) as outlined above.
Conclusion
[85]
In the result the following order is made:
1. The appeals of both
first and second appellants are upheld with costs, including the
costs of two counsel.
2. The orders of the
Tribunal are set aside and replaced with the following:
2.1
First appellant is found to have contravened s4(1)(b)(i), (ii) and
(iii) of the Act.
2.2
An administrative penalty of R 8
720
000, being 20% of R 43 684 056 is imposed upon first appellant.
2.3 Second appellant is
found to have contravened sections 4(1)(b)(i) and (ii) of the Act.
2.4 An administrative
penalty of R 2 037 070.00 is imposed on second respondent, being 7%
of R 29 101 000.00.
3. The penalties must be
paid to the Competition Commission within 20 days of this order.
_____________________
DAVIS JP
DAMBUZA and ZONDI JJA
agreed