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[2009] ZACAC 4
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Senwes Ltd v Competition Commission of South Africa (87/CAC/FEB09) [2009] ZACAC 4; [2009] 2 CPLR 304 (CAC) (13 November 2009)

IN
THE COMPETITION APPEAL COURT OF SOUTH AFRICA
Case No.: 87/CAC/FEB09
In
the matter between:
SENWES LIMITED Appellant
and
THE
COMPETITION COMMISSION OF
SOUTH
AFRICA Respondent
JUDGMENT: 13 November 2009
DAVIS JP
Introduction
[1] On 3 February 2009, the
Competition Tribunal (‘the Tribunal’) made an order in which it
held that the appellant had contravened
section 8(c) of the
Competition Act 1998 (“the Act”) by engaging in what it
classified as ‘a margin squeeze’. Appellant
has approached this
court on appeal against this decision.
[2] In its determination, the Tribunal
rejected respondent’s (‘the Commission’) argument that
appellant’s conduct fell to
be considered in terms of section 8(d)
of the Act; that is the impugned conduct should have been classified
as a species of price
discrimination and thus should have been
assessed in terms of sections 8(d) and 9(1) of the Act. The
Commission has cross appealed
against this finding.
Background
[3] Appellant is a public company that
operates in the agricultural sector, inter alia, by providing grain
storage facilities and
marketing as well as trading in grain. For
most of its 99 years of existence, it was a co-operative but was
converted into a
public company in April 1997.
[4] Senwes’ silos are located mainly
in the Free State and, to a lesser extent in the Northwest, Gauteng
and the Northern Cape.
The silos were built between the mid 1960’s
and the mid 1980’s, at a time when grain cooperatives played a
unique role in
the storage and handling of large quantities of grain
as well as the marketing thereof. The role of these cooperatives
was largely
attributable to their appointment as agents of the Maize
Board. As Professor Vink, who testified before the Tribunal,
observed:
“
The grain cooperative has always
played a unique role within the cooperative movement, and in the
marketing of grains, largely as
a result of their appointment as
agents of the Boards. Yet, in terms of the Marketing Act, producers
always had majority representation
in the Boards, and producer
representatives were always members of a cooperative, and often Board
members for their cooperative.
Hence, there were principal/agent
problems with respect to many of the decisions that were taken in the
normal course of business
of both the cooperatives and the Boards
.”
Prof Vink noted that, until the early
1990’s, “some of the grain cooperatives were the main agents for
the maize board, earning
a substantial portion of their total income
from handling and storing of grain on behalf of the board”. It is
thus not surprising,
given the regulated nature of the industry, that
Senwes enjoyed a near monopoly in its own area, owning 56 of the 80
silos in the
areas in which it operated and having 90% of the storage
capacity in 45 of these silo areas.
[5] Until 1995, legislation ensured
that cooperatives were forbidden from entering into competition with
one another. Grain production
was subjected to a centralised system
of planning. Farmers were obliged to sell their product to the
Maize Board which, in turn,
was obliged to buy from them at a
regulated price. The Maize Board then sold the product to millers
who processed the grain for
the final consumer.
[6] In 1995 the various marketing
boards, including the maize board, were abolished and the trading of
grain was no longer regulated
by legislation.
[7] However, the physical
infrastructure pertaining to grain storage was unaltered. Hence,
the monopoly position in relation to
silos did not change.
Ownership, however, did change in that, cooperatives previously owned
by farmers in the relevant area,
became public companies, such as
appellant, and were now owned by shareholders, many of whom were
institutional investors. Thus,
Senwes was run for the benefit of
these shareholders and not, as had previously been the case, the
community of farmers within
its area.
[8] Referring to the existing monopoly
regarding storage and the possibility for change in access for
storage facilities, Professor
Vink noted that the construction costs
of new conventional silos were high while ‘new storage technologies
such as silo bags
of storage bins have their own shortcomings’.
[9] After 1995, grain was traded as a
commodity, subject to market forces. In 1995, grain began to be
traded on the South African
Futures Exchange (SAFEX). In her
evidence, Dr Theron described the manner in which the producer price
was fixed: ‘The producer
price, or the farm gate price, is usually
determined by the interaction between the buyers (traders, users of
grain, etc.) and
the sellers (farmers). However, in the grain
markets the producer prices derived from the SAFEX spot price minus
the average
transport differential and the handling and storage
classes plus a location premium… Futures traded on a futures market
(such
as SAFEX) are generally labeled ‘derivative’ since their
prices are ‘derived’ from the spot markets. In the grain markets

we have a situation where the spot prices are derived from their
futures prices (specifically the price of the near future)…
[i]t is
sufficient to note that prices on both the ‘SAFEX and spot markets
are market determined and competitive. However,
the final producer
price (and all other prices along the supply chain) are influenced by
the handling and storage costs…”.
[10] In order for grain to trade on
SAFEX, it is traded by way of a negotiable instrument. The
instrument is referred to as a
silo certificate and is issued by
silos which are registered with SAFEX, as is the case with Senwes.
Silos certificates represent
the holder’s entitlement to a fixed
quantity of grain stored in a particular silo. In the case of maize,
each certificate represents
a hundred tons of maize. A certificate
can be traded many times. Ultimately, a holder is entitled to
collect the quantity specified
in the receipt from the silo which
issued it. The holder is liable for any outstanding storage and
handling costs. The certificate
records any storage and handling
fees paid to the date endorsed by the silo owner on the certificate
which would include the costs
incurred as of the dates the
certificate was issued.
[11] The SAFEX price becomes
particularly important when traders purchase grain from farmers, in
that they use this price as the
basis for the contract. They then
make deductions based on the SAFEX tariff for transport, storage and
handling.
[12] It appears that the traders’
actual transport costs may well be lower than those provided by the
tariff because the distance
for transport is shorter than the
generalised calculation under the tariff and the trader may employ
alternative transport which
could prove to be cheaper than rail.
SAFEX also sets a rate for handling and storage based on the daily
rate which is reviewed
annually.
