Equivalent Transactions & other matters.
The next feature of the South African Competition Act is the question of equivalent transactions. Anyone complaining under the price discrimination section is required to prove that the price discrimination occurs between equivalent transactions.
The precise wording of the relevant portion of the Act is as follows:
The actions of a dominant firm is prohibited price discrimination if it … ‘relates to the sale, in equivalent transactions, of goods or services of like grade and quality to different purchasers’
The Supreme Court of Appeal commented in May 2004 on this question as follows; An action by a dominant firm cannot be price discrimination unless it relates to sales in what are called ‘equivalent transactions’, of goods or services of like grade and involves discriminating between the purchasers in terms of price. The Court refrained from defining its interpretation of the term ‘equivalent transactions”, and sidestepped the issue perhaps awaiting a determination from either the Tribunal or the Competition Appeal Court.
Lets deal with the easy parts first, and consider the question of what constitutes like grade and quality. It would be nonsense to compare a 24 carat gold ring to a plastic ring emanating from a child’s lucky packet. Equally, it would nod be appropriate to compare pharmaceutical grade chemicals to unrefined chemicals. Neither would it be appropriate to compare premises rentals in the high street with those in a backwater. The point is that the grade and quality of the products or services under examination should be sufficiently similar so as to allow proper comparison.
It is at this juncture that the arguments begin. Clearly, the goods or services must have been sold to different purchasers in equivalent transactions. But what precisely does this mean?
There appear to be two views in this regard. The first says that orders make up make up the constituent parts of an equivalent transaction. It is argued that the sum of the orders makes up the term transaction as contemplated by this part of the Act. Furthermore that orders are part of commercial reality and cannot be ignored. It has been suggested that a large volume of orders permits production certainty and that large customers are a better credit risk. Accordingly someone who orders 10 truck loads a month deserves a better price than someone who only orders one truckload a month. Implicit in this approach is that the term ‘sold’ does not refer to the term ‘equivalent transactions’. For the above reasons, it is suggested that a better price is appropriate.
The alternative view is that individual sales transactions are contemplated by the term equivalent transactions. That the term ‘transactions’ should refer to the common form of everyday commerce. In other words, the issue of a tax invoice should correspond with the term transaction, as contemplated by conventional accounting and tax practice. Accordingly, a tax invoice evidencing a load of 30 tons of bulk material is the transactional equivalent of an identical load sent to a different customer. For this reason, the alternative suggests there should be no difference in price. Implicit in this approach is that the term ‘sold’ refers directly to the term ‘equivalent transactions’.
The sale of an item requires that the item must have been measured. The Act requires the item to have been sold. In other words, the item must have been measured and have been available for delivery or collection. Orders are not completed sales, as the items have not yet been measured and the sale is still incomplete. Orders may vary or be cancelled prior to shipment or delivery. In competitive markets customers vary orders all the time. For this reason, we believe that orders are not intended to constitute part of the make-up of the term ‘equivalent transactions’.
Our view is as follows; the term equivalent transaction, as contemplated, is intended to relate to the measure of how the good or service is sold. That is whether the good or service is sold by the kilogram or ton, load or drum, palette or box, box or item or hour or day. Such an approach is consistent with economic reality and general commercial practice. It would not be appropriate to compare inconsistent measures, because there are invariably administrative, packaging and transport costs associated with selling product in smaller measures.
It is our view that the reference to like grade and quality directs us to compare goods or services which, while they may be supplied in similar measures, cannot be considered to be similar. A measure of 250grams could apply equally to both fillet steak and hamburger patty. The intrinsic value of the products based on the grade and quality is however substantially different.
Read together, this interpretation makes sense. The first part relates to the measure of the sale, the latter part to the intrinsic value inherent in the product. Such an interpretation permits both elements of the selling price to be considered when comparing the sale of goods or services to different customers. Such an approach is also consistent with commercial reality and practice.
There is a reverse onus of proof that applies to the price discrimination section of the Act. The effect of this Section could also impact on the debate around what constitutes an ‘equivalent transaction’. This reverse onus will be covered in the next commentary.
But we may be way off track in our approach. Until the definition of equivalent transactions has been traversed by the Tribunal, your interpretation is as valid as that of anyone else. Impending interpretation in this regard will soon clarify these issues.
We will also touch on one the other requirement for price discrimination to be declared unlawful. The action of the supplier is unlawful if;
it involves discriminating between those purchasers in terms of –
(i) the price charged for the goods or services;
(ii) any discount, allowance, rebate or credit given or allowed in relation to the supply of goods or services;
It is important to note that differences of price and differences in discount, rebate etc. are treated in the same way by the Act. Since a discount has the same net effect as a reduced price, this is a sensible approach. The Act does not stop at this point, it continues to include any credit given and any rebate allowed. The question then arises as to why this is so? In price discrimination matters, there are many ingenious excuses and possible rationales for the presence of price discrimination. One we are aware of is the rebate system offered for higher order volumes. This was discussed in the Michelin case in the E.U. It seems at least to us, that any rebate is to be treated in the same way as a discount. And it must therefore comply with the defences permitted by the Act, all else being equal.
We also note that in this regard, the price discrimination must relate to the supply of goods or services. This requirement does not require a sale, as is required by the definition of equivalent transactions. If a dominant supplier charges a different net price to a customer, then it ought to be able to explain the economic rationale for its pricing structure. If it fails to do so, then it discriminates at its own peril.
Finally, we should consider what happens in the real world. If a dominant supplier practices price discrimination, two conditions apply. Firstly, if the price discrimination is in reality an unlawful practice and the supplier is incorrectly found not to have contravened the Act, then injustice is served upon consumers in general, hence the importance of the reverse onus. This is one importent reason to err on the side of caution and provide benefit of any doubt to a complainant alleging price discrimination. If however, the price discrimination unlawful but for the defences available under S 9(2), and the supplier is found to be in contravention of the Act, the supplier still has the defences of the reverse onus available to it.
There is an argument that any person wanting to take
advantage of an exception under an Act should be required to
prove that exception. In the case of price
discrimination in general, the exception relates to those
circumstances permitted by the reverse onus. The counter
argument to this requirement is that this exception comes into
play only upon proof of prohibited price discrimination.
For this reason, it can be argued that reverse onus defences
are inseperable from the main requirements of the proof of
price discrimination. There is of course a counter
argument, and more on this later.
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Disclaimer: This site does not profess to offer legal assistance or interpretation. It’s content reflects the view and experience gained by of the author during a hearing at the Competitions Tribunal of South Africa. It may help you to figure out what happens & why.