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Vertical Agreements defined in Section 3(4) of the Competition Act

Vertical agreements are agreements that are entered amongst enterprises or persons at different stages of the production chain. These are agreements that operate at different levels of trade.

By: Riya Singh, 4th year, BBA LLB, KLE Society’s Law College, Bangalore.

Competition Act, 2002, was enacted by the Parliament of India to establish a commission, to protect the interest of the consumers and guarantee freedom of trade in markets in India-

  • To prohibit the agreements or practices that restrict free trading and also the competition between two business entities,
  • To ban the abusive situation of the market monopoly,
  • To provide the opportunity to the entrepreneur for the competition in the market,
  • To have the international support and enforcement network across the world,
  • To prevent anti-competition practices and to promote fair and healthy competition in the market.

Agreement Under the Competition Act

Section 3[1] of the Competition Act states about the anti-competitive agreement, there are two kinds of agreement under the Act-

 1. Vertical

 2. Horizontal

The difference between Horizontal and Vertical Agreements is that in Horizontal Agreements there is the same level of competition whereas in Vertical Agreement there is a different level of competition.

Vertical Agreement

Section 3(4) states that any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade-in goods or provision of services, including:

 (a) Tie-in arrangement;

 (b) Exclusive supply agreement;

 (c) Exclusive distribution agreement;

 (d) Refusal to deal;

 (e) Resale price maintenance,

There exists another category of agreements that might get hit from the prohibition created against the Anti- Competitive Agreements, if they result in an appreciable adverse effect on the competition and thus, fall under the ambit of those agreements that have to be judged by the application of ‘rule of reason’ instead of ‘rule of per se’. The burden to prove the same lies on the prosecutor or the investigator. These include-

  1. Tie- in Agreements – These are those agreements that require a buyer of the product, as a condition precedent to such purchase. It is an agreement with a condition that the party will sell the product only on the condition that the buyer will also buy another product.

In re. Godrej and Boyce Mfg. Co. Pvt. Ltd, the burden of proof is one the plaintiff who institutes the claim per se violation to prove that:-

  • The seller conditioned the sale of a product or service on the purchase of the second.
  • That the two products or services are two separate products that they are not parts of the same product.
  • That the seller has sufficient position on the market for tying the product to enforce it.

In Apple Case: Necessary Ingredients-

Presence of two separate products or services capable of being tied,

Seller: sufficient economic power in tying good to restrain competition in tied   good, and tying arrangement affects a not insubstantial amount of commerce.

Fx Enterprises v. Hyundai Motor India Limited

Allegations: Hyundai entered into exclusive supply agreements and refusal to deal arrangements with its distributors. Further, by prescribing maximum permissible discounts to its dealers, it was alleged that it was engaging in resale price maintenance. Additionally, it was alleged that it tied the sale of CNG kits, lubricants, oils, and car insurance.

  1.  Exclusive Distribution Agreements – Such an agreement is entered into for limiting or restricting or withholding the supply or output of any good or allocating any area or disposing in some market.

Bajaj Case: Bajaj was allocating areas of the business to all its dealers found to be an exclusive dealership agreement under Section 3(4)(c) of the Act however, no AAEC found, therefore, no violation.

Spare Parts Case: Agreement between OEM and local OESs preventing the latter from supplying to the aftermarket – found to violate Section 3(4)(c).

  1. Exclusive Supply Agreements – These are those agreements that restrict the buyer in any manner in the course of his business or trade from dealing or acquiring any good.

In the Intel Case – the CCI held that a requirement to inform the supplier when the distributor deals with products belonging to the suppliers competitors cannot amount to an exclusive supply arrangement.

  1. Refusal to Deal – These are those agreements that prohibit any person or class of persons from dealing with a particular good either selling a particular good or buying them.

Spare Parts Case: The agreement between OEM and local OESs preventing the latter from supplying to the aftermarket also held to amount to a refusal to deal.

Fx/Hyundai Case: No case of refusal to deal where the distributor only had to take prior permission from the supplier, before dealing with competitors products, and permission had never been denied.

  1.  Resale Price Maintenance – The agreements that cover the condition that the charges on the reselling of the goods by the buyer will be equivalent to the price that was stipulated by the seller.

It can be noted here, that all the above-mentioned concepts were covered under the Monopolies and Restrictive Practices Act, 1969 and were taken forward by the Competition Act, 2002.

Essentials of Vertical Agreement

As per Section 3 (4) of the Competition Act, 2002, the ingredients for classifying an agreement as a vertical agreement is:

  1. Existence of an agreement between the persons or enterprises
  1. Parties to the agreement must regulate at different stages of the production chain
  1. The agreement must result in an adverse impact on the competition.

Conclusion

The scope of vertical agreements within Section 3(4) is limited in nature. This section, by specifying certain forms of vertical agreements, disregards the existence of any novel agreements that are entered into, in the e-commerce sector. Vertical agreements are agreements that are entered amongst enterprises or persons at different stages of the production chain say e.g. an agreement between an input supplier and a manufacturer of a product using the input or agreements between principals and dealers etc. These are agreements that operate at different levels of trade.

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