A domestic carpentry business enters into a joint venture with an overseas logging company, Logging Co. Logging Co produces premium quality logs and the new joint venture company, Timber Floor Experts, is created to manufacture and sell these logs in the form of timber flooring. Logging Co owns 80% of the shares in Timber Floor Experts.
Following incorporation, Timber Floor Experts enters into an agreement with Logging Co to secure the right to sell the wood. However, the agreement contains a condition that Timber Floor Experts must not use or sell wood from any other supplier. The agreement also stipulates that, unless Logging Co permits, Timber Floor Experts cannot undertake any activities other than those set out in the agreement. These activities are limited to drying, sawing, sanding and combining the wood provided by Logging Co into timber planks.
In this illustration two potential questions arise:
- can other suppliers of wood bring a claim for anti-competitive behaviour?
- can Timber Floor Experts bring a claim due to the oppressive nature of these clauses?
Competition and Consumer Act 2010
The CCA seeks to enhance consumer protection by prohibiting behaviours that weaken competition and fair trade. Entering into a contract that contains an anti-competitive clause amounts to such prohibited behaviour. A contractual clause can amount to anti-competitive behaviour if it is entered into with the purpose of substantially lessening competition in a market. These clauses are unenforceable and will be severed from the contract.
However, the CCA contains an exception. If the behaviour arises from a contract, arrangement or understanding to which the only parties are related companies, a claim cannot be brought. Companies are held to be related if:
- a company is the holding company of another company;
- a company is a subsidiary of another company; or
- two companies are both subsidiaries of the same holding company.
What constitutes a subsidiary?
A company is a subsidiary of another if it is controlled by that other company. Control can be established in a number of ways:
- through having the ability to determine the composition of a company’s board of directors;
- by having the ability to cast over 50% of the votes at a company’s general meeting; or
- by holding over half a company’s issued shares.
A company is also related to another company if it is a subsidiary of a subsidiary of the holding company. For example, if A owned 60% of B, and B owned 60% of C, A and C are held to be related as C is a subsidiary of B which is a subsidiary of A.
To successfully bring a claim under the CCA of anti-competitive behaviour in relation to agreements between unrelated entities, the following has to be established:
- the behaviour must take place in a market that can be identified and defined; and
- the behaviour must have been entered into for the purpose of substantially lessening the competition in the identified market.
This purpose does not have to be the sole purpose for engaging in the behaviour, it may be one of several purposes, so long as it serves as a substantial purpose. Additionally, not all parties have to share this purpose, it is sufficient even if it is shown that only one party had the purpose.
If a provision in a contract is held to be anti-competitive, and therefore in breach of the CCA, the clause must be severed from the contract, irrespective of the effect that may then have on the validity of the contract.
If you would like advice on any of the issues contained in this article, please get in touch with the McCabe Curwood Corporate team.