PUBLICATIONS

Publications

Our lawyers keep up with the latest trends and issues in New Zealand law and business, and regularly publish articles and reports on current topics.

Email me when new articles are published

Cartel Amendments to Commerce Act: Impact on Supply & Distribution Agreements

Written by Darryl King, PARTNER on March 21st, 2016.    

Share
Background

The Commerce (Cartels and Other Matters) Amendment Bill is currently in its final stages in Parliament. This Bill will have an impact on supply, distribution, agency and similar arrangements where there is a competitive relationship between the parties – or would be but for the arrangement. The changes could affect anyone entering into these arrangements, including distributors, importers, vendors, manufacturers and suppliers of goods and services. 
 

This article provides a brief overview on the Bill, its potential impact on your supply arrangements and what needs to be done to prepare for the passing of the Bill.  For simplicity, we have referred to all types of supply, distribution, agency and similar agreements as ‘supply agreements’ in this note. 

What does the Bill do?
The Bill amends the Commerce Act 1993 to make a business arrangement containing a cartel provision unlawful.  A cartel provision is a provision or arrangement between competitors that provides for: 
 
  • fixing prices;
  • restricting output;  or
  • allocating markets. 
The Bill contains three exemptions – the most likely to apply to supply arrangements is the vertical supply exemption. This is discussed in more detail below.
 
How will it affect my supply agreements?
The Bill is only concerned with arrangements “between competitors”.  A competitive relationship will exist in a supplier and reseller arrangement, for example, where the supplier also competes with the reseller, by selling goods or services:
 
  • online;
  • via its own stores, such as through a factory outlet store; or
  • to a specific category of customers.
If this sounds like you, then we recommend carefully looking at your supply agreements to identify any cartel provisions.  If there are cartel provisions, then you should assess whether the vertical supply exemption applies.  
 
Common cartel provisions in supply agreements
Typical clauses in supply agreements that might be caught by the cartel restrictions include clauses which:
 
  • set or influence resale prices – including setting maximum pricing;
  • allocate geographical territories or a specific type of customer to resellers; or
  • prevent a reseller from also selling a competitor’s product.
These types of clauses are common in supply agreements, and will often be essential to the success of the supply relationship.  It will, therefore, be important to consider whether the vertical supply exemption will apply, or whether the clauses can be amended so that they no longer fall foul of the legislation. 
 
When will the vertical supply exemption apply?
Briefly, the four criteria that must be met for the vertical supply exemption to apply are:
 
  • a written supply contract must be in place – an arrangement or understanding is not sufficient;
  • the contract must contain a cartel provision;
  • the cartel provision must relate to the supply or likely supply of goods or services, including to the maximum price at which the goods or services may be supplied; and
  • the cartel provision must not have the dominant purpose of lessening competition. 
The purpose of the cartel provision is important – for example a clause setting a maximum price for resale that is designed to lower prices for consumers is likely to be fine, however if the purpose of the maximum price is to increase or maintain prices, then the exemption is not likely to apply. 
 
If you propose entering into a supply agreement with a cartel clause (under the vertical supply exemption) then you should clearly document your reasons for any potential cartel clauses (for example in correspondence or business plans) at the time each new agreement is entered into.  This will assist you to explain your intentions to the Commerce Commission, in the event that your agreements are ever investigated.  
 
What steps do you need to take to comply?
If your supply agreements could be caught by the Bill, we recommend that you:
 
  1. Assess if you are contracting with your competitors:  Determine whether you compete in the same market as any of your suppliers, customers, etc.  If not, then the Bill will not apply to you.
     
  2. Review and amend your supply agreements:  Review your template supply agreements and agreements with parties who compete in the same market, to:
    • identify any potential ‘cartel’ clauses;
    • consider whether the vertical supply exemption could be applied;  and
    • amend the agreements where necessary.
  3. Become familiar with the Bill:  This will also assist you to ensure that all new agreements you enter into comply with the Bill from the outset, and your business plans and other correspondence clearly set out the reasons for any cartel provisions you choose to include in your agreements. 
When do you need to comply?
The Bill was introduced into Parliament in 2011 and has been making slow progress through Parliament. However, with the criminalisation aspects having been removed from the Bill, it seems likely that the Bill will be passed soon. As the Bill does not give any lead in time for new agreements (meaning that from the commencement date of the Bill any new supply agreements and any renewal agreements would need to comply), we recommend that you start taking steps now to ensure your agreements comply with the Bill. 
 
How we can help
We are happy to discuss the Bill with you in further detail, answer your questions, and assist you to comply with your obligations under the Bill. We can help you review your supply agreements and to provide you with a compliance guide.  We can provide this as a fixed fee package to give you cost certainty.

 

Disclaimer
The information contained in this publication is of a general nature and is not intended as legal advice.  It is important that you seek legal advice that is specific to your circumstances.
 
All rights reserved © Jackson Russell 2016
Key Contacts

Darryl King 167
Darryl King, PARTNER
 

CONTACT US

Level 13, The AIG Building, 41 Shortland Street,
Auckland 1010, New Zealand

PO Box 3451, Auckland 1140
New Zealand

Telephone
+64 9 303 3849

Fax
+64 9 309 0902

Email
enquiry@jacksonrussell.co.nz