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[2003] ZACAC 5
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SAPPI Fine Paper (Pty) Ltd v Competition Commission and Another (23/CAC/Sep02) [2003] ZACAC 5; [2003] 2 CPLR 272 (CAC) (25 September 2003)
IN
THE COMPETITION APPEAL COURT OF SOUTH AFRICA
(REPORTABLE)
CASE
NO: 16/CAC/Apr02
In the matter between:
PATENSIE SITRUS BEHEREND BEPERK
Appellant
and
THE COMPETITION COMMISSION
1st Respondent
JAKOBUS JOHANNES PIETRUS BEZUIDENHOUT
2nd Respondent
JAN DANIEL DU PREEZ
3rd Respondent
JUDGMENT
DELIVERED ON 7 JULY 2003
SELIKOWITZ
J:
This is an appeal against the decision and order
handed down by the Competition Tribunal (hereinafter “the
Tribunal”)
on 8 April 2002 following a remittal hearing held in
terms of the provisions of Part D of chapter 5 of the Competitions
Act, No.
89 of 1998 (hereinafter “the Act”).
Appellant is Patensie Sitrus
Beherend Beperk, a public company duly registered and incorporated
during 1999 in accordance with the
company laws of the Republic of
South Africa.
First Respondent is the
Competition Commission of South Africa, (hereinafter “the
Commission”) a juristic person established
in terms of section
19 of the Act
Second Respondent is Jacobus Johannes
Petrus Bezuidenhout, a citrus farmer and the owner of the farm
“Fairview” situated
in the Gamtoos River Valley
(hereinafter “the GRV”) in the Eastern Cape. At
all material times Second
Respondent was a shareholder in Appellant.
Third Respondent is Jan Daniel Du
Preez, a citrus farmer who owns the farm “Hardleigh” in
the Gamtoos River Valley.
Third Respondent was also a shareholder in
Appellant.
The hearing before the Competition
Tribunal concerned a consolidation of two referrals to the Tribunal.
The one referral related
to complaints made by the Second and Third
Respondents which raised
the issue of conduct prohibited by the
Act. The complaint was referred by the Honourable Mr Justice Horn
from the South Eastern
Cape Local Division of the High Court of South
Africa in terms of
section 65 2 (b) of the Act. The
other referral was by the Commission in terms of section 50 of the
Act pursuant to a complaint.
It is
unnecessary to set out the rather complex history of the disputes
which
en route
to
the remittal hearing before the Tribunal first came before the High
Court both in the Eastern Cape and in Gauteng and also before
the
Tribunal for interim relief. Suffice to say that at a pre
hearing conference the parties agreed to
consolidate the two referrals before the Tribunal.
Background to and History of Appellant
The history of the citrus industry in
South Africa as also the genesis of Appellant were concisely
described by the Tribunal as
follows:
“
The
South African citrus industry accounts for approximately 2% of the
total citrus production in the world market. Approximately
65% of the
citrus produced in South Africa is exported, the balance either being
sold in local markets or to a local processor
to be made into juice.
In
1939 citrus co-operatives – many of which had been established
in the ‘twenties - belonged to the South African Citrus
Exchange, a central co-operative which handled more than 81% of the
fruit produced in South Africa. At about this time, the
government established a statutory control board which brought the
single channel marketing system into being. In terms of
this
system, all packers (co-operative and independent) had to channel the
packed fruit to the co-operative Citrus Exchange, later
replaced by
Outspan International. Prior to the repeal, in 1996, of the
Marketing Act of 1968, the citrus industry had deregulated
the
selling of fruit on the South African market.
[Appellant
is the successor of an entity] originally registered as Patensie
Citrus Co-operative Limited in terms of the Co-operative
Societies
Act 29 of 1939. Until July 1998 it conducted its packing and
distribution operations as a co-operative under
the
Co-operative Societies’ Act. On 3rd July 1998 the
co-operative was converted into a limited liability company.
All former members of the co-operative became shareholders in (or
‘members’ of) a restructured company, Patensie Sitrus
Beperk (‘PSB’). The company’s Articles of
Association purported to eliminate any distinction between producers
and members. However a producer was a specific type of member
because certain members were not producers, but only made use
of the
trading department which supplied farm equipment.
In
March 1999, a second company, namely Patensie Sitrus Beherend Beperk,
the [Appellant] in the present matter, was incorporated.
The
directors of PSB became the directors of, and sole shareholders in,
the respondent. In September 1999 a special resolution
was
passed bringing the respondent’s Articles into line with those
of PSB. Members of PSB, including [Second and Third
Respondents], exchanged their shares in PSB for shares in the
[Appellant]. It appears that most of these transfers were
affected in late 1999.
The
respondent is a public company. It is the holding company of, and the
majority shareholder in, PSB. It is envisaged that,
once the
restructuring process is complete, Patensie will be the sole
shareholder in PSB. The respondent’s shareholders
are all
citrus farmers. It provides packing and marketing facilities
through its subsidiary, PSB, which it refers to as its
operational
arm.”
Appellant’s Articles of Association
Appellant submits that, in contrast with other companies, it does not
operate as ‘an ordinary company or independently from
its
members’. It contends that its Articles reflect the long path
that has been trodden. The Articles prescribe specific
rights and
obligations relating to
inter alia
membership; the servicing
of the Appellant’s long-term loans; the transfer of its shares;
the termination of membership, and
the utilisation of its packing and
marketing services.
The origin of these provisions is to be
found by reference to the provisions which existed under the old
co-operative and which
were relocated in Appellant’s
Articles of Association.
Under the co-operative members held pack rights (“
pakregte
”)
which entitled them to an annual quota fruit which could be packed at
the co-operative’s pack shed. The individual
pack rights were
determined through a complex formula based on the individual members’
financial contribution to redeeming
the packing facilities capital
liability in relation to the total available packing capacity of the
pack house and not the volume
of fruit actually delivered.
The pack rights were used to calculate the “
pack right levy
”
(“
pakregheffing
”) which was the capital
contribution that members were liable to pay to the co-operative on
resignation. This capital contribution
represented the
pro rata
obligation of each member for the long-term debt of the co-operative.
This system was carried over from the co-operative to PSB,
the
predecessor of the Appellant.
With the conversion from PSB to Appellant, a revised system for the
calculation of the shareholders’ capital levies was introduced
after consultation with the members. Henceforth the levies would be
determined by the number of crates of fruit delivered across
the
Appellant’s weighbridge by each of the members. It appears that
the size of a member’s shareholding in Appellant
is
approximately proportionate such member’s output. The size of a
member’s shareholding correlates with the capacity
of the
resources of the pack house used by that shareholder. Accordingly,
the capital levy refers to a member’s
pro
rata
share of the capital obligation
incurred by the company in investing in infrastructure and equipment.
The capital levy (member’s
pro
rata
share of the debt) is directly
proportional to the current shareholding of that member. Thus, if a
member holds one
per cent
of the issued shares in Appellant, such member is liable for one
per
cent
of the gross debt of the company.
The packing cost payable by each farmer
using Appellant’s facilities is calculated by reference to the
quantity and the quality
of fruit delivered by that particular
member.
Otherwise, members’ rights remained the same as
they had been under both the former co-operative and under PSB.
In Appellant’s answering
affidavit, its secretary Mr Jacobus Stephan Du Toit states:
“I have
already mentioned hereinbefore that the Respondent’s Articles
of Association are the standard ones found in
Schedule 1, Table A of
the Companies Act 61 of 1973, with certain additions thereto
in a document
termed ‘
Toevoeging tot Statuut van
Patensie Sitrus Beherend Beperk om Voorsiening te Maak vir Speciale
Kontraktuele Voorwaardes Tussen Lede
en die Maatskappy’
to
cater
for the
sui generis
nature of the Respondent and the purposes for which it was
established.”
It is the addendum, which forms
part of the Articles which contains the provisions that were the
subject of the enquiry undertaken
by the Tribunal and are - save in
respect of Article 110 which the Tribunal declined to strike down -
the provisions relevant in
this
appeal.
A
rticle
112
of the Articles of Association
provides in its introduction that Appellant has a ‘first right
and option’ to acquire
the whole of the citrus crop of each
member or such portion of the crop as Appellant decides upon. The
actual text which is in
Afrikaans reads:
“112.
