Brief Summary

Competition — Restraint of trade — Application for interim relief regarding restraint clause in sale of business agreement — Applicant, Nedschroef Johannesburg (Pty) Ltd, seeks to lift restraint preventing it from manufacturing certain fasteners — Third respondent, CBC Fasteners (Pty) Ltd, opposes application, asserting that the restraint contravenes section 4(1)(b) of the Competition Act — Tribunal grants order in favor of Nedschroef, finding that the restraint is enforceable and that CBC would suffer irreparable harm if the restraint is breached.

Comprehensive Summary

Summary of Judgment

1. Introduction

This decision of the Competition Tribunal of South Africa concerns an application for interim relief in terms of the Competition Act 89 of 1998. The applicant, Nedschroef Johannesburg (Pty) Ltd (“Nedschroef”), sought an interim order preventing the enforcement of a restraint of trade clause contained in a sale of business (asset) agreement, on the basis that the restraint allegedly constituted a prohibited restrictive horizontal practice.

The respondents cited were Teamcor Limited (first respondent), Waco International Limited (second respondent), CBC Fasteners (Pty) Ltd (“CBC”) (third respondent), and Avlock International (Pty) Ltd (fourth respondent). Only CBC opposed the application. The application was withdrawn against the fourth respondent, and the first and second respondents did not oppose.

The procedural setting was that Nedschroef launched the interim relief proceedings on 6 October 2005, and lodged a complaint with the Competition Commission at the same time. The interim relief was sought to operate pending the Commission’s investigation and potential referral (or a direct referral by Nedschroef if the Commission declined to refer).

The general subject-matter of the dispute was whether a contractual restraint clause—operating to confine Nedschroef to manufacturing and distributing only certain listed fasteners—amounted, prima facie, to market division between firms in a horizontal relationship as contemplated by section 4(1)(b)(ii) of the Act, and whether interim relief suspending enforcement of the restraint was reasonable and just under section 49C(2).

2. Material Facts

Nedschroef is a South African subsidiary of a Dutch parent company and conducts business in South Africa as a manufacturer and distributor of fasteners, principally for the automotive industry, while also having operations in other cold-forged products. The judgment treated the meaning and breadth of “fasteners” and the segmentation of the fastener market as contextual background relevant to how the restraint operated.

During the late 1990s and around 2000, Teamcor owned a business division (National Bolts) that included an automotive fastener manufacturing operation. Following poor performance, Teamcor moved toward selling certain assets. CBC acquired certain assets from Teamcor (on CBC’s version, it acquired only the nuts and bolts division rather than the automotive division). Teamcor continued operating the automotive division, but decided to close it. A closure notice was sent to customers, which led to interest from Nedschroef’s Dutch parent in acquiring the automotive business.

Negotiations occurred in August 2000, and an agreement was concluded in September 2000. While the Dutch parent conducted negotiations, Nedschroef (the applicant) was the contracting purchaser under the sale agreement. It was common cause on the papers that Nedschroef conducted business continuously since acquiring the assets on 28 September 2000, and that at the time of concluding the agreement it was either not yet in existence or not yet trading; this fact became relevant to CBC’s argument about whether the parties were competitors when the restraint was agreed.

The sale was an asset sale, with significant assets being machinery capable of manufacturing a wide range of fasteners. The agreement contained reciprocal restraints structured around a list of products in Annexure F. Teamcor undertook not to manufacture or distribute products listed in Annexure F (clause 15). Nedschroef undertook (clause 16) that for ten years it would not be interested in or concerned in any business manufacturing, distributing, or importing any fasteners apart from those listed in Annexure F, and this undertaking was made in favour of both Teamcor and CBC. The restraint in favour of CBC (and CBC’s acceptance of the benefit) was the central contractual feature in issue.

By the time of the hearing, the restraint period was roughly halfway complete. Nedschroef sought to enter, in particular, the market for a fastener described as a “short lock bolt”, which fell within the scope of the restraint.