[13] Turning to the storage of grain,
when a farmer brings grain to a silo, it is stored according to its
grade. The consignment
of grain loses its identity as the property
of a particular farmer, but the farmer obtains a receipt for the
quantity of grain
delivered. This owner’s receipt is not however
equivalent to the SAFEX certificate.
[14] Appellant’s policy towards
storage was to offer a daily rate for storage at the SAFEX tariff and
then, after a period, to
set a ceiling on that rate for the balance
of the season. In other words, once a farmer had paid the daily
rate for storage for
up to 100 days, the rate was capped and the
farmer could store free until the end of the season. Once the new
season commenced,
storage was again charged on a daily basis. This
can be illustrated thus: Assume that a farmer stored for 150 days.
The system
farmer will pay the equivalent of 100X daily costs of
storage. The storage for the last 50 days would be free. This
tariff,
referred to as the ‘capped tariff’, was offered to
storage customers, regardless of whether they were farmers or traders
until
May 2003. In 2001, a deferred tariff was introduced as an
option, in terms of which billing for storage would be deferred until

1 January or when the grain was sold, (which ever was the sooner) and
the amount charged would be the lower of the daily tariff
or the
capped tariff.
[15] In May 2003, appellant removed
the capped tariff for traders and offered it only to farmers. This
new tariff became known
as the ‘differential tariff’, as it
differentiated between traders and farmers. A trader who stored for
longer than 100 days
continued to pay the daily tariff. When a
farmer, who stored under the capped tariff sold to a trader, a farmer
could still benefit
from the capped tariff but the trader would pay
storage from the date of sale at the daily rate. If a farmer
applied for a silo
certificate, he would be regarded as a trader and
would then have to pay storage at the daily tariff rate from the date
of the
request for the silo certificate. Furthermore, the
Commission contended that, around 2003, farmers were informed that,
if they
sold to a third party as opposed to appellant, they would
receive a less favourable price because appellant would not charge
them
for storage or allow a discount on storage charges while traders
would deduct from their offer price, the full costs of storage
at a
daily rate. With this background, it is now possible to examine the
nature of the complaint.
The Complaint
[16] In respondent’s referral
affidavit, the essence of the complaint was set out thus:
“
Senwes abuses its dominance in
the handling and storage of grain market by charging in effect lower
storage fee to a producer who
agrees to sell the grain stored in
Senwes’ silos to Senwes. Producers who sell their products to
third parties that compete
with Senwes downstream pay a higher fee
for the storage of grain. CTH alleges that his practice has made it
virtually impossible
for it to compete with Senwes in the trading
market within the relevant geographic area
.”
In an affidavit, deposed to by Mr
Maphumulo, the following is stated as the justification for this
complaint:
“
1. Senwes makes a distinction
between storage charges for producers and traders in terms of what it
refers to as the deferred storage
tariff. This tariff comprises the
daily tariff over a 100-day period (this is also regarded as a
“ceiling amount” payable)
and also includes the handling tariff.
2. The ceiling amount benefit
accorded to producers applies until the beginning of the next season.
When the new season begins
the producer is obliged to pay uncapped
storage charges in respect of stored grain. This benefit is only
applicable to grain
harvested by a producer himself, not grain
purchased by a producer in his capacity as a trader.
3. The Commission’s investigation
revealed that Senwes’ failure to accord a similar benefit to
traders who store their grain
in its silos effectively means that
traders are compelled to store their grain on daily tariffs, which
are more expensive.
4. The storage fee differentials
also depend on whether a producer would ultimately sell his/her grain
to Senwes or not. The capped
fee (yearly or deferred storage
tariff) i.e. the ceiling amount only applies in situations where the
farmer concerned intends to
sell his grain to Senwes. However, if
the farmer wishes to sell the grain to a third party, like CTH, the
capped storage tariff
is not applied, and is not available.
5. Section 8(d)(i) of the Act
provides that a dominant firm may not require or induce a supplier or
customer to not deal with a
competitor. Senwes has contravened this
section of the Act by inducing producers not to deal with a
competitor, viz, CTH, among
others.
6. Senwes’ pricing policy for
grain storage is such that it favours or facilitates a situation
whereby it would not be financially
feasible for a farmer to sell
his/her grain to a competitor of Senwes. This practice gives Senwes
an unfair advantage over its
competitors in the grain trading market.
This conduct thus constitutes an inducement to suppliers and
customers not to deal with
Senwes’ competition. The effect of
this is to impede new firms from entering into the grain trading
market or to impede existing
firms from expanding within that market.
7. Senwes leverages its dominance
in the upstream market for grain storage to create an advantage for
itself in the downstream market
for trading in grain.”
The
Tribunal’s determination
[17] The Tribunal first dealt with the
Commission’s case brought under section 8(d)(i) and, in particular,
whether appellant had
engaged in exclusionary behavior that
constituted inducement to farmers not to trade with rival traders as
it denied the benefit
of the capped storage to any farmer who sold
his grain to a third party trader. The Commission argued that this
act constituted
an abuse by appellant as a dominant firm, in that, it
sought to induce its customers not to deal with rivals in
contravention of
section 8(d)(i), which provides that it is an abuse
of dominance for a dominant firm to engage in an exclusionary act,
the effect
of which is to require or induce a supplier or customer
not to deal with the competitor. In the alternative, the Commission
contended
that the same facts gave rise to a case in terms of section
8(d)(iii) which provides that it is prohibited for a dominant to sell

goods or services on condition that the buyer purchases separate
goods or services unrelated to the object of the contract or forces
a
buyer to accept the condition unrelated to the object of the
contract. In this instance, the case was premised on the fact
that
appellant forced farmers, who are buyers of storage services, to
sell to it as a trader in order to benefit from the capped
storage.
[18] The Commission also contended
that appellant is a vertically integrated firm, dominant in the
upstream market, that supplies
an essential input, storage, to its
downstream rivals who are traders in the physical market for grain,
at prices that prevent
the latter from earning a viable price/cost
margin in the post 100 day storage period.
[19] The Tribunal was thus confronted
with a case argued in terms of both section 8(c) and section 8(d).