Eerste reg en opsie op sitrusoes ten
gunste van Maatskappy
Vanaf datum van verkryging
van lidmaatskap, verleen elke lid afsonderlik, ‘n eerste reg en
opsie aan die
Maatskappy
om jaarliks ‘n lid se gehele sitrusoes of sodanige gedeelte
daarvan as wat die Maatskappy mag besluit, te koop
teen ‘n
prysbepaling soos in Artikel 114 uiteengesit en
onderneem
die lid on sodanige oes of sodanige gedeelte ten opsigte waarvan die
Maatskappy die opsie uitoefen, te lewer onderhewig
aan die volgende
voorwaardes”
The words “
koop
”
and also “
koopprys
”
appear in the Articles in the provisions which regulate the
relationship between Appellant and its member/producers. This
led to
debate and some confusion before both the Tribunal when considering
interim relief and thereafter before the Commission.
The Commission
ultimately concluded that the literal meaning “
koop
”
(‘purchase’) and “
koopprys
”
(‘purchase price’) were inappropriate and that on a
proper construction of the
modus
operandi
and the relationship there was
no sale of fruit to Appellant. The fruit is handed over to Appellant
which then pack and marketed
it. Thereafter the proceeds of the sale
of the fruit on the market are divided between the member/producers
in accordance with
a formula which allowes for the deduction of
Appellant’s expenses including the cost of servicing its debt.
Sub - Articles 112.1 to 112.6 provide:
f
or
an individual member to submit details of the size and quality of the
crop he anticipates that will be delivered to Appellant.
In certain
instances the management can intervene to establish the facts.
(112.1);
for the members to make
application for exemption from the requirement to deliver all of
their crop and the procedure therefor
(112.2);
for Appellant to refuse to
exercise its option (112.3 -112.4);
for compliance with a harvesting
and delivery schedule specified by the Appellant (112.6.1 - 112.6.2);
and for the levying of fines in
the event of a member’s non-compliance (112.6.3).
Sub-article 109.2 provides that, in the
event of a member no longer complying with his obligations to deliver
his crop, such member
may be required by Appellant to sell his shares
failing which Appellant may itself make arrangements for the sale of
the dissident
member’s shares.
Article 110 - which, as noted, was not
struck down by the Tribunal - specifies the limitations imposed on
the transfer of shares
in Appellant. Shares may be transferred to an
heir of a deceased member (110.1) and to the purchaser of a member
citrus farm (110.2);
However, transfer to any other person is
governed by Article 110.3 which provides that:
“
enige
ander persoon of regspersoon wat met die toestemming van die Raad van
Direkteure kwalifiseer vir lidmaatskap kragtens die
vereistes gestel
deur die Raad van Direkteure van tyd to tyd.”
Article 114.3 of Appellant’s Articles of Association provides
for remedies which are available to Appellant in the event
that any
member fails to meet his obligations to Appellant.
Inter alia
Article 114.3.1 entitles the respondent to apply for an urgent
interdict to prevent a member from selling or delivering his citrus
crop to anyone other than Appellant. Article 114.3.2 entitles
Appellant to issue summons for specific
performance and/or to recover the fines provided for in
the Articles for in the Articles of Association.
In terms of section 65(2) of the
Companies Act (Act No. 61 of 1973) the Articles of Association bind
the company and the members,
as if the Articles had been signed by
every member. One effect is that the Articles of Association have
contractual force both
between the company and all its members.
It was common cause before the Tribunal that the Articles alleged by
the Commission to be in contravention of the Competition Act
are to
be found in the ‘
Toevoeging tot Statuut van Patensie Sitrus
Beherend Beperk om Voorsiening te Maak vir Speciale Kontraktuele
Voorwaardes Tussen Lede
en die Maatskappy’
. Furthermore,
that Article 112 - which contains the obligation imposed on the
members to deliver their citrus crop to Appellant’s
pack house
- is at the centre of the dispute. The other Articles in contention
are those which are allegedly ancillary to Article
112 in that they
are designed to give effect to the obligation contained in the
Article.
After considering the record, hearing
viva
voce
evidence and argument, the
Tribunal concluded that Appellant’s Articles of Association
contained provisions which contravened
section 8(d)(i) of the Act.
It found further, that no defence by way of technological, efficiency
or other pro-competitive
gains which outweigh the anti-competitive
consequences of the offending Articles had been demonstrated.
The Tribunal, acting
in terms of section 58(1)(a)(v) of the Act
declared Articles 112, 109.2, 114.3.1 and 114.3.2 to be practices
prohibited in terms
of section 8(d)(i) of the Act and accordingly
void. No order was made in respect of costs.
Grounds of Appeal
Appellant’s grounds of appeal are
that the Tribunal erred:
By
finding that the relevant product market as the market for the
provision of packing and marketing services to citrus farmers;
By
finding that Appellant is a seller and its members purchaser of
packing and marketing services;
By
finding that the relevant geographic market as the market for the
packing and marketing of citrus fruit in the Gamtoos River
Valley;
By
finding that Appellant is dominant in the relevant market;
By
finding that Appellant’s members are its customers;
By
finding that aspects of Appellant’s Articles of Association
constitute “exclusionary acts” as defined in section
1 of
the Act;
By
finding that Appellant did not show technological, efficiency or
other competitive gains which outweigh any alleged anti-competitive
effects of its acts;
By
declaring Article 122 of Appellant Articles of Association void in
its entirety;
By not striking out certain portions
of and annexures to the affidavits filed on behalf of the Commission,
alternatively by attaching
too much weight to them;
By
not awarding costs to Appellant.
The Process: From Citrus Farm to
Consumer
It is useful to consider the processes
followed from the point where the citrus fruit is produced on the
producers farm until it
reaches the shelves of retail outlets. The
explanation will also note Appellant’s practices.
Production Stage:
The farmers grow the fruit on their
farms utilising various resources including the land, labour,
equipment, water, fertilisers
and pesticides. When harvested the
fruit has to go through further preparatory and handling processes
before it is marketable for
consumption.
Market Preparation:
The citrus fruit is washed,
disinfected and sometimes waxed. It is graded for quality and size
before being packed in suitable containers.
These containers are
palletised and the fruit is inspected to ensure
compliance with official
regulations. These functions are normally performed in a specially
equipped packhouse. Farmers who do not
have their own packhouses will
normally deliver the fruit to a
packhouse for processing as
aforesaid. In Appellant’s case it has a modern packhouse. Its
facilities were updated and improved
some four years ago at a cost of
R21 million. There are in excess of two
hundred packhouses in South Africa
and Appellant packs and arranges to market approximately five per
cent of the country’s
total citrus production. Appellant packs
and arranges to market
approximately seventy per cent of
the citrus fruit produced in the Gamtoos River Valley. Farmers do not
sell their fruit to Appellant
- neither money nor risk passes when
the fruit is delivered to Appellant’s
packhouse.
Transportation to point of intake
:
After preparation and packaging, the fruit is
transported to the next “
station
”.
Where the fruit is not destined for export, the “
station
”
could be a municipal market, a local wholesaler or retailer or a
processing facility which might process extract the juice
or
manufacture a citrus preserve or similar product. Some sixty five per
cent of the citrus fruit produced in South Africa is marketed
overseas. Where the fruit is exported, the next “
station
”
is a seaport or an airport. The fruit which travels by road or rail
is received at the port by a marketing agent. Appellant
appoints a
number of marketing agents on a per season basis to attend to the
citrus fruit which it markets on behalf of its members.
The
fruit is not sold to the marketing agent and the producer continues
to carry the risk.
Port Handling:
The citrus fruit is inspected and then
placed into cold storage to bring the temperature down to required
standards for shipment.
The fruit is then loaded into a ship or
aeroplane.
Shipping:
The fruit is shipped - less frequently,
flown - to its overseas destination.
Overseas Port of Entry;
On arrival at the destination port
the fruit is cleared for entry, stored and then forwarded by clearing
agents to the wholesale
markets, interim service providers or
customers who can be fruit importers or
retail suppliers. It is only at
this point that the citrus fruit is sold and where the price which
the producer will receive is
determined. Until this point of sale the
producer continues to carry the risk. Even at
this point of sale the risk
includes a need to destroy fruit that has deteriorated or fails to
comply with local regulations.
End consumer:
The fruit is thereafter sold to the
retailer and, in turn to the consumer.