Nedschroef’s case on harm was tied to its poor business performance and an asserted risk of closure under pressure from its Dutch parent unless it could diversify into more lucrative markets (including the restrained market). Nedschroef also relied on evidence from a distributor, Bearing Man, which stated difficulties obtaining access to the short lock fastener distribution market and suggested limited competition in that area; the Tribunal treated this as supporting evidence of harm to competition and consumers, rather than as determinative of a separate abuse of dominance complaint.

A disputed factual issue arose regarding delay: Nedschroef explained the timing of the application by alleging it only became aware the restraint might contravene the Act during attorney consultations on a related matter. CBC countered that Nedschroef’s representative had for some time previously asserted the restraint was unlawful and anti-competitive. The Tribunal regarded this dispute as not capable of resolution on the papers and, in any event, subsidiary to the broader “reasonable and just” enquiry.

3. Legal Issues

The Tribunal was required to determine whether, on the evidence before it, it was reasonable and just to grant interim relief under section 49C(2), having regard to the statutory factors, namely the evidence relating to the alleged prohibited practice, the need to prevent serious or irreparable damage to the applicant, and the balance of convenience.

The principal substantive competition law question was whether clause 16 of the sale agreement, in so far as it operated in favour of CBC, constituted prima facie evidence of a prohibited practice under section 4(1)(b)(ii), specifically dividing markets by allocating specific goods or services, and whether the arrangement was “between parties in a horizontal relationship” (competitors).

This involved questions of law and application of law to fact, including whether the parties needed to have been actual competitors at the time of the agreement, whether being potential competitors sufficed, and whether reciprocity was a necessary element of market division for purposes of section 4(1)(b).

Further issues concerned the Tribunal’s evaluative and discretionary judgments under section 49C(2), including how to treat delay in bringing interim relief proceedings within the “reasonable and just” standard, and how to assess harm and the balance of convenience on the papers.

A further jurisdictional or remedial competence question was whether an interim order interdicting enforcement of a contractual restraint amounted to voiding the clause (implicating section 65(1)) and whether such relief was impermissible because it might be “final or irreversible” in terms of section 49C(8).

4. Court’s Reasoning

The Tribunal began by clarifying the interpretive approach to section 49C(2). It contrasted the current provision with the former section 59(1) (pre-amendment), emphasising that the amended section requires the Tribunal to decide whether granting relief is “reasonable and just”, considering the listed factors collectively, rather than as separate, independently determinative requirements. It endorsed the approach previously articulated by the Tribunal in National Wholesale Chemists (Pty) (Ltd) and Astral Pharmaceuticals (Pty) (Ltd) et al, drawing on the Appellate Division’s interdict principles in Eriksen Motors (Welkom) Ltd v Protea Motors, Warrenton to the effect that the factors are interrelated and must be weighed together.

On delay, the Tribunal accepted that undue delay can be relevant to whether relief is reasonable and just, even though urgency is not explicitly required by the statute. However, it rejected CBC’s complaint that Nedschroef had been dilatory after launching the application, noting that approximately two months between service and hearing was not excessive for a complex interim relief matter. As to the five-year gap between concluding the agreement and launching the application, the Tribunal considered the dispute about Nedschroef’s prior awareness of unlawfulness but found that this issue was not decisive. It also rejected the proposition that Nedschroef should be barred merely because it had voluntarily entered into the restraint, reasoning that prohibited practices often take contractual form and that barring contracting parties from interim relief would undermine competition enforcement. The Tribunal further distinguished civil interim interdict proceedings (where the applicant controls the timing of the main action) from section 49C proceedings (where the Commission has a period to decide on referral), concluding that strict civil-law delay principles did not directly apply. In the circumstances, and given the strength of Nedschroef’s case on other aspects, the Tribunal held it would not be reasonable and just to refuse relief solely due to the delay.

On the evidence of a prohibited practice, the Tribunal treated the terms and existence of clause 16 as common cause, with the dispute being about legal characterisation. Nedschroef alleged clause 16 constituted market allocation (division of markets by allocating specific goods) between competitors, contravening section 4(1)(b)(ii). CBC raised two defences.