The relevant portions of section 8
read thus:
“
It
is prohibited for a dominant firm to –
(c) engage in an exclusionary act,
other than an act listed in paragraph (d), if the anti-competitive
effect of that act outweighs
its technological, efficiency or other
pro-competitive gain; or
(d) engage in any of the following
exclusionary acts, unless the firm concerned can show technological,
efficiency or other pro-competitive
gains which outweigh the
anti-competitive effect of its act-
(i) requiring or inducing a
supplier or customer to not deal with a competitor;
(ii) refusing to supply scarce
goods to a competitor when supplying those goods is economically
feasible;
selling goods or services on
condition that the buyer purchases separate goods or services
unrelated to the object of a contract,
or forcing a buyer to accept
a condition unrelated to the object of a contract;
selling goods to services below
their marginal or average variable cost; or
buying-up a scarce supply of
intermediate goods or resources required by a competitor.”
[20] The Tribunal first considered the
requirement of ‘induce’ as contained in section 8(d)(i). The
Tribunal held that, in
the case of inducement, where it was alleged
that the appellant had sought to entice or persuade customers that
they should deal
with appellant rather than another trader, the
Commission had established that appellant had committed an
exclusionary act which
constituted an inducement for the purposes for
section 8(d)(i).
[21] Turning to the case of margin
squeeze and whether it fell within section 8(d), the Tribunal
concluded:
“
Raising rivals costs is one
matter but there is nothing in this conduct to suggest that it
persuades or entices customers not to
deal with Senwes’ rivals.
Indeed customers may not even be aware of what traders’ terms with
Senwes are. The mere fact that
rivals cost are raised and that
consequently they may have to make less competitive offerings to
customers does not constitute
inducement for the purpose of section
8(d)(i).”
[22] By contrast, the Tribunal found
that the margin squeeze was an exclusionary act which fell to be
considered in terms of section
8(c) of the Act.
[23] After evaluating the evidence,
the Tribunal concluded with regard to the margin squeeze abuse, that
the evidence revealed that,
in the post cap period, the market was
foreclosed to rivals, consumer welfare was harmed, both in respect of
prices paid to farmers
and selling prices to processors.
[24] Having found that appellant had
induced customers to deal with it, the Tribunal was required to
consider whether section 8(d)
of the Act was now applicable. It
held:
“
The evidence of foreclosure in
the earlier period i.e. the period when the daily tariff applies to
all, farmers and traders is not
that marked. Both the data offered
by the Commission and the evidence of the traders seems to suggest
that the exclusionary effect
is felt post cap. Indeed this is the
express evidence of traders such as Keyser who seems to concede that
pre-cap they can compete
effectively with Senwes both for purchases
from farmers and traders. It seems here that the smaller traders
have been affected,
but not the larger firms. This is perhaps
because the inducement abuse, certainly on the incidents we are aware
of, has been
targeted at smaller traders or been perceived to be more
credible when directed against them. However because this evidence
is
weaker than that of the post cap period, which shows a marked and
consistent pattern, we cannot find sufficient evidence of
anti-competitive
effects in the pre-cap period. This has important
implications for this case. It means that we find that the
inducement abuse
is not proven – although there is an exclusionary
act, we cannot find on the balance of probabilities evidence of a
sufficient
anti-competitive effect. This means that the
Commission’s case in terms of section 8(d) fails.
”
[25] It is within this context that
both the appeal and the cross-appeal must be evaluated.
The
Appeal
[26] Mr Brassey, who appeared together
with Ms Engelbrecht on behalf of the appellant, summarised the
essence of appellant’s case
as follows:
1. The margin squeeze case had not
been pleaded. Further, appellant, far from tacitly accepting an
extension of the issues which
had been raised in the complaint, had
repeatedly objected to their extension. Appellant could not have
expected nor required,
given the legal and factual complexity of a
case based on a margin squeeze, to submit to such an informal
enlargement of the issues.
2. On the evidence presented by the
Commission, no case had been made out for a margin squeeze.
3. There is no basis in South African
law for the importation of the doctrine of a margin squeeze.
I turn to deal with each of these
objections.
The
Pleadings
[27] Mr Brassey submitted that the
Tribunal ought to have found that no complaint, based on an
allegation that it had engaged in
a practice of “a margin squeeze”,
had been investigated by the Commission or referred to the Tribunal
for adjudication. Accordingly,
the Tribunal was not empowered
jurisdictionally to adjudicate upon the complaint. Furthermore, the
Tribunal should have limited
the Commission to a case based
specifically on the complaint referral affidavit. In this context,
appellant had expressly indicated
an objection to the exercise of
jurisdiction over a matter which was not included in the complaint
referral.
[28] Mr Brassey submitted that a
reading of the complaint referral did not justify a conclusion that
the case brought by the Commission
encompassed a margin squeeze. He
further submitted that, on the basis of the Tribunal’s finding, a
respondent would be expected
to read a complaint referral not merely
in the terms directly pleaded but as if it encompassed almost all of
the contraventions
of the Act that could potentially be prosecuted on
the basis of the allegations made. In his view, even on a generous
reading
of the complaint, the allegations did not lead to an
axiomatic inference that the Commission could rely on a complaint
about a
margin squeeze in the particular prosecution of appellant.
[29] Mr Brassey conceded that the
Commission had stated in the complaint, in respect of section
8(d)(i), that appellant’s failure
to offer to traders the same
benefit as the producers had made storage for traders ‘more
expensive’ than for producers. However,
he submitted that this
allegation, without more, simply involved a complaint about a
difference in treatment between traders and
producers and never
indicated that the true complaint was that the margins of rivals had
been inappropriately placed under pressure.
[30] Mr Brassey also referred to a
schedule which had been placed before the Tribunal by appellant’s
legal representatives which
recited the issues pleaded and identified
those parts of the witness statements that it regarded as
objectionable. In this Schedule,
appellant recorded:
“
The only alleged practices of
Senwes that require consideration by the Tribunal were …
differentiation in silo costs depending
on whether the producers
sells it produce to Senwes or not; and differentiations in silo costs
depending on whether the party storing
grain is a trader or a
producer
”.