Price received by the producers
South African citrus fruit farmers
have no influence upon the market and the price received for their
fruit. They are “price
takers” on the international
market. Because of the fact that the overwhelming
majority of the citrus fruit
handled by Appellant in the Gamtoos River Valley is destined for
export and because that market accounts
for approximately ninety
three per cent of the income of Appellant’s
members, the parties before the
Tribunal focussed almost exclusively on the export market. Nothing
turns on the ommission to analyse
the local citrus market. The
determinations made in respect of the
export market apply with equal
force to the local marketing of citrus fruit. Certain costs are
deducted from the market price received
before the producer receives
payment for his citrus crop. Those
include the following costs
directly related to the packing and marketing process.
Production costs:
These are the costs of preparing the
fruit for the market.
DIP costs:
These include transport costs and
statutory levies which are incurred when the fruit reaches the point
of intake.
FOB costs
:
The costs of shipping, handling,
storage, loading and insurance from the point of intake until the
fruit is loaded into the ship
or aeroplane.
Sea or air freight
:
These costs are significant as they are
US dollar related and a fluctuating exchange rate can have an effect.
Import duty:
Also a significant cost, it can vary
from market to market and over time.
Overseas costs:
The cost of clearing, storage in cooling
facilities and transport to the point of sale.
Appellant’s heads of
argument filed before this court, it is stated that:
“
The
essence of the Appellant’s case is that, with reference to its
co-operative origins and background; its peculiar relationship
with
its members, who are all citrus producers, and the exigencies
and demands of the highly competitive citrus market in
which it
operates, the Articles of Association had been formulated and agreed
to in precisely the disputed form in order to enable
its members to
compete effectively in that market, to the benefit of all its
members, the end-consumer and the national economy.
It was
argued that, in the light of the proven facts, the Articles of
Association of the Appellant constitute no more and no less
than an
ordinary contractual arrangement which does not fall foul of the Act
and which should not have enjoyed the attention of
the Commission in
the first place.”
It is also submitted that:
“Since 1928
to the present day, and even after the former co-op had changed into
a company, the relationship between the entity
itself (currently the
Appellant) and its members has not changed: for pro-competitive,
sound economic, cost-effective and efficiency
reasons, a number of
farmers have come together to pool their resources for the purposes
of packing and marketing, thereby ultimately
ensuring a higher net
return to themselves”
and
further that:
“The whole
purpose of the joint packing and marketing arrangement is to manage
the packing and marketing facilities on a more
economical basis.
The
second paragraph of the pre-amble to the
Additions
to the Appellant's Articles of Association makes special reference to
the pro-competitive gains expected to flow from
the said
arrangement.”
A considerable amount of evidence
was advanced to establish that the joint packing and marketing of
citrus fruit by a number of
farmers was beneficial. That it benefits
the producers who utilise the
services would appear to be clear.
What is in issue, however, is whether the means chosen by Appellant
and its members to achieve
their stated goals contravenes the Act.
More particularly, whether the
“
arrangement” between
Appellant and its members who are the producers amounts, in the
circumstances, to an unjustified abuse
of dominance as is prohibited
by section 8 of the Act. It is useful at this
stage to set out out a number of
matters which bear upon the decision in this matter. Firstly,
Appellant is no longer a co-operative.
Since March 1999 Appellant is
a public company. It remains, however,
possible to view the company as
the vehicle through which its shareholders jointly undertake the
packing and marketing of their
citrus produce. So viewed, Appellant
is a public company which exhibits
many of the characteristics of an
agricultural co-operative.
Secondly, a co-operative is an enterprise linking
assets, business activities, financial obligations and people in a
distinctive
way. Care must constantly be taken to recognise and in
some cases to distinguish the dual status of people who are both its
customers
and the owners of the co-operative,
in
casu
, the members to whom earnings will
be distributed according to customer patronage.
Thirdly,
large agricultural co-operatives are very different from what they
were a century, or even half a century ago. South African
citrus
farmers have seen major changes in the citrus industry and, in
particular, in the packing, processing and marketing of citrus
fruit.
The industry has undergone important institutional changes over the
past eight decades. As noted the legal form of the entity
undertaking
the packing and marketing of citrus fruit in the Gamtoos River Valley
has changed from that of a co-operative (of which
the farmers were
members) to that of a limited liability company of which the farmers
are now shareholders. A further important
change concerns the
marketing of the crop. The international marketing of agricultural
produce was, until recently, the exclusive
preserve of a number of
statutory ‘control boards’ established in terms of The
Marketing Act No. 59 of 1968. This statute
was repealed by the
Marketing of Agricultural Products Act, No. 47 of 1996
. The upshot is
that the packing companies and others who desire to offer fruit on
the international market will market the fruit
through the agency of
one of the many market agents who undertake the marketing function.
The advantages gained by farmers and producers of food forming
co-operatives has long been recognised in foreign jurisdictions.
The
special treatment usually affords limited exemption from the reach of
competition law. Wherever such special treatment has
been given it is
to be found in statutory enactments. In the United States since 1914,
section 6 of the
Clayton Act
(36 Stat. 730 [1914]) partially
exempted agricultural organisations from the competition laws. The
Capper-Volstead Act
(42 Stat. 388 [1922]) extended the
exemption to capital stock agricultural co-operatives.
Articles 32 to 38 of the
European Community Treaty
establish a special regime for agriculture and allow the Council to
limit the application of the rules of competition law in regards
to
the production
and trade in agricultural products.
Indeed, the fact that the Act does not
exempt agricultural activities from its reach ought to sound a note
of caution in the approach
to the issues raised in this matter. It
should be noted that the Act does
allow for agreements and practices
to be granted exemption from the provisions of Chapter 2 which deals
with prohibited practices
including abuse of dominance. (Section 10).
In seeking to determine
the relevant market, the analysis advanced by
Warren CJ in the United States Supreme Court in
Brown
Shoe v United States
,
[1962] USSC 112
;
370 U.S. 294
(1962) at 325 provides a useful analysis and insight into the
appropriate methodology.
“
The
outer boundaries of a product market are determined by the reasonable
interchangeability of use or the cross-elasticity of demand
between
the product itself and substitutes for it.
However,
within this broad market, well-defined submarkets may exist which, in
themselves, constitute product markets for antitrust
purposes. The
boundaries of such a submarket
may
be determined by examining such practical indicia as industry or
public recognition of the submarket as a separate economic
entity,
the product's peculiar characteristics and uses,
unique
production facilities, distinct customers, distinct prices,
sensitivity to price changes, and specialized vendors.”
And, at 336-337:
"The
criteria to be used in determining the appropriate geographic market
are essentially similar to those used to determine
the relevant
product market. . . .
Moreover, just as a product submarket may have
significance as the proper "line of commerce," so may a
geographic submarket
be considered the appropriate "section of
the country." . . . . Congress prescribed a pragmatic, factual
approach to
the definition of the relevant market and not a formal,
legalistic one. The geographic market selected must, therefore, both
"correspond
to the commercial realities" of the industry
and be economically
[1962] USSC 112
;
[370 US 294
, 337] significant. Thus, although the
geographic market in some instances may encompass the entire Nation,
under other circumstances
it may be as small as a single metropolitan
area.”
The
United Kingdom Office of Fair Trading Market Definition
Guideline
also provides useful guidance in the approach to be
taken when defining the relevant product market from the demand side
which
is appropriate here.
“
3.1 The process usually starts by
looking at a relatively narrow potential definition. This would
normally be the products which
the parties to an agreement both
produce or the products which are the subject of a complaint. Common
sense will normally indicate
the narrowest potential market
definition. The Director General then considers how customers would
react if prices were raised
a small but significant amount above
competitive levels.
3.2 Common
practice in both Europe and the US is to consider a price 5-10 per
cent above competitive levels. This will normally
be the Director
General’s approach, although, in
practice,
it is often difficult to quantify a potential price rise. The 5-10
per cent test is a rough guide rather than a rule.”