First, CBC argued there was no horizontal relationship because Nedschroef was not a competitor at the time the restraint was agreed, given that it was not yet trading. The Tribunal rejected this as a categorical defence, reasoning that market division can occur between potential competitors, and that firms may divide markets precisely to avoid becoming competitors. The Tribunal supported this reasoning by reference to the United States Supreme Court decision in Jay Palmer et al v BRG of Georgia, Inc et al, quoted for the proposition that allocation agreements are anticompetitive whether the parties split a market where both currently do business or reserve separate markets for each other.

Second, CBC contended that market division required reciprocity, meaning each party must cede some market to the other. The Tribunal rejected reciprocity as a legal requirement for market division, reasoning that absence of reciprocity could not immunise anticompetitive arrangements from section 4(1)(b). It also found that, on the facts, some form of reciprocal benefit existed in any event: CBC’s evidence indicated Nedschroef obtained a discount for agreeing to the restraint, while CBC received the practical benefit of an allocated market free from Nedschroef’s competitive entry. The Tribunal concluded that Nedschroef had established, prima facie, the essential elements of section 4(1)(b): an agreement between parties in a horizontal relationship (including potential competition) involving market division by limiting Nedschroef to the goods listed in Annexure F and excluding it from other fastener sub-markets, including short lock bolts.

On serious or irreparable harm, the Tribunal regarded parts of Nedschroef’s consumer and third-party harm evidence as not directly aligned to the pleaded prohibited practice (noting CBC’s criticism that the Bearing Man affidavit resembled a dominance complaint). Nonetheless, it considered Bearing Man’s readiness to distribute Nedschroef’s products as relevant evidence of actual market demand and of harm to competition and consumers caused by clause 16. Regarding harm to Nedschroef itself, the Tribunal accepted that the evidence was less direct and contained speculative elements (including uncertainty about long-term survival and the possibility of aggressive competitive responses by CBC). However, it preferred Nedschroef’s evidence over CBC’s speculation on the feasibility and timing of market entry, noting Nedschroef’s existing participation in related markets, technical expertise, and a prospective customer. The Tribunal held that any weaknesses in proving irreparable harm to Nedschroef were compensated by the strength of the prima facie prohibited practice evidence and the prima facie harm to competition.

On the balance of convenience, CBC argued that the balance could not favour a contracting party seeking interim release from contractual obligations without a final unlawfulness finding, and that CBC would be left without remedy. The Tribunal accepted that these concerns could be addressed through Nedschroef’s tender to hold profits in trust and to provide a basis for calculating damages. The Tribunal found that incorporating these safeguards into the order shifted the balance of convenience in Nedschroef’s favour, as CBC could monitor and quantify potential loss during the interim period. It further held that refusing relief in the face of prima facie evidence of a prohibited practice would deprive both Nedschroef and the market of competitive benefits.

On the competence of the relief, the Tribunal rejected CBC’s argument that interdicting enforcement of clause 16 was equivalent to voiding it and was therefore barred by section 65(1). It held that section 65 regulates the civil consequences of competition findings and the interface with civil courts, and does not prevent the Tribunal from granting interim relief that temporarily suspends enforcement. The Tribunal emphasised the distinction between voiding a clause and suspending its operation for an interim period, noting that clause 16 would remain enforceable upon expiry of the interim order. It also rejected CBC’s reliance on section 49C(8) as a restriction on the Tribunal’s power to grant interim relief, interpreting it instead as addressing the circumstances in which a respondent may appeal an interim order that has a final or irreversible effect.

Synthesising these considerations, the Tribunal concluded that Nedschroef had established a prima facie case that clause 16 contravened section 4(1)(b), and that it was reasonable and just to grant interim relief.

5. Outcome and Relief

The Tribunal granted interim relief interdicting and restraining the first and third respondents from enforcing clause 16 of the sale agreement, from requiring Nedschroef to abide by clause 16, and from implementing the clause.

The interim relief was ordered to operate until the earlier of a final determination of Nedschroef’s complaint under the Act (including a finding that clause 16 constitutes a prohibited practice and is declared void), or six months after the granting of interim relief.