Appellant also objected to the
introduction of evidence relating to the difference between how it
treated itself and other parties.
In the Schedule, it objected to
Dr Theron’s expert witness statement on the ground that it ‘relied
on evidence of alleged
abuses that had not been referred’.
[31] To the extent that respondent
contended that the issues had also received further attention in the
witness statements, Mr Brassey
submitted that witness summaries are
not pleadings. Only pleadings define the issues between the
parties.
The
Commissions argument
[32] Mr Bhana, who appeared together
with Mr Dalrymple on behalf of respondent, submitted that the issues
relevant to the determination
of the complaint, which were contained
in the form duly filed, were the same as those which were relevant
for demonstrating a margin
squeeze. The conduct relied upon was the
same: that is a price differentiation between appellant and rival
traders. Accordingly,
appellant did not have to conduct its case in
any materially different fashion. Furthermore, it did not object to
the evidence
of Dr Theron which was led on the margin squeeze abuse.
It allowed the proceedings to continue but took the view that it
did
not have to deal with this issue. It refrained from seeking a
ruling at the commencement of the hearing as to whether the margin

squeeze case was properly referred and it not did seek a ruling that
evidence concerning this issue was inadmissible.
[33] At the very latest, from the time
that respondent’s expert Dr Theron had filed her summary, it was
clear that her expert
evidence was based upon a theory of harm
relied upon by the Commission in the form of a margin squeeze. From
then on, appellant
had been placed on the alert that this was the
particular case which it was required to meet. Appellant did not
expressly object
to this evidence, notwithstanding that under
cross-examination, some attempt was made to argue its relevance with
Dr Theron although,
again, this line of enquiry was not pursued.
[34] In the complaint, the allegation
was made of an abuse of dominance in the handling and storage of
grain market by charging
effectively a lower storage price to a
producer who agreed to sell to appellant the grain stored in the
latter’s silos. Furthermore,
the allegation was made that
producers who sell products to a third party which competes with
appellant downstream pay a higher
fee for the storage of their grain.
This makes it ‘virtually impossible for it to compete with Senwes
in the trading market
within the relevant geographic area’. As an
alternative, the following appears in the complaint:
“
Senwes’s practice of charging
deferential tariff fees for storage is exclusionary and has an
anti-competitive effect, as it impedes
or prevents CTH and other
grain traders who would compete with Senwes from expanding within the
downstream market for grain trading
and is thus in contravention of
section 8(c) of the Act
.”
[35] Various witness statements
amplified on this complaint. In particular, Dr Theron stated the
following in her report:
“
Senwes is dominant in the
upstream market and controls the majority of the upstream facilities
in the relevant market. Its downstream
competitors need access to
these facilities and there is an incentive for Senwes to engage in a
strategy of ‘raising rivals’
costs or ‘margin squeeze’. It
will be explained below how Senwes acts in order to raise the costs
of rivals (in the current
case, other traders and buyers of grain
storage services)…
A margin squeeze generally prevents
rivals also active in the downstream market from making a profit.
The dominant firm uses its
power over supply of the downstream input
to distort competition in this way. This can be done by raising
input prices to a level
where the rival firms cannot survive or
compete. Generally, there should not be a discriminating difference
between prices charged
to the downstream rivals and its own
integrated business (although a margin squeeze might be accompanied
by price discrimination).
In the current case, this is the alleged
practice that Senwes is guilty of. If a producer sells its produce
to Senwes Grain
Marketing (Senwes’ downstream integrated
business/trading arm), then the price of grain storage is different
from that charged
to other downstream competitors
.”
Evaluation
[36] These competing submissions need
to be evaluated in terms of the role which the Act envisaged for the
Tribunal in the adjudication
of competition disputes.
[37] Section 52(1) and (2) of the Act
provide as follows:
“
52. (1) The Competition
Tribunal must conduct a hearing,
subject to its rules, into every
matter referred to it in terms of this Act.
Subject to subsection (3) and (4),
the Competition Tribunal-
must conduct its hearings in
public, as expeditiously as possible, and in accordance with the
principles of natural justice;
and
may conduct its hearings
informally or in an inquisitorial manner.”
(my emphasis)
[38] Section 55 of the Act goes on to
provide:
“
55. (1) Subject to the
Competition tribunal’s rules of
procedure, the Tribunal member
presiding at a hearing may determine any matter of procedure for that
hearing, with due regard to
the circumstances of the case, and the
requirements of section 52(2).
(2) The Tribunal may condone any
technical irregularities arising in any of its proceedings.
(3) The Tribunal may-
(a) accept as evidence
any
relevant oral testimony
document or other thing whether or not-
(i) it is given or proven under
oath or
affirmation ; or
(ii)
would
be admissible as evidence in
court
;
refuse to accept any oral
testimony, document or other thing that is unduly repetitious.
”
(my emphasis)
[39] These sections indicate that the
purpose of the Act is to ensure that the Tribunal would not be
constrained by the law relating
to pleadings in the same way as would
a civil court during a trial. The Tribunal is entitled to conduct
its hearing ‘as expeditiously
as possible’ and ‘in accordance
with the principles of natural justice’. Thus, it is empowered,
if it so decides, to conduct
its hearings in an informal manner or
choose an inquisitorial model.
[40] The Act does not view the
Tribunal as functioning in the same way as would an ordinary court,
inflexibly constrained by an
adversarial model of adjudication.
While a party, against whom a complaint has been lodged, is clearly
entitled to sufficient
information to determine the nature of the
prohibited practice, in terms of which the complaint has been lodged,
the enquiry as
to the requisite level of understanding should not be
sourced in principles which apply to the nature of adversarial
proceedings
employed in a civil case.
[41] In this case, the facts revealed
that appellant knew, prior to the commencement of the hearing, of the
nature of the evidence
which would be led as a result of the
production of various witness statements. Furthermore, although the
respondent did not
employ the phrase ‘margin squeeze’, it set out
sufficient facts to indicate to a reasonable reader of the referral
affidavit,
possessed of a reasonable level of knowledge of
competition law, that the nature of the alleged practice was
predicated upon conduct
which was alleged to have been pursued by the
appellant.