The
European
Commission
notice on
The
Definition of the Relevant Market for the Purposes of Community
Competition Law
(Published in the
Official Journal: OJ C 372 on 9/12/1997) after describing market
definition as a tool to identify and define
the boundaries of
competition between firms goes on to record that:
“
The
objective of defining a market in both its product and geographic
dimension is to identify those actual competitors of the undertakings
involved that are capable of constraining their behaviour and of
preventing them from behaving independently of an effective
competitive
pressure. It is from this perspective, that the market
definition makes it possible, inter alia, to calculate market shares
that
would convey meaningful information regarding market power for
the purposes of assessing dominance or for the purposes of applying
Article 85.
It
follows from the above, that the concept of relevant market is
different from other concepts of market often used in other contexts.
For instance, companies often use the term market to refer to the
area where it sells its products or to refer broadly to the industry
or sector where it belongs.”
This last observation finds resonance -
albeit by way of a failure to recognise the distinction - in
Appellant’s submissions
as to the appropriate product market
definition.
In their text
Economics Of E.C. Competition Law Concepts,
Application And Measurement
(1999) at p.49), S Bishop and W
Walker state that:
“
The
relevant market contains all those substitute products and regions
which provide a significant competitive constraint on the
products
and regions of interest . The relevant market can be defined as a
collection of products such that a (hypothetical) single
supplier of
that collection would be able to increase price profitably. Defining
the relevant market in this way ensures that all
products which pose
a significant competitive constraint on the parties under
investigation are taken into consideration. In this
section, the
application of these principles in practice is discussed and the
following guiding principle proposed: a relevant
market is something
worth monopolising. A market is worth monopolising if monopolisation
permits prices to be profitably increased.
This will be the case if
the collection of products contained in this "market" are
not subject to significant competitive
constraints by products
outside the market.”
For the assessment of demand substitution the so-called "5%
test" or "SSNIP test" (SSNIP is the popular acronym
for "
small but significant non-transitory increase in price
")
is useful. This test which was first used by the
United States
Federal Trade Commission
and is now the test proposed in
paragraph 14 of the
European Commission
Notice referred to
above. The SSNIP test is increasingly being made use of by
competition authorities throughout the world.
Application Of the legal and
economic principles to the facts
It is, in my view, apparent from the
evidence that the undertaking of packing and arranging for the
marketing of citrus fruit is
a service offered and rendered by
Appellant to citrus producers. It is trite that a product market can
include goods or services
of this kind.
Although notionally the market for the sale of citrus on
international markets can be described as a “
market
”
it is not the market that is at all relevant for purposes of the
present enquiry. Common sense dictates that the “
narrowest
potential market definition”
in this instance is not the
sale of citrus on some distant international market but the rendering
of the services in question within
the GRV. It is in this market that
the services which are the “
subject of the complaint”
are rendered. The evidence is that there are other parties engaged in
offering the relevant services in the GRV.
The fact that Appellant would have
itself viewed for present purposes as the sum of its members and that
it does not perceive itself
as competing with like services offered
and undertaken by other fruit packers in the region is not a
determinative factor for purposes
of defining the parameters of the
relevant market.
In defining the relevant market Appellant and its expert witnesses
have failed to have regard to the
hypothetical monopolist
undertaking the relevant services. They advance a business model that
is constrained by and reliant upon the characteristics peculiar
to
Appellant, including the anti-competitive structures and practices
that are the very subject matter of the complaint.
In its grounds of appeal, Appellant asserts, in relation to the
Tribunal’s finding that the relevant product market is the
market for packing and marketing service in the GRV, that: “
On
all the evidence the Tribunal should have found that, by their own
volition and choice, the members/shareholders of the Appellant
are
not competing in the notional "packing and marketing services
market", whether in the Gamtoos River Valley or anywhere
else”
.
As noted, it is not competition engaged
in by Appellant’s members that is in issue. In issue, is
competition by Appellant
itself in the market in which it is engaged.
In any event, a voluntary withdrawal from competition whether
contractually confirmed or not is not a decisive factor in defining
the relevant market.
Per contra
, it is irrelevant.
Significantly, the ground of appeal acknowledges a “notional”
packing and marketing services market
in which Appellant submits that
its members do not compete.
Appellant also emphasised that it did
not seek to profit from its services to its members and that the
amount deducted by Appellant
from the selling price of the fruit was
limited to Appellant’s costs including the cost of servicing
its capital loan debts.
Be that as it may, the producers are required to compensate Appellant
for the services they utilise. The fact that the amount is
limited to
Appellant’s costs does not make it any less a
quid pro quo
.
In fact, Appellant’s costs as deducted may exceed the charges -
including a profit margin - at other packhouses which offer
equivalent services.
A region the size of the GRV can comprise a relevant
market. The valley is approximately some one hundred kilometres long
and there
are approximately one hundred and ten citrus farmers in the
GRV.
In regard to the actual current position,
Appellant’s affidavits demonstrate that the establishment of
pack-houses is extremely
capital intensive and beyond the reach of
most citrus producers in the GRV. Appellant spent R21 million on its
packhouse some four
years ago. Furthermore, although there are other
packing facilities in the GRV and the neighbouring Sundays River
Valley “
there is no, or very
little flow of packing services between these areas
”.
This factor is of marginal significance when the producers of in
excess of 70 per cent of the citrus fruit produced in
the GRV are
bound to deliver their crop to Appellant.
The real issue is whether a hypothetical
monopolist engaged in the business of rendering packing and marketing
services in the GRV
would be in a position to raise the price
associated with the rendering of those services “
a
small but significant amount above competitive levels”
(the SSNIP test).
Based on
quotations obtained by Appellant the additional transport cost to
transport citrus from the GRV to the Sundays River Valley
packhouses
will be R1.90 per carton. This sum represents a percentage increase
of 12.67 per cent to the cost of packaging based
on the amount
charged by Appellant for the services rendered to its members in the
GRV. I do not agree with the Appellant which
seeks to compare the
additional transport costs as a percentage of the total price of the
citrus products received on the international
market and then argues
that transport costs comprise a relatively insignificant part of
those costs so that in given circumstances
a citrus producer would
convey his products past the nearest packing facility to one located
further a field. That argument is
premised upon the relevant product
market being the sale of citrus fruit on the international market
rather than the market for
the provision of packing and arranging
marketing services. It is clear that a hypothetical monopolist who
renders the services
that are provided by Appellant would be in a
position to raise the price of those services appreciably - certainly
above the five
or even ten per cent commonly used by the SSNIP and
other tests - without losing a significant number of its customers.
A small but significant increase
of five to ten per cent by Appellant for the services it renders to
its members would not, in my
opinion, result in a significant number
of members transporting their products
out of the GRV.
Accordingly, the market for the
provision of packing and marketing of citrus fruit in the GRV is a
market worth monopolising.
Appellant asserts that the
relevant geographic market is the international market for the sale
of citrus products.
Appellant’s premise is an incorrect
assumption that a sale of goods must take place in order for a market
to exist and a failure
to recognise that there can be markets within
markets. Indeed, the processing and handling chain which Appellant
contends ends
with the sale of the fruit on the international market
would appear,
prima facie
,
to involve a number of markets which can be “relevant markets”
for the enforcement of competition law . Possible markets
include a
market for the provision of market agency services. Appellant is
itself a customer in that market. It appoints three
marketing agents
each year from the available market which comprises in excess of two
hundred competitors. There would also appear
to be a market, perhaps
even, separate markets, for the transport of the citrus fruit by
road, by sea and by air. In the premises,
the Tribunal correctly held
that the Gamtoos River Valley constitutes the geographic area of the
relevant market and that the relevant
market is the “
market
for the packing and marketing of citrus fruit in the Gamtoos River
Valley”
.
A Single Economic Entity
The concept of a “single
economic entity” seems to have found its way into the matter in
an affidavit filed by Appellant
and deposed to by one, Calvyn Michael
Du Toit who describes himself as “a part-time Professor of
Business Economics, lecturing
to and guiding students in their post
graduates studies on a free-lance basis at various higher education
institutions.”
In the heads of
argument filed on behalf of Appellant , it is submitted that
Professor Du Toit is correct when he says “
that
the Articles of Association of the Respondent essentially constitute
a voluntary agreement between farmers or producers of
citrus to
jointly pack and market their fruit through the Respondent as a
vehicle in order to manage the packing and marketing
facilities on a
more economical basis. The members accordingly form a single economic
entity insofar as the packing and marketing
of their fruit are
concerned. The members of the Respondent
are not competitors in respect of the packing and marketing of their
fruit. They are in
effect partners.
