ANTI-COMPETITIVE

AGREEMENTS:
PROHIBITIONS UNDER COMPETITION ACT & INDIAN CONTRACT ACT

SANKALP JAIN*

ANTI-COMPETITIVE AGREEMENTS: COMPETITION ACT, 2002

Agreement by virtue of resulting out of commercial relationship can be regarded as child of
commerce or commercial transactions. An agreement in contract law can be defined as an
acceptance of an offer. However, an agreement under the Competition Act is defined as “any
arrangement or understanding or action in concert:

i. whether or not, such arrangement, understanding or action is formal or in writing; or

ii. whether or not such arrangement, understanding or action is intended to be
enforceable by legal proceedings.”1

Agreements which generally cause an adverse effect or distort or restrict competition are
known as anti-competitive agreements. Section 3 of the Competition Act, 2002 defines anti-
competitive agreements as any agreements in respect to production, supply, distribution,
storage, acquisition and control of goods or provision of services that causes an appreciable
adverse effect on competition in India. Adverse effect on competition refers not to a particular
list of agreements, but to particular economic consequences which may be produced by quite
different sorts of agreements in varying time and circumstances. It generally refers to any
action which operates to the prejudice of the public interests by unduly restricting competition
or unduly obstructing due course of trade. Whether or not an action has an appreciable adverse
effect on competition or not depends on various factors such as:2

*
sankalp_jain11@yahoo.com.
1
Competition Act, 2002; S. 2(b).
2
Antitrust Review 2011 - GCR - Global Competition Review.htm available at:
http://www.globalcompetitionreview.com) (Visited on October 14, 2015).

Electronic copy available at: http://ssrn.com/abstract=2780099

 a) Market share in the relevant market3

b) Strength of remaining competition

c) Whether the action springs from business requirements or purpose to monopolize

d) Probable development of the industry, consumer demands, and other characteristics of
the market

Thus, any act which essentially obstructs the free flow of commerce between the states, or
restricts, in that regard, the liberty of a trader to engage in business, including restraints of
trade aimed at compelling third parties and strangers involuntarily not to engage in any other
trade, is said to have an appreciable adverse effect on competition.

HORIZONTAL AGREEMENTS (CARTELS)

Cartel is defined in Section 2(c) of the Competition Act. "Cartel" includes an association of
producers, sellers, distributors, traders or service providers who, by agreement amongst
themselves limit, control or attempt to control the production, distribution, sale or price of, or,
trade in goods or provision of services. Cartels are agreements between enterprises (including a
person, a Government department and association of persons/enterprises) not to compete on
price, product (including goods and services) or customers. The Act gives a detailed definition of
an enterprise in Section 2(h).4 The objective of a cartel is to raise price above competitive levels,
resulting in injury to consumers and to the economy. For the consumers, cartelization results in
higher prices, poor quality and less or no choice for goods or/and services.5 A cartel is said to
exist when two or more enterprises enter into an explicit or implicit agreement to fix prices, to
limit production and supply, to allocate market share or sales quotas, or to engage in collusive
bidding or bid-rigging in one or more markets. An important dimension in the definition of a

3
DGIR v. UB-MEC Batteries, [1996] 87 CompCas 891 (MRTPC).
4
Advocacy Booklet on Cartels under Competition Act, 2002 available at:
www.competitioncommission.gov.in. (Visited on October 14, 2015).
5
Ibid.

Electronic copy available at: http://ssrn.com/abstract=2780099

cartel is that it requires an agreement between competing enterprises not to compete or to
restrict competition.

An international cartel is said to exist, when not all of the enterprises in a cartel are based in the
same country or when the cartel affects markets of more than one country.6 An import cartel
comprises enterprises (including an association of enterprises) that get together for the
purpose of imports into the country.7 An export cartel is made up of enterprises based in one
country with an agreement to cartelize markets in other countries.