[42] It is also significant that the
appellant, notwithstanding an awareness of the allegations advanced
on behalf of the respondent
pertaining to the margin squeeze, as was
evident from a number of witness statements, did not object at the
time this evidence
was led nor did it bring any application
challenging this aspect of the case.
[43] For all of these reasons, the
case was set out with sufficient specificity to allow the appellant
to prepare therefore. There
is accordingly no merit in the argument
that the issue had not been pleaded with sufficient particularity to
justify the conclusions
that the Tribunal did not lawfully make its
finding.
[44] This finding seeks to achieve a
balance between a party such as complainant being placed in the
position of knowing the case
it is called to meet and not imposing
unnecessary procedural rigidly upon the Tribunal. In this
connection, the following statement
of the law by Brassey
et
al
Competition
Law
at 319 is very
apposite:
“
The Tribunal must conduct its
hearing ‘as expeditiously as possible’ and ‘in accordance with
the principles of natural justice’.
It may also conduct its
hearings ‘informally’ or ‘in an inquisitorial manner.’ The
trend towards inquisitorial proceedings
arises from the concern that
adversarial proceedings are unnecessarily drawn out and may lead to
injustice where one party is able,
for social and financial reasons,
to secure more competent legal representation than another.
The hallmark of inquisitorial, as
opposed to adversarial, proceedings is that the judicial officer
plays an active role in the presentation
of evidence and the
questioning of witnesses and does not rely exclusively on the
parties’ legal representatives to make their
respective clients’
cases. Thus, Tribunal members are empowered to summon persons to
appear or to produce books, documents or
other items necessary for
the purpose of the hearing, to question any person, to accept oral
submissions from any participant,
to accept any other information
submitted by a participant, and to determine any matter of procedure
for the hearing
.”
The
Nature of a Margin Squeeze
[45] Mr Brassey submitted that South
African law would be ill advised, save if there was an express
provision to the contrary, to
develop the concept of a margin
squeeze. In this connection Mr Brassey relied on an argument
developed by JG Sidak 2006 (4)
Journal
of Competition Law and Economics
279 in which the learned author argued thus:
“
The price-squeeze theory of
antitrust liability should be abolished in American antitrust law.
The theory is incompatible with
contemporary anti-trust
jurisprudence, and on economic grounds the threat of such liability
discourages investment, retail price
competition, and the voluntary
provision of inputs on negotiated terms by vertically integrated
monopolist to current and potential
rivals otherwise unable to obtain
or self-provide them. If a vertically integrated monopolist willing
to provide inputs to rivals
at a negotiated price exposes itself to a
potential price-squeeze claim when it lowers its retail prices, it
faces a strong disincentive
to deal at all.”
[46] Mr Brassey sought to buttress
this argument with reference to a recent decision of the Supreme
Court of the United States in
Pacific
Bell Telephone Company v Linkline Communications Inc
.
et al
.
(decision of the United States Supreme Court 25 February 2009). In
this case, Roberts CJ held that, where there is no duty to
deal in
the wholesale market and there is no predatory pricing at the retail
level, a firm has no obligation to deal under terms
and conditions
favourable to its competitors. Recognising price-squeeze claims
would require courts simultaneously to police
both the wholesale and
retail prices to ensure that rival firms are not being squeezed.
Chief Justice Roberts held that courts
would then be aiming at a
moving target, since it is the interaction between these two prices
that may result in a squeeze. Moreover,
firms seeking to avoid
price-squeeze liability will have no safe harbor for their pricing
practices. Accordingly, the court held
that there was no basis under
section 2 of the Sherman Act to bring a price-squeeze case.
[47] In Mr Brassey’s view, as was
made clear from the decision of the Tribunal, the existence of a
margin squeeze abuse does not
emerge from the clear language of the
Act. Further, on the strength of the authorities he cited, there
were grave doubts as to
whether a margin squeeze is compatible with
contemporary competition law. Hence, in his view, the Tribunal
should have eschewed
the acceptance of the doctrine and refused to
read it in by implication.
[48] The Tribunal found legislative
justification for a margin squeeze in terms of section 8(c). To
recapitulate, this section
provides that it is prohibited for a
dominant firm to engage in an exclusionary act, other than an act
listed in paragraph (d),
if the anti-competitive effect of that Act
outweighs a technological, efficiency or other pro-competitive gain.
[49] This court has warned on a number
of occasions against the tendency of the Tribunal initially to
determine a result of a case
which it considers to be compatible with
the objectives of the Act and then to rewrite the relevant
legislative provision to justify
its initial finding. It is
important to emphasise that this approach cannot, on any basis, be
justified. A court or tribunal
cannot draft legislation. If it
does, it breaches the doctrine of separation of powers for it is the
legislature’s role to
introduce and pass legislation. It is trite
to note that a court is required to interpret this legislation.
[50] Much is made, and correctly so,
of the interpretive scope available to courts as a result of a
relatively recent adoption of
a purposive approach to legal
interpretation. But a purposive interpretation is designed to
determine the purpose of the legislation
through engagement with the
text. The interpreter cannot simply read a purpose or object into a
provision in an arbitrary manner,
shorn of any plausible
interpretative justification as to why the relevant statutory
provision has been given this designated meaning,
other than to
arrive at a result for which the Tribunal or court considers the
legislature should have provided.
[51] Fortunately this is not such a
case. The Tribunal correctly read an open ended provision, section
8(c), to include the concept
of margin squeeze, in the light of the
definition of exclusionary act which means an act that impedes or
prevents a firm entering
or expanding within a market. As Dr Theron
noted, a margin squeeze generally will prevent a rival which is also
active in the
downstream market from making a profit. This is
effected by a dominant firm employing its power over the supply of
the downstream
input to distort competition by raising input prices
to a level where the rival firm cannot survive or compete.
Restated, a margin
squeeze exists where a dominant vertically
integrated network operator sets its wholesale and/or retail prices
at levels that do
not give a reasonable margin to its downstream
competitors.