”
The issue of Appellant and its
members constituting a single economic entity is introduced into the
Tribunals reasons for its decision
where it discusses the relevant
market definition. Noting that there is a “yawning gap”
between the definitions advanced
by the respective parties, the
Tribunal continues:
“
...
The respondent does not merely argue that the ‘market for the
packing and marketing of citrus products of the GRV’
is not the
relevant market. Its attack on the Commission’s
contention
goes significantly deeper than this – it insists that there is
no such market at all, or, at least, that the respondent
and its
members do not participate in this market. The
respondent
avers that it, Patensie, is simply the sum of its members who are
citrus fruit producers of the GRV, and that accordingly
it cannot
enter into a market exchange with itself,
much
less inflict ‘abuse’ upon itself in the conduct of that
exchange. On this version the provision of packing services
by the
respondent to its members is in the nature of a transaction
internal
to a firm. It is, to be sure, an activity that adds value to the
product – the fruit – when it ultimately enters
the
market but it is no more a market transaction than would be the
rendering
of services by the IT department of a bank to, let us say, the Human
Resources department of the self-same institution.
On this version
the charge levied by the respondent
on
‘its’ farmers/owners for rendering a packing service
reflects nothing more than the cost of providing the service,
an
internal bookkeeping charge, useful for costing and budgeting
purposes
but not indicative of the existence of a market.
In
order then to test the validity of these contending views we have
first to decide whether the relationship between the individual
farmers and the respondent is, indeed, in the
nature
of a non-market, internal exchange. Expressed otherwise, do the
respondent and the farmers who are its members constitute
a single
economic entity by virtue of the latters’
shareholding
in the former?”
In its grounds of appeal,
Appellant contends that:
“
The
Tribunal in any event erred in its evaluation of the "single
economic entity," argument and in ignoring the clear
evidence
that it is wholly artificial, for packing and marketing
purposes,
to distinguish between the Respondent and its members/shareholders”
The characterisation of
Appellant’s relationship with its farmer members as a single
economic entity is problematic. The concept
of a single economic
entity is only to be found in Section 4 of the Act, the
section dealing with horizontal
restrictive practices.
Section 4(5)
provides:
The
provisions of subsection (1) do not apply to an agreement between, or
concerted practice engaged in by,-
(1)
a
company, its wholly owned subsidiary as contemplated in Section 1(5)
of the Companies Act, 1973, a wholly owned subsidiary of
that
subsidiary, or any combination of them; or
(2)
the
constituent firms within a single economic entity similar in
structure to those referred to in paragraph (a).
The Tribunal states further that:
“
Sub-section
4(5) ensures that agreements between firms that are related to each
other in the fashion described will not be hit by
the prohibition of
the horizontal agreements described
in sub-section
4(1). Implicit in the reasoning underlying Section 4(5) is the notion
that firms cannot conspire with ‘themselves’.
In
insisting that the respondent and its members do not
have a
separate existence, the respondent is effectively proposing that we
import the reasoning underlying Sub-section 4(5) to a
consideration
under Section 8 – it employs this section
in order to
argue that a firm cannot abuse ‘itself’ and, hence, if
related to the target of its alleged abuse in the
manner described in
Sub-section 4(5), its conduct will fall outside of the
provisions of
Section 8. We note, and we will imminently return to this, the only
matter in which the ‘single economic entity’
concept has
thus far been considered by the Tribunal was in
respect of a
claim that a merger of two firms, allegedly part of a single economic
entity, was not subject to the scrutiny of the
Act – in other
words, the Tribunal on that occasion
permitted the
‘importation’ of the concept underlying Section 4(5) into
a procedure under Section 12. In our view this
concept is equally
pertinent for enquiries under Sections 5 or 8 –
just as a
party cannot merge with itself or conspire with itself, so can it not
abuse itself or conclude a vertical agreement with
itself.”
The Tribunal rejected the argument that Appellant
could, on the facts, claim to be in a single economic entity
relationship with
its members. I agree with that finding and it is
accordingly unnecessary to
consider whether the “importation” of the
concept “single economic entity” into a case to be
decided in
terms of section 8 is either appropriate or permissible by
law.
I am, however, of the
prima facie
opinion that the concept of a “single economic entity”
may well be, inappropriate here. As I understand the evidence
and the
arguments Appellant appears to, more accurately, be claiming to be a
joint
venture of citrus farmers who chose to carry on their joint
venture through the medium of a public company. I make no finding on
this characterisation.There is considerable and conflicting learning
in the
field of joint ventures in foreign jurisdictions. The concept
arises in respect of prohibited practices particularly prohibited
horizontal practices, more particularly intra-enterprise conspiracy.
(See for e.g
indices
sub
“joint venture” in:
Competition
Law
- Brassey et al (2002);
Competition Law
4thed 2001 -
Richard Wish;
Competition Law of the United Kingdom and European
Community
, M Furse
(1999);
Bellamy & Child, European Community Law of
Competition
, 5thed P M Roth (ed)). It has also been embraced by
the Tribunal in South Africa to the analysis of control issues in
merger
proceedings. (See:
Bulmer SA (Pty) Ltd and Distillers
Corporation SA Ltd, SWF Group (Pty) Ltd
, 94/FN/Nov00).
It is necessary to record that our competition law is to be sought in
the Act. The policies, reach and regulatory method applicable
in
South Africa are defined by the Act. The Act must be interpreted in a
manner consistent with the Constitution and give effect
to the
express purposes set out in Chapter 2. Interpretation should also be
in compliance with the international law obligations
of the
Republic. Whenever foreign law is considered in interpreting or
applying the provisions of the Act it is essential
to ensure that the
foreign law is appropriate before adopting the foreign methodology or
solutions. There is no warrant in
the Act for the institutions
entrusted with the task of enforcing its provisions to amend or
extend the policy and reach which
is set out therein. That is the
sole domain of the legislature. Care must be taken not to impose
solutions which are not founded
upon a proper interpretation of the
Act. Where a
lacuna
may be detected, it cannot simply be filled
by having regard to imported solutions; no matter how attractive and
suitable such solutions
may appear to be.
For present purposes I note that the Tribunal assumed (in Appellant’s
favour) that “a section 8 charge cannot be sustained
if the
farmers -
qua
victims of the abuse - and [Appellant] are related
in a manner described in section 4(5)” of the Act. The
assumption does
appear to me to confuse the question of whether
section 8 is intended to protect a victim or to prevent
anti-competitive activities
whether or not there is an identified
victim.
As I understand the law it is competition itself
which is the victim. Indeed, that very distinction may be a decisive
factor in
deciding whether the concept of a “single economic
entity” or of a “joint venture” can properly be
transposed
to section 8 charges without legislative intervention. We
were not referred to any authority - foreign or local - for the
proposition
that a joint venture which is organised and operates in
the manner in which Appellant is organised and operates, and which
undertakes
“prohibited practices” - such as abuse of
dominance - is exempt from the reach of the Act. The tribunal went on
to
reject the notion that Appellant and its members were, on the
facts, properly regarded as a “single economic entity”.
Appellant relied upon its history, its ‘not for profit’
character and its structure and “ownership” to
support
its claim to be a single economic entity with its members. I agree
with the Tribunal that Appellant’s history takes
its claim no
further. Whatever the historic position may have been it is now
subject to scrutiny in terms of the Act. The farming,
packing and
marketing of citrus fruit has changed considerably over time. I have
earlier noted some of the changes. Having chosen
to incorporate, the
Appellant is now to be viewed for what it is, a public company whose
shares are held by farmers and their heirs.
The ‘not for profit’ practice does not
establish that a single economic entity exists. Profit does not
determine the
reach of competition law. Profit is not a necessary
factor in determining anti-competitive
behaviour. Nor does the idea that the supplier does
not recoup more that its costs from its customers indicate that the
supplier
and customer constitute to a single economic entity. The
ownership and
control factors is advanced on the basis that the
members are all citrus farmers; that Appellant’s Board of
Directors are
all farmer-members and that there is close contact
between Appellant’s
management and its members.
Adopting the approach advocated in the
United States in Copperweld
Corporation v Independent Tube Corporation
,
467 US 752
(1984) and
in
Fishman v Estate of Wirtz
F. 2d 520 (Seventh Circuit -
1986), the Tribunal sought in vain for evidence of an individual or
small group which exercised control
over the parties to the single
economic entity‘ independently of the wishes of investors. The
lack of a ‘complete unity
of action’ militates against a
positive finding in favour of a single economic entity.
