The new buyer power provisions
17 Jul 2020
The new buyer power provisions of the Competition Act and the Regulations are in effect. On 20 May 2020 the buyer power guidelines were further published, which set out the general principles that the Competition Commission will follow in assessing whether conduct contravenes the provisions, and elaborate on each element required to establish a contravention of the provisions.
The buyer power provisions prohibit dominant buyers that operate in one of the designated sectors from requiring or imposing unfair prices or trading conditions on suppliers that fall within the designated class of suppliers.
The designated sectors are –
- Agro-processing, defined as “the processing of raw materials and intermediate products derived from the agricultural sector, including agriculture, forestry and fisheries;
- Grocery wholesale and retail, defined as “the wholesale or retail of food, pet food, drinks, cleaning products, toiletries and household goods”;
- E-commerce and online services, defined as “the sale, or facilitation of sale, of goods supplied by third party businesses the provision or facilitation of a service using contracted individuals or other businesses to supply the service that forms the basis for an online sale” and “the online sale of goods or services to businesses or consumers”, respectively.
The designated class of suppliers are firms that are small and medium enterprises (“SMEs”), or firms that are owned and controlled by historically disadvantaged persons (“HDPs”) and supply 20% or less of the purchases of the dominant buyer for the relevant goods or services.
The Regulations set out the factors and benchmarks for determining whether a price or trading condition is unfair.
A trading condition may be deemed unfair if it –
- unreasonably transfers risks or costs onto a SME or HDP supplier; or
- is one sided, onerous or not proportionate to the objective of the specific clause in the supply agreement (such as unduly long payment terms); or
- bears no reasonable relation to the objective of the supply agreement.
Factors to be taken into account when determining whether a price will be unfair include –
- whether there is a difference between the relevant price paid to the SME or HDP supplier, and the prices paid to other suppliers of like goods or services, in particular those suppliers that are not SMEs or HDPs (the prices paid to other suppliers are for example higher); or
- the magnitude of any differences in prices paid to other suppliers of like goods or services;
- whether reductions in existing purchase prices are directly or indirectly required from, or imposed on, the SME or HDI suppliers;
- whether reductions in existing purchase prices are retrospective, unilateral or unreasonable;
- whether costs are directly or indirectly imposed on, or required from SME or HDI suppliers, which reduce the net prices received by these suppliers; or
- whether the direct or indirect imposition or requirement of costs is retrospective, unilateral or unreasonable.
The buyer power provisions also include anti-avoidance provisions that prevent dominant buyers from refusing to procure goods or services from the designated SME or HDI suppliers. These dominant buyers will have to prove that they are not doing so in an attempt to avoid complying with the buyer power provisions.
Dominant buyers that contravene the buyer power provisions face an administrative penalty of 10% of their turnover in South Africa and exports from South Africa for a first contravention, and up to 25% of their turnover for a repeat contravention.
The extensive scope of the buyer power provisions and significant consequences of a contravention require firms that are dominant buyers operating in the designated sectors to carefully consider the provisions and to carefully assess their market position and power, network of suppliers, trading terms imposed on suppliers, procurement policies and supply agreements.
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