[52] From this definition, the
conditions for a margin squeeze can be set out thus:
1. one firm is dominant in the
upstream market but also supplies an essential input to rivals in the
downstream market within which
it is also active;
2. the input provided by the dominant
firm must be essential for the downstream firm to compete;
3. the input supplied must form a
substantial part of the downstream firm’s fixed expenditure. If
it only constituted a small
part of the firm’s costs, it would be
difficult to ascribe losses to the margin squeeze.
[53] The definition of an
‘exclusionary act’ in the Act is extremely wide. If properly
proved, a margin squeeze, which would
impede or prevent a firm from
expanding or indeed entering into a market, would fall within its
scope and therefore could be considered
to be a prohibited abuse of
dominance in terms of section 8(c) of the Act.
[54] This conclusion does not
constitute judicial legislation, of the kind described above.
Rather, it is a result which flows
from a justifiable interpretation
of a widely couched provision. Further, margin squeezes are
recognised in a jurisdiction whose
competition underpinnings are more
congruent with the Act; that is the EU. See for example
Deutsche
Telekon AG v Commission
(Case T – 271/03: 208); see also the decision of the UK Competition
Appeal Tribunal in
Genzyne
LTD v Office of Fair Trading
(Case No 1016/1/1/03: 11 March 2004) where a margin squeeze was
recognised as a form of abuse to prevent competition on the merits:
“
A further particular example of
the same general principle may occur where an undertaking that is
dominant in an upstream market
supplies an essential input to its
competitors in a downstream market, on which the dominant company is
also active, at a price
which does not enable its competitors on the
downstream market to remain competitive. Such a practice is called
a “margin squeeze”
or “price squeeze
”.”
at para 491
[55] For these reasons, there is no
merit in relying upon US jurisprudence which is incompatible with the
purposes of the Act, as
can be determined from an engagement with
the wording thereof in order to trump the argument for the inclusion
of a margin squeeze
into our law. Accordingly, there is no
justification to reject the finding of the Tribunal, namely that a
margin squeeze falls
within the scope of section 8(c), read together
with the definition of exclusionary act in section 1.
The
Evidence in Relation to a Margin Squeeze
[56] Mr Brassey attacked the manner in
which the Tribunal had justified its adverse finding against
appellant on the basis of the
evidence presented to it. Relying on
the decision in
Wanadoo
Espana v Telefonica
(decision of European Commission (4/7/2007)), Mr Brassey submitted
that a complex methodology was required to assess the existence
of a
margin squeeze; in particular the Tribunal was required to consider
five important issues:
“
1. The level of efficiency of
the competitor: profitability should be assessed on the basis of the
dominant company’s downstream
costs (“the equally competitor
test”)’;
2. the appropriate cost standard,
which is long run average incremental costs (“LRAIC”);
3. the profitability analysis to be
made: the Commission has analysed profitability on the basis of two
methods: namely the period-by-period
method and the discounted
cashflow (“DCF”) method;
4. the level of aggregation to be
used in the margin squeeze test: the margin squeeze has been
conducted on the basis of the mix
of the retail services marketed by
Telefonica’;
5. the upstream input when testing
the replicability of the downstream prices: Telefonica’s retail
prices must be replicable by
an equally efficient operator on the
basis of at least one Telefonica product in each relevant wholesale
market.”
[57] In Mr Brassey’s view, the
Tribunal had made no attempt to assess the full range of costs faced
by the downstream competitors
of appellant. No cost standard was
adopted, no profitability analysis, in any detail, was conducted,
aggregation was not undertaken
and replicability was not tested. In
his view, the reason that the Tribunal could not test these questions
was that no evidence
had been led by the Commission to meet the
stringent test for finding that a margin squeeze abuse had been
implemented by the appellant.
[58] Mr Brassey also criticised the
implication that the storage input must have been essential, in the
sense of constituting an
essential facility for the downstream firm
to compete. In his view, appellant’s rival traders were able to
compete without
access to storage in appellant’s silos. For
example, Freestate Mielies had decided to diversify outside of the
area of appellant.
Whatever the limitations of the use of silos
bags for storage, some traders, on the evidence available, had
invested in silo
bags.
[59] Mr Brassey contended that, while
it might have been preferable for a trader to have access to a long
term storage in the area
which appellant was dominant, it could not
be said that it was essential for a national trader which competes
with appellant to
have such access in that limited period and that
limited area to remain competitively relevant.
[60] In order to evaluate these
criticisms, it is important to emphasise the nature of respondent’s
case: appellant was a vertically
integrated firm that supplies an
essential input by way of storage, in a market in which it is
dominant, to downstream rivals,
that is to traders which trade in the
physical market for grain. The supply is at a price that prevents
the latter from earning
a viable price/cost margin in the market for
long term storage (more than 100 days) in the area in which appellant
is dominant.
[61] In her evidence, Dr Theron stated
that, as the lower tariff was no longer available to all clients of
appellant, that is to
anyone who do not sell grain to appellant,
including producers and other traders, this group had to pay a higher
storage charge.
Accordingly, they had to offer the farmer more for
the farm to realise the same nett price.
[62] As Dr Theron said:
“
This clearly raises the costs of
doing business of Senwes’s downstream competitors. As the
downstream competitors still have
to find ways to compete, they will
have to absorb these costs by reducing their margins, i.e margin
squeeze. Senwes can do this
because they are dominant, and also
because the vertically integrated nature of its upstream and
downstream units means that they
can absorb some losses in one market
by increasing volumes and profits in a related market
.”
This evidence from Dr Theron reveals
that, unlike the cases cited by Mr Brassey, the present dispute did
not involve a complex industry,
but an industry in which the key
three elements are storage, transport and finance. The transport
differential was determined
by the standard SAFEX calculation.
Finance costs, on the evidence, appeared to be of a fairly standard
nature. The only cost
component that was in significant dispute
comprised the cost of storage. As Dr Konrad Keyser testified, since
appellant introduced,
what he termed a discriminated tariff
structure, the firm, of which he was a director, Brisen Commodities
(Pty) Ltd, had virtually
stopped its long term storage of grain with
appellant, which prevented it from being competitive as a trader as
compared to appellant.