Here
the farmer-members are independent farmers who each owns his or her
farm and operates it without any participation from Appellant
or from
any of his co-shareholders. Pointing out that each farmer-member owns
a relatively insignificant share in Appellant - individual
members
hold between one and six per cent - the Tribunal were unable to find
a basis upon which to conclude that there was a ‘complete
unity
of action’ between all the entities. They have nothing in
common except their participation in Appellant. While
the
members’ control over their farms as economic entities is
absolute, they have no significant control over Appellant.
I agree
with the reasoning of the Tribunal and with its rejection of the
concept of a single economic entity between Appellant
and its
members.
It is of interest to note,
en passant
, that the result of
upholding Appellant’s contention would be to allow a company
such as Appellant which is clearly dominant
to evade the reach of the
Act without seeking or obtaining an exemption nor reliant upon any
other discernable statutory basis
for avoiding prohibitions in
section 8 of the Act. It would effectively afford,
inter alia,
the
agricultural sector the benefits of special treatment for which in
other jurisdictions there has had to be legislative approval.
Our Act evidences no such special regime.
Dominance
Section 7(a) of the Act provides that:
“
A
firm is dominant in a market if-
(1)
it has at least 45% of that market;
(b) it has at least 35%, but less than 45%, of that
market, unless it can show that it does not have market power, or
(3)
it has less
than 35% of that market, but has market power.”
At least seventy per cent of the citrus fruit grown
in the GRV is packed by and marketed through the Appellant.
Section 7 of the Act distinguishes between various
market share thresholds for the purposes of establishing the
dominance of a firm.
Appellant’s market share in the relevant
market exceeds the highest threshold of 45% and is at least double
the threshold
of 35% at which a firm can show that it does not have
market power.
Appellant is irrebutably presumed to be a dominant
firm.
Prohibited Practice in terms of section 8(d)(i)
Section 8(d)(i) of the Act provides that:
“
Abuse
of Dominance Prohibited
It is
prohibited for a dominant firm to:
(a) ...
(b) ...
(c) ...
(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 effects of its act –
(i) requiring
or inducing a supplier or customer to not deal with a competitor;”
The question to be decided is whether or not the provisions in
Appellant’s Articles of Association have the effect of
“
requiring or inducing a supplier or customer to not deal
with a competitor
” in contravention of section 8(d)(i) of
the Act. If the answer is in the affirmative, Appellant can
avoid the prohibition
by showing “
technological, efficiency
or other pro-competitive gains which outweigh the anti-competitive
effect of its act.”
Requiring or inducing a supplier or customer to not
deal with a competitor is an exclusionary act which is defined in
section 1(1)
of the Act as follows:
“'
exclusionary
act
' means an act that impedes or prevents a firm from
entering into, or expanding within, a market.”
Are Appellant’s members who are the farmers who utilise
Appellant’s packaging and marketing services also its
customers?
The
Concise Oxford Dictionary
defines
“
customer
” as:
“
customer
n.
a person who buys goods or services from a shop or business.
a person one has to deal with”
Applying the ordinary meaning of the word “
customer
”
to the facts of the instant case, it is clear that the members both
“
deal with
” and for all intents and purposes “
buy
”
packing and marketing “
services
” from Appellant.
The Tribunal was correct when it found that “
the products
exchanged are services for the packing and marketing of citrus fruit
- the [Appellant] is the seller of these services
and the farmers are
the purchasers
”
Appellant’s conduct that is complained of amounts to what is
know as “
an exclusivity agreement
”. It is an
agreement awarding Appellant the exclusive right to pack and market
the citrus crop of its members.
Exclusivity agreements are an
abuse because they distort competition between producers by depriving
customers of the undertaking
in a dominant position of the
opportunity to choose their source of supply. In the instant
case Appellant’s Articles
have the effect of depriving members
from choosing the source of supply of the packaging and marketing
services they require.
The abuse is reinforced by the
provisions which permit Appellant’s Board of Directors to
impose sanctions and by the barriers
to exiting membership.
It appears from the Articles of Association and from the
viva
voce
evidence given by Appellant’s secretary before the
Tribunal that there are significant exit barriers, not least, because
termination
of membership is very costly.
Appellant‘s conduct that is complained of is in clear violation
of Section 8(d)(i). Appellant’s Articles of Association
-
specifically Article 112 - clearly provide that the members of
Appellant, who are farmers, are obliged to deliver their entire
output or such portion as Appellant’s Board of Directors
decides upon, to Appellant for the purposes of packing and
marketing should the respondent exercise its ‘
eerste reg en
opsie
’.
Expressed in the language of Section 8(d)(i), Appellant requires its
customers - who are also its members - to deal exclusively
with it,
or, conversely, ‘
to not deal with a competitor
’.”
Appreciating the distinction between members
qua
and
qua
farmers who produce citrus fruit, the Tribunal correctly
approached its analysis by focussing upon the
nexus
which
Appellant’s Articles of Association creates between the
respective functions of the farmers and their duties as shareholders.
Consequently the Tribunal did:
“
... not take issue with the restrictions imposed on the
alienation of shares in the respondent. Nor do we oppose the view
that insists
that,
having guaranteed the respondent’s capital liability, it is
the duty of the guarantor, and one by no means inconsistent with
competition law, to honour that commitment. These are contractual
matters between the individual shareholders and the respondent
and,
as such, are not the concern of the Competition Act. However, we do
not accept the form in which this particular guarantee
is effectively
cast – this does constitute a violation of the Competition Act.
It is, in effect, what US anti-trust jurisprudence
would refer to as
a ‘
naked restraint of trade
’. It is certainly in
flagrant violation of Section 8(d)(i)’s injunction against a
dominant firm ‘requiring or
inducing a supplier or customer to
not deal with a competitor’ and, a such constitutes a
prohibited ‘exclusionary act’,
and act that, in the words
of the statute, ‘impedes or prevents a firm entering into, or
expanding within, a market’”.
The concept of abuse is an objective one and it is
therefore irrelevant whether or not the members agreed or even
requested the
exclusivity provisions in Appellant
’
s
Articles of Association. The abuse is outlawed because it
hinders the maintenance of the competition that exists in the
market
or the growth of that competition.
As was stated in
Hoffmann-La Roche and Co AG v Commission of the
European Communities
, case 85/76
[1979] ECR 461
- para 89:
“
An
undertaking which is in a dominant position on a market and ties
purchasers - even if it does so at their request - by an obligation
or promise on their part to obtain all or most of their requirements
exclusively from the said undertaking abuses its dominant
position
within the meaning of Article [82] of the Treaty, whether the
obligation in question is stipulated without further qualification
or
whether it is undertaken in consideration of the grant of a rebate.”
In paragraph 91 the court held that:
“
The
concept of abuse is an objective concept relating to the behaviour of
an undertaking in a dominant position which is such as
to influence
the structure of the market where, as a result of the very presence
of the undertaking in question, the degree of
competition is weakened
and which, through methods different from those which condition
normal competition in products or services
on the basis of the
transactions of commercial operators, has the effect of hindering the
maintenance of the degree of competition
still existing in the market
or the growth of that competition.”
There can be no doubt that the restraint provisions,
with or without the reinforcement by the penalty provisions in
Appellant’s
Articles of Association enable Appellant to prevent
all its members from offering their produce to other packing houses
indefinitely
and for so long as they are members of the Respondent.
Conversely, the members are deprived of the opportunity to select a
competitor
to pack and market their citrus fruit. Furthermore
by tying more than 70 per cent of the farmers to the exclusivity
agreement,
other potential competitors who may wish to compete in the
relevant market are effectively excluded. The effect of the
offending
Articles of Association is to hinder the maintenance of the
degree of competition which exists and to hinder the growth of
competition.
The Tribunals finding that Appellant’s “conduct
that is complained of is in clear violation of section 8(d)(i)”
is, in my view unassailable.
The Efficiency Defence
Section 8(d) entitles a dominant firm to “
show
technological, efficiency or other pro-competitive gains which
outweigh the anti-competitive effect of its act
”. The
efficiency defence requires Appellant to show that the efficiencies
relied upon are directly related to and dependant
upon its “act”
that has been found to be the practice which is prohibited. In
other words that the anti-competitive
behaviour is a
sine qua
non
of the efficiencies and that the gains could not be otherwise
achieved..