To address prejudice and potential remedies, the Tribunal ordered that during the interdict period Nedschroef must place any profits accruing as a result of the order into a separate trust account held in favour of CBC, and must keep a record of all sales of any goods referred to in Annexure F, including customer identity, purchase price, and date of sale. If a final order declaring clause 16 void is not granted, or if the complaint is not brought to a final hearing either at all or within a reasonable time, the trust account is to be retained until resolution of any civil damages action by CBC, and the sales record must be provided within seven business days of demand.

No order was made against the fourth respondent (as the application was withdrawn against it). The Tribunal restricted the operative interdict to the first and third respondents, and awarded costs against the third respondent (CBC) only, including the costs of two counsel, because the first respondent did not oppose.

Cases Cited

National Wholesale Chemists (Pty) (Ltd) and Astral Pharmaceuticals (Pty) (Ltd) et al (Competition Tribunal Case No 98/IR/Dec00).

Eriksen Motors (Welkom) Ltd v Protea Motors, Warrenton 1973 (3) SA 685 (A).

National Association of Pharmaceutical Wholesalers et al v Glaxo Wellcome (Pty) Ltd et al (Competition Appeal Court Case No 29/CAC/Jul03) (unreported).

Juta & Co Limited v Legal and Financial Publishing Co (Pty) Limited 1969 (4) SA 443.

Crossfield & Son Limited v Crystallizers Limited 1926 WLD 216.

Jay Palmer et al v BRG of Georgia, Inc et al 498 U.S. 46, 111 S. Ct. 401.

American Natural Soda Ash Corporation and CHC Global (Pty) Ltd v Botswana Ash (Pty) Ltd (Supreme Court of Appeal; further law report citation not provided in the judgment).

Legislation Cited

Competition Act 89 of 1998, section 4(1)(b)(ii).

Competition Act 89 of 1998, section 49C(2).

Competition Act 89 of 1998, section 49C(5).

Competition Act 89 of 1998, section 49C(8).

Competition Act 89 of 1998, section 65(1).

Competition Act 89 of 1998 (pre-amendment reference), section 59(1).

Rules of Court Cited

No specific rules of court were cited in the judgment.

Held

The Tribunal held that Nedschroef established a prima facie case that clause 16 of the sale agreement constituted a prohibited restrictive horizontal practice in the form of market division by allocating specific goods, as contemplated by section 4(1)(b)(ii) of the Competition Act.

The Tribunal held that, under the section 49C(2) standard, the factors relevant to interim relief must be weighed holistically to determine whether granting relief is reasonable and just, and that delay, while relevant, did not justify refusal on the facts of this case.

The Tribunal held that a market division arrangement may contravene section 4(1)(b) even where firms were not actual competitors at the time of agreement, because potential competition may suffice, and that reciprocity is not a legal requirement for market division.

The Tribunal held that interdicting enforcement of a contractual restraint on an interim basis does not amount to voiding the clause under section 65(1), and that section 49C(8) concerns appealability rather than limiting the Tribunal’s competence to grant interim relief.

LEGAL PRINCIPLES

The decision applied the principle that interim relief under section 49C(2) turns on whether relief is reasonable and just, assessed by considering the statutory factors together, rather than requiring strict proof of each factor in isolation.

The decision applied the principle that, in evaluating whether an agreement is between parties in a horizontal relationship for purposes of section 4(1)(b), the relevant concept includes potential competitors, and the prohibition is not confined to cases where the parties were pre-existing competitors before the market allocation arrangement.

The decision applied the principle that market division under section 4(1)(b)(ii) does not require strict reciprocity in the form of mutual restraints between the competing firms; the core enquiry is whether competition is limited through allocation of markets (including by allocating specific goods or services).

The decision applied the principle that section 65(1) addresses the civil-law consequences of prohibited contractual provisions and does not prevent the Tribunal from granting interim relief that suspends enforcement of a contractual provision pending final determination, and that section 49C(8) is concerned with when interim orders may be appealed rather than defining the Tribunal’s remedial powers.

Nedschroef Johannesburg (Pty) Ltd and Teamcor Ltd / Waco International Ltd / CBC Fasteners (Pty) Ltd / Avlock International (Pty) Ltd (95/IR/Oct05) [2006] ZACT 7; [2006] 1 CPLR 98 (CT) (1 February 2006)