In Dr Keyser’s view, Brisen’s business,
in the area in which appellant was dominant and in respect of the
trading in grain
which was stored over a long period of time, had
deteriorated significantly.
[63] Significantly, in his evidence,
Mr Wikus Grobler, the assistant general manager of the grain division
of appellant, confirmed
that, in calculating whether appellant
internal trading division made a profit, storage charges were not
taken into account.
Thus, competitors were mulcted with storage
charges while appellant’s competing business was free of this
additional cost.
[64] Dr Keyser testified that, as a
result of the differential tariff imposed by appellant on rival
traders, an increase of costs
of 3.31% was experienced which was
particularly onerous, when as he testified, “we work on a profit
margin, gross profit margin
of around 1% if lucky”.
[65] On the basis of this evidence,
the Tribunal correctly found that appellant was dominant in the grain
storage market, that it
was vertically integrated and traded
significantly in the trading market. This conclusion elicited
little by way of a plausible
dispute. Mr Anton Lubbe, general
manager of grain of appellant conceded, in his answering affidavit,
that appellant accepted
that the storage of grain was highly
localised. He then stated:
“
Senwes is also willing to
accept, for the same purposes that within these local markets for
the storage of grain, it is dominant
within the contemplation of the
statute
.”
Furthermore, the evidence revealed
that, in the trading market, appellant had a market share of 16% in
the white maize trading
market, 19% in yellow rice, 24% in sunflower
and 13% in wheat. It is not an insignificant player in these
trading markets.
There was no opposition to the conclusion that
storage and grain silos constitute an essential input to traders in
the trading
market, notwithstanding that, to a very small extent,
silo bags appear to have been in use.
[66] The evidence, regarding the only
contested requirement, that the dominant firm’s prices would render
the activities of an
equally efficient rival uncompetitive was not
refuted. As the Tribunal correctly noted, absent a refutation which
it was incumbent
upon Senwes to adduce, the Tribunal was entitled to
assume that these storage costs were not passed on to appellant’s
trading
arm. By extension of this argument, it can be inferred
that, if the trading arm was faced with similar costs for storage, it
would not have been possible for it to offer its downstream prices
and maintain a profitable margin.
[67] Taken together, this evidence
justified the conclusion that appellant conducted an exclusionary act
which had the effect of
impeding or preventing rival traders
downstream from competing with appellant’s own downstream trading
enterprise.
[68] Once this conclusion is reached,
section 8(c) places an onus on the complainant, in this case, to
demonstrate that the anti-competitive
effect outweighs the gains
which may emanate from the justifications contained in the
provision. However, some justification
is required from the
dominant firm in order to engage in this process. In other words,
there is, at least, an evidential burden
placed upon the dominant
firm to provide some evidence of technological, efficiency or other
pro-competitive gains which flow from
this exclusionary act.
[69] Appellant tentatively suggested
that the differential pricing was designed to prevent what was
referred to as “selecting
against”. This explanation was hardly
developed before the Tribunal with any measure of coherence. To the
extent that it was
proffered, it emerged from the testimony of Mr
Hodge, appellant’s expert economist. He suggested that the point
could be illustrated
thus: A held grain in terms of a silo
certificate which is required to trade on SAFEX, A could decide
which quantity of grain
held under this certificate that he wished to
trade. On the basis that A bought grain steadily throughout the
relevant period
and that he wished to sell some grain in the short
term and some in the long term, he could minimise storage costs by
retaining
grain stored first and then sell it last (first and last
out system). If A knew that he would sell late in the season, that
is
post 100 days, he could benefit from the cap because the grain
would have been stored for more than a 100 days. Hence, A could

obtain the benefit of the cap. If however, A wished to sell grain
in the short term and was liable for the daily tariff during
the
first 100 days, he would sell grain acquired later, thereby operating
a sell last in first out system.
[70] This example sought to confirm
the testimony of Mr Booysen that, “we always hold the short end of
the stick in terms of storage,
so we decided to remove the cap.”
Unfortunately, none of this evidence was ever put to the Commission’s
expert, Dr Theron
nor was any documentation provided which
substantiated the version that this argument constituted appellant’s
reason for the
introduction of the differential. In short, on the
basis of this dubious quality of evidence which stood to be rejected,
the
Tribunal was entitled to conclude that it did not need to engage
in the balancing test required by section 8(c). There was no

pro-competitive set of considerations which could be taken into
account and accordingly section 8(c) of the Act was applicable
to
appellant’s act; that is the margin squeeze.
The Cross Appeal
[71] The Commission has cross appealed
that part of the decision and order in which the Tribunal found that
the margin squeeze conduct
was not an exclusionary act which fell to
be determined within the scope of section 8(d) of the Act.
[72] In summary, the Commission
submitted that the Tribunal ought to have found that the margin
squeeze was recognised in international
competition jurisprudence as
a form of price discrimination and that it thus stood to be
determined in terms of section 8(d) and/or
9(1) of the Act as opposed
to section 8(c) thereof.
[73] The Commission thus contends that
the margin squeeze constituted conduct which was prohibited in terms
of section 8(d) because
appellant’s conduct raised the costs of its
rivals and constituted an inducement for the purposes of section
8(d)(i). This act
could also be prohibited under section 8(d)(iii)
of the Act.
[74] In this connection, the referral
complaint specifically referred to section 8(d) (i) of the Act
namely, that a dominant firm
may not require or induce a supplier or
customer not to deal with a competitor:
“
The storage fee differentials
also depend on whether a producer would ultimately sell his/her grain
to Senwes or not. The capped
fee … i.e. the ceding amount only
applies in situations where the farmer concerned intends to sell his
grain to Senwes. However,
if the farmer wishes to sell the grain to
a third party, like CTH, the capped storage tariff does not apply,
and is not available…
Senwes has contravened this section of the
Act section 8(d)(i)) by inducing producers not to deal with a
competitor viz.CTH amongst
others.