Appellant has raised a number of factors which it submits serve to
show “pro-competitive gains ”
flowing from its Articles
of Association”
.
Appellant points out that “
the whole purpose of the
conversion from a co-operative to a company to become more
competitive and efficient in an increasingly
competitive citrus
industry ...
”
In the appeal, Appellant submitted that the Tribunal “
erred
in ignoring the fact that the said requirement was inserted in the
Articles for precisely the reason that members of the Appellant
were
desirous of achieving a fairer system of recovering the capital debts
incurred by them via the Appellant.
”
Appellant also relied upon the following alleged
technological, efficiency and other pro-competitive gains and
advantages :
a significant cost saving to its members;
enabling present farmers and, perhaps even more
importantly in the light of the objects of the Act, potential new
farmers, to enjoy
facilities which they could not normally afford;
achieving huge discounts because of the ability
of the Appellant to engage in bulk buying of packing materials;
the volume of fruit handled by the Appellant's
packshed enables it to contract on better terms with overseas
distributors and agents;
the Appellant’s packshed has
technologically very advanced equipment and processes, especially
with regard to the handling
and packing of soft citrus;
the efficiency of the Appellant’s packshed
is superior, to the benefit of all its members;
the aforesaid relationship between the Appellant
and its members, as well as the aforesaid technically superior
processes and equipment,
increase its global competitiveness and
avoid the weakness inherent in a fragmented supply by numerous small
marketers of citrus
fruit;
the Appellant, as the largest employer in the
Gamtoos River Valley, contributes actively to the socio-economic
upliftment of numerous
people, including formerly disadvantaged
persons, in the Gamtoos River Valley, thus satisfying one of the aims
of the Act.
Appellant focusses upon benefits to its members and
fails to establish that the Articles which are prohibited are
necessary to achieve
the alleged efficiencies or that they outweigh
the anti-competitive effect of its acts. Indeed, the
efficiencies are, except,
in the case of the two last mentioned,
solely and directly beneficial to the members themselves.
Appellant also submits that the Tribunal ignored the
fact that the requirement that members of the Appellant deliver their
fruit
to the packshed, had been voluntarily agreed to by its
members. As noted above, this is irrelevant.
The Tribunal also examined and rejected Appellant’s
contentions that the exclusivity provisions were necessary for the
raising
of capital. The Tribunal found that the method and
financial model employed by Appellant to procure finance and to
secure
its loans has unacceptable anti-competitive effects and that
alternatives exist which do not infringe our competition law.
I am not persuaded that the Tribunal erred in
rejecting the efficiency defence, it was, in my view, the correct
decision.
Application to strike out
On the date of the complaint referral hearing
Appellant applied to the Tribunal for an order striking out certain
passages from
affidavits filed by the Commission and deposed to by
Jan Daniel Du Preez - the Third Respondent, Volschenk Bernard Verwey
a farmer
from Patensie and Jakobus Johannes Petrus Bezuidenhout,
Second Respondent as also the expert report compiled by Geoff Parr,
Head
of Policy and Projects at the Commission. The report was filed
as an independent document, not confirmed under oath nor attached
to
any affidavit .
Appellant’s application was not upheld. In its
decision the Tribunal stated:
“
We are
reluctant to grant the application to strike out. Section 55 of the
Act explicitly takes an expansive view of the admissibility
of
evidence in proceedings before the Tribunal and
this, in our
view, dictates that an application to strike out will only be granted
in rare circumstances. We are however prepared
to accord a
relatively low weighting to evidence that is
hearsay and,
in particular, to evidence which the respondent has not had to
opportunity to rebut. In this particular case,
we are comforted
by the fact that, albeit inconvenienced by the
timing and
character of certain of the submissions of the Commission,
[Appellant] has, for the most part, taken the trouble to respond.
Indeed certain of the allegations made in the
belated
expert’s report are pre-emptively dealt with in earlier
submissions by [Appellant].”
In a footnote to the decision the Tribunal noted
that:
“
We do
not in any event need to decide the striking out application since,
as will be seen later, on [Appellant’s] own evidence,
transport
costs still exceed the SSNIP test. Nor do we
need to decide
this striking out application in respect of the affidavits of Du
Preez, Verwey and Bezuidenhout, since we have not
relied on the
material sought to be struck out in our
decision.”
In its Notice of Appeal, Appellant appeals
against:
“
The
Order relating to the Appellant's application to strike out certain
portions of and annexures to the affidavits filed on behalf
of the
[Commission]”
In setting out the detailed grounds of appeal
Appellant contends that:
“
The
Tribunal should have allowed the Appellant's application for the
striking out of certain portions of affidavits and annexures
to
affidavits filed at a late stage by the [Commission]
on the basis
that such evidence was inadmissible and highly prejudicial to the
Appellant's case and that allowing such evidence
constituted both
procedural and substantial unfairness
vis-à-vis
the Appellant.”
It bears emphasis that Appellant has not given notice
of an appeal against the Tribunal’s decision not to strike out
the passages
from Parr’s expert report. The Respondent’s
Notice of Appeal and grounds for appeal deal only with the Tribunal’s
decision not to strike out “certain portions of and annexures
to the affidavits filed on behalf of the Commission”.
Even though the terms of the Notice of Appeal could
per se
held
to be decisive, the parties argued the refusal of the application to
strike out Mr Parr’s expert opinion and it will,
in the
interests of justice, be considered.
Section 55(3) of the Act provides that:
The Tribunal
may-
(14)
accept
as evidence any relevant oral testimony, document or other thing,
whether or not -
(1) (
i) it is given or proven
under oath or affirmation; or
(ii) would be
admissible as evidence in court; but
(b) refuse to accept
any oral testimony, document or other thing that is unduly
repetitious.
Pursuant to section 52(1)(b) of the Act the Tribunal to “
may
conduct its hearings informally or in an inquisitorial manner
”.
Our Courts have repeatedly stated that where proceedings are
conducted informally or in an inquisitorial manner the decision maker
is placed in an active role to get at the truth and that the ordinary
rules of evidence do not apply. Subject at all times
to the
requirements of fairness, the Tribunal is not precluded from having
regard to hearsay evidence. (See:
Smit v Seleka
,
1989
(4) SA 157
(O) at 164;
Benjamin v Sobac South African Building And
Construction (Pty) Ltd
,
1989 (4) SA 940
(C) at 964-5;
Ross v
South Peninsula Municipality
,
2000 (1) SA 589
(C) at 595)
Indeed, it seems to me that expert evidence in
disciplines such as economics and socially related sciences will
inevitably be based
upon hearsay evidence. Given that the
expert has to rely upon reported statistics, surveys and other
factors and can hardly
be expected to glean every basic fact
personally, the value of the expert testimony and the conclusions
drawn will always be dependant
upon the reliability of the raw data.
The sources upon which such experts rely are often themselves a
product of hearsay
data. An obvious example being the
statistical data issued by official State departments of statistics.
Applications to strike out are not granted where the applicant will
suffer no prejudice were the alleged offensive material remain
on the
record. (See:
Beinash v Wixley
,
[1997] ZASCA 32
;
1997 (3) SA 721
(SCA) at
733-4;
Steyn v Schabort en Andere NNO,
1979 (1) SA 694
(O);
The
Free Press of Namibia (Pty) Ltd v Cabinet for the Interim Government
of South West Africa,
1987 (1) SA 614
(SWA) at 621F--G;
Vaatz v Law Society of Namibia,
1991 (3) SA 563
(Nm) at
566B;);
Inkatha Freedom Party And Another v Truth And
Reconciliation Commission And Others,
2000 (3) SA 119
(C) at 126)
Appellant has not suffered any prejudice as a result
of the Tribunal’s decision not to strike out the passages from
the affidavits
filed by Du Preez, Verwey, and Bezuidenhout because,
in reaching its decision, the Tribunal did not rely on the material
sought
to be struck out.
Similarly, no reliance was placed on the expert
report of Mr Parr. I am unable to find support for Appellant’s
submission
that Parr’s evidence was - despite the Tribunal’s
disavowal, nonetheless, relied upon. At the hearing of the
appeal, the Commission expressly abandoned reliance upon Parr’s
evidence. The evidence which the Tribunal relied upon
to
analyse the transport costs for the purpose of defining the relevant
market is all to be found in the affidavits filed by Appellant.