”
[75] Insofar as this aspect of the
complaint was concerned, the Tribunal found:
“
We thus find that on the balance
of probabilities Senwes had a practice of through its traders of
making farmers and other traders
believe that farmers would have an
advantage by selling to Senwes because it could make them a better
offer because it did not
apply its storage policy to own trading
division as it did to third parties. This practice seems to have
existed independently
of the issue of the cap. Indeed it is more
probable that it operated before farmers were sent their annual cap
invoice – the
only invoice they seem to get for storage except when
they apply for a silo certificate in which case they are selling to a
third
party and storage would be charged on the daily tariff from the
date of delivery of the grain to the silo. Thus the inducement

representations on the probabilities were at their most effective in
the pre-cap period when farmers who had enquired about wanting
to
sell grain were induced to sell to Senwes on the basis of
representations accompanying the boer prys offer, which appeared to

be and more than likely probably was more favourable than the price
offered by rival traders for an equivalent period.
“
[76] However, in the pre-cap period,
the Tribunal found that there was insufficient evidence of an
anti-competitive effect. While
the Commission’s notice of a cross
appeal challenged this part of the Tribunal’s decision, it did not
provide any evidence
to gainsay the conclusion adopted by the
Tribunal.
[77] This failure is not surprising
because there was a factual dispute regarding whether appellant
offered a cap to producers only
if they sold their grain to it.
Some of the traders, whose evidence was led by the Commission,
accepted that producers obtained
the cap, irrespective of the
identity of the purchaser of the grain. Mr Bester, a trader who
operated in the area, acknowledged
that producers received the
benefit of the cap, of whether or not they sold their grain to Senwes
and that the daily rate only
started to apply once the trader become
the owner of the grain. Another witness, Mr Johannes Davel appeared
to have no knowledge
of whether the cap was a conditional one. In
his evidence, he expressly eschewed knowledge of a conditional tariff
and referred
only to the differential tariff between producers and
traders.
[78] In my view, the Tribunal may have
been generous to the Commission in its treatment of the available
evidence of the conditional
tariff, by assuming that the markets
generally believed that a conditional tariff existed, notwithstanding
the absence of undisputed
any factual foundation for such a
conclusion.
[79] The Commission also contended
that the Tribunal had erred by not finding that there was price
discrimination in terms of section
9 of Act, namely that the traders
suffered a substantial relative disadvantage on the basis of the
differential prices charged.
In the referral complaint, the case on
price discrimination is set out thus:
“
The service of provision of
commercial handling and storage facilities of grain by Senwes to
producers and traders constitutes a
sale, in equivalent transactions,
of services of like grade and quality to different purchasers.
Senwes’ differentiated pricing
policy for grain storage between producers and traders is such that
it involves discriminating
between those purchasers in terms of:
The price charged for the service:
or
The discount or rebate given or
allowed in relation to the supply of the service.
The aforegoing conduct further has
the effect of substantially preventing or lessening competition
within the contemplation of section
9(1) and is therefore prohibited
price discrimination in terms of the Act.
”
[80] In its cross appeal, the
Commission contends that appellant engaged in prohibited price
discrimination because of the effect
on the structure of the market
which been found pursuant to the exclusionary act.
[81] Mr Bhana submitted that this act
had lessened competition, and was thus contextually linked with its
potential effect on the
structure and degree of concentration in the
relevant market. The lessening of competition through price
discrimination was not
limited to an examination of what happens to
competition between farmers and traders.
[82] Mr Brassey observed correctly,
that to bring a case under section 9, the Commission was required to
show an equivalence between
the transactions concerned. Thus, on
the assumption that the Commission was not limited, by virtue of the
pleadings, to an assessment
of the differentiation between producers
and traders, and the differentiation between appellant and third
party traders, the Commission
had to show, in the present case, that
the transaction, in which a dominant firm provides a service or
product to its own vertically
integrated division, is equivalent to
an arms’ length transaction with a third party. Alternatively, if
it continues to rely
on the difference between traders and producers,
it must show equivalence in respect of these transactions.
[83] On the evidence, it is difficult
to see how the Commission’s case can pass muster. The producers
and traders were competitors.
Producers sell to traders who sell to
other traders or third parties. Furthermore, as already noted, there
was no evidence that
farmers were actually denied the cap because
they sold to a third party trader as opposed to appellant nor was
there evidence of
appellant systematically waiving the daily fee when
farmers sold to appellant. In addition, the evidence indicated that
the true
harm created by the price differential was upon the
relationship between appellant and the traders in the trading market
and not
between traders and producers or farmers.
[84] For these reasons therefore, the
Tribunal was correct to conclude that the case was best characterised
as an exclusionary abuse
under section 8(c) rather than one of price
discrimination in terms of section 9(1), as this part of the case was
specifically
pleaded. The Commission also contended that it had a
case based upon a contravention of section 8(d)(iii); that is the
facts
supported the conclusion for a case of mixed bundling, where
the dominant firm makes its two services available in combination for

a lower combined price than the sum of the prices for the two
services if they been offered separately.
[85] There is, in my view, no need to
traverse the arguments raised with regard to a mixed bundling case.
The notice of cross
appeal provides no indication that the
Commission’s intended to mount a case based on “mixed bundling”.
Not even the most
generous interpretation of the notice of
cross-appeal supports such a conclusion. It appears to have been
only the conditional
tariff on which the Commission relied in its
notice of cross appeal when it sought to argue for a finding based
upon the provisions
of section 8(d)(iii). If it wished to have
based its case on a mixed bundling argument, the least it could have
done was to have
set out the basis of its case in its notice of cross
appeal.
[86] This court is reluctant to permit
further arguments of substance to be raised when they were not
specifically contained in
the notice of the cross appeal which forms
the basis of the case brought before this court, let alone where
there is no benefit
of the Tribunal’s view on a point, which
appears to have been thought of at the proverbial eleventh hour.
The cross appeal
on this issue does not get out of the starting
blocks.
[83] For all these reasons therefore,
the following order is made.
1. The appeal is dismissed with costs,
including the costs of two counsel.
2. The cross appeal is dismissed,
including the costs of two counsel.
3. The order of the Tribunal of 3
February 2009, is confirmed.
______________
DAVIS J P
MAILULA and MALAN JJA concurred.