Fair hearing and procedural fairness
In addition to attacking the Tribunal’s refusal
to strike out the alleged offending evidence on the grounds of
hearsay, Appellant
also contends “that allowing such evidence
constituted both procedural and substantial unfairness vis-à-vis
the Appellant.”
The parties have a Constitutional right to have their dispute decided
in a fair public hearing before the Tribunal. Section
33(1) of
the Constitution provides that “
everyone has the right to
administrative action that is lawful, reasonable and procedurally
fair
."
Section 34 of the Constitution states that:
"Everyone
has the right to have any dispute that can be resolved by the
application of law decided in a fair public hearing
before a court
or, where appropriate, another independent and
impartial
tribunal or forum."
The Constitutional right is given effect to by the
Promotion of
Administrative Justice Act
, No. 3 of 2000.
Section 3(1) of that Act provides that:
"Administrative
action which materially and adversely affects the rights or
legitimate expectations of any person must be procedurally
fair."
In terms of section 3(2)(b)(b) the right to
procedurally
fair administrative action includes "a reasonable opportunity to
make representations".
The decisions of the Tribunal are administrative
decisions and fall within the definition of 'administrative action'
in the Promotion
of Administrative Justice Act.
In
Janse Van Rensburg NO And Another v Minister Of Trade And
Industry And Another NNO,
(1) SA 29 (CC), paragraph [24],
Goldstone J stated:
“These
features must be weighed against the requirements of administrative
justice. In doing so it must be appreciated that
one of the enduring
characteristics of procedural fairness is its flexibility. The
application of
procedural fairness must be considered with regard to the facts and
circumstances of each case.
. . . ”
(See also:
Permanent Secretary, Department Of Education And
Welfare, Eastern Cape, And Another v Ed-U-College (PE) (Section 21)
Inc
,
2001 (2) SA 1
(CC), para [19];
Minister Of Public Works
And Others v Kyalami Ridge Environmental Association And Another
(Mukhwevho Intervening)
,
2001 (3) SA 1151
(CC), paragraph [101]);
Bel Porto School Governing Body And Others v Premier, Western
Cape, And Another
,
[2002] ZACC 2
;
2002 (3) SA 265
(CC)
Relevant facts and circumstances of this case
An examination of the facts and circumstances of this
case reveals that the Tribunal issued directions at a pre-hearing
conference
held with the parties on 13 December 2001. The following
specific provision was made for the filing of expert and discovery
documents:
“
The
Commission will file:
a. A summary of
the nature of the expert evidence it will bring by 15 January 2002;
2.
Its expert summaries before 25 January 2002 ;
3.
Its witnesses affidavits by 25 January 2002;
4.
Its discovery affidavit by 15 January 2001.
The
[Appellant] will file:
1.
Its reply, if any, to the Commission's expert
witnesses by 13 February 2002;
2.
Affidavits of any further witnesses it intends to
bring by 13 February 2001;
3.
Its discovery affidavit by 15 January 2002.
On 30 January 2002 and at a further pre-hearing
conference was attended by the parties. The timetable for the filing
of documents
was revised as follows:
4(c) The Commission will file
its expert affidavit by Monday 4 February 2002 at 10h00
4(d) The [Appellant] will file its
reply, if any, to the Commission's expert witnesses by 20 February
2002, as well as the affidavits of any further witnesses it intends
to bring also by this date. The [Appellant] will approach the
Tribunal should it have a difficulty with this date.”
Paragraph 4(c) of the direction was part of what was described as
“
the revised timetable
” and the use of the phrase
“
expert affidavit
” must be considered to have been
a drafting error. The stated intention was to revise the timetable
not to alter the format
of the expert report.
The Tribunal also directed that witnesses who had filed affidavits
should be available throughout the hearing for questioning
in the
event that either the opposing party or the Tribunal wishes to
question them
”.
A summary of the expert economic opinion of Mr Geoff
Parr, was filed his on 15 January 2002 and his economic opinion was
filed on
4 February 2002.
Appellant filed a lengthy reply to the affidavits of
the further witnesses that had been filed during the last week of
January 2002
and the report of Mr Parr. The reply was deposed to by
deposed to by Appellant’s secretary and was filed on 21
February 2002.
On the following day, Appellant filed a supplementary
expert affidavit deposed to by its managing director in which he too
responded
to Mr Parr’s expert opinion.
Appellant did not avail itself of the opportunity,
expressly reserved to it by the Tribunal on 30 January 2002, to
approach the
Tribunal should it require further time within which to
respond to the expert opinion and the further affidavits filed on
behalf
of the Commission in accordance with the revised timetable.
At the commencement of the referral hearing Appellant
filed a formal notice of its application to strike out the evidence
that it
had already responded to.
At no stage did the Respondent apply for more time or
for a postponement of the hearing in order to deal further with any
particular
aspect of the Commission’s expert report or further
affidavits. Nor did Appellant apply at the referral hearing for
Mr Parr to be called to testify and be cross-examined.
Considering all the circumstances I am satisfied that
the appeal against the refusal to strike out portions of the
affidavits and
Mr Parr’s expert opinion cannot succeed and that
the Tribunal afforded Appellant a hearing that was both procedurally
and
substantially fair.
Costs
In its grounds of appeal, Appellant contends that:
“
In all
the circumstances of the case, the Tribunal erred in not awarding
costs against all the Respondents, particularly having
regard to the
numerous instances of objectionable, unreasonable and mala fide
conduct by them.”
In Appellant’s heads of argument criticism is levelled against
the Commission for the manner in which it conducted its enquiry
in
this matter. That issue was not argued before us. Suffice it to
record that the judgment of the
Supreme Court of Appeal in
Simelane NO and others v Seven-Eleven Corporation SA (Pty) Ltd and
another
,
[2003] 1 All SA 82
(SCA) which analysed the role of the
Commission and the ambit of its enquiry would appear to deal
adequately with and answer the
complaints raised.
Appellant submitted that the Tribunal ought to have
awarded costs against Second and Third Respondents who lodged the
original complaints
against Appellant.
As regards the alleged
“objectionable,
unreasonable and
mala fide” conduct
the original
complainants there appears to be no doubt that vacillated in their
attitude and their analysis of the issues. However,
when regard is
had to the history of
the dispute it is apparent that the issues gave all the parties
and the Commission considerable difficulty. For example, questions
as
to the legal nature of the transactions between the members and
Appellant were complicated by the use of the word
koop
”
in the Articles of Association. In addition, the very divergent views
taken by the respective parties in relation to the
relevant market
considerably
expanded the scope of the dispute. There was also the Appellant’s
focus upon the benefits that its structure afforded its members
to
enable them to compete in the international citrus market, an
approach
that failed to appreciate that the true enquiry related to
competition in the market for the services offered by Appellant
itself.
Given all these facts and circumstances I cannot fault the
Tribunal for exercising
its discretion against making any order as to costs.
Section 57 of the Act provides that:
“
(1)
subject to subsection (2) and the Competition Tribunal's rules of
procedure, each party participating in a hearing must bear
its own
costs.
(2)
the Competition Tribunal -
(1)
has not made
a finding against a respondent, the Tribunal member presiding at a
hearing may award costs to the respondent, and against
a complainant
who referred the complaint in terms of section
51 (1); or
(1)
has made a finding against a respondent, the
Tribunal member presiding at a hearing may award costs against the
respondent, and
to a complainant who referred the complaint in terms
of section 51(1).”
The Tribunal decided to make no order as to costs. In
the light of section 57 and the finding made by the Tribunal against
Appellant
there is no basis upon which we can set aside the
Tribunal’s order and replace it with an order of costs in
Appellant’s
favour.
In these proceedings Appellant asks for an order for
costs against all three Respondents. Second and Third Respondents did
not participate
as parties to the appeal though both deposed to
affidavits filed on the record.
As for the costs of appeal there is no reason why
they should not follow the result. Appellant will be ordered to pay
the costs
of appeal.
The Result
For the reasons stated the appeal is dismissed and
Appellant is to pay the costs of the appeal.
........................................
SELIKOWITZ JA
Concur:
Hussain JA
Malan AJA