In the Competition Act, cartels meant exclusively for exports from India have been excluded
from the provisions relating to anti-competitive agreements. Anti-competitive activities,
including cartels, taking place outside India but having effect on competition in India would fall
within the ambit of the Act and can be inquired into by the Commission. The Act, therefore,
boasts of extra-territorial reach.8

Whether an agreement is anti-competitive by reason of having an adverse effect on
competition or not is decided either by the presumptive rule approach or the rule of reason
approach. Section 3 goes on to define what agreements may be presumed to have an
appreciable adverse effect on competition. The parties to the agreement must be either
enterprises or persons or an association of the afore-mentioned who are engaged in identical
or similar trade of goods or provision of services. Section 3(3) provides for the following four
types of horizontal agreements:

a) Which directly or indirectly determine purchase or sale prices – Price fixing either
directly or indirectly is prohibited. Agreements that are entered into with the sole
purpose of defeating competition through fixing prices are prohibited as it is not in the

6
Augustine Peter, “Anti-Competitive Agreements including Cartels (Presentation at India International Centre,
Annex 27-11-2008).
7
Ibid.
8
S. 32.

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 best interests of the consumer.9 The prohibition under this head relates to price fixing
and pricing methods. Thus, any agreement entered into for the purpose and with the
effect of raising, depressing, fixing, pegging or stabilizing the price of a commodity is per
se illegal and this also includes agreements relating to specific forms of price
computation and also price discrimination.10

b) Limit or control production, supply, markets, technical development, investment or
provision of services11 – Any agreement that stipulates the amount of production or
restricts the market where the goods or services are to be offered is prohibited.

c) Share the market or source of production or provision of services by way of allocation
of geographical area of market, or type of goods or services, or number of customers
in the market or any other similar way12 – If the retailers/distributors mutually enter
into an agreement dividing the market by geographical areas amongst themselves and
supplying only to those customers, or if they mutually agree to offer only particular
goods or services to the deterrence of the consumers, such an agreement is prohibited.
The agreement must no result in a territorial division or division of the product market
amongst enterprises. Similarly, market sharing and allocation detrimental to the
consumers is also prohibited.

d) Directly or indirectly results in bid rigging or collusive bidding13 – The explanation to
Section 3(3) defines bid rigging as any agreement that has the effect of eliminating or
reducing competition for bids or adversely affecting or manipulating the process for
bidding. Collusive bidding though not defined means an attempt by conspiring bidders
to circumvent rules and laws laid down to ensure free and competitive bidding. It has to
be kept in mind that the Competition Act defines agreement as being inclusive of

9
Antitrust Review 2011 - GCR - Global Competition Review.htm available at:
http://www.globalcompetitionreview.com (Visited on 18.11.2015).
10
Supra note 7.
11
Pralika, “Anti Competitive Practices in India” available at: www.legalserviceindia.com (Visited on 18.11.2015).
12
Ibid.
13
Ibid.

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 informal oral understanding also. Rigging has an adverse effect on competition and
collusion is a secret agreement for illegal purposes or a conspiracy. Hence, any
agreement or understanding that leads to bid rigging or collusive bidding is also
prohibited.

According to Section 3(3), certain agreements (price-fixing, output restricting, market sharing,
or bid rigging, generally known as "hard-core" cartels) are presumed to have an appreciable
adverse effect on competition.14 There are divergent views whether this amounts to a per se
prohibition on this, even amongst those responsible for the Act. It is considered to be "similar,
but not necessarily identical to, the per se rule in the United States," because there is a long-
established tradition in Indian law to treat "presumption" as rebuttable. However, if a per se
prohibition was intended, Section 3(3) would have stated that such agreements were deemed
to have an anti-competitive effect. Indian courts defer to the legislative intent behind such
"deeming clauses" or "statutory fictions," unless they violate the Constitution. The Commission
shall, while determining whether an agreement has an appreciable adverse effect on
competition under Section 3, have due regard to all or any of the following factors, namely:

a) creation of barriers to new entrants in the market;

b) driving existing competitors out of the market;

c) foreclosure of competition by hindering entry into the market;

d) accrual of benefits to consumers;

e) improvements in production or distribution of goods or provision of services;

f) promotion of technical, scientific and economic development by means of production or
distribution of goods or provision of services.

14
Augustine Peter, “Anti-competitive Agreements including Cartels” (Presentation at India International Centre,
Annex 27-11-2008).

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Now, criteria (a)-(c) help to determine whether an agreement has an appreciable adverse effect
on competition but (d)-(f) do not: they instead provide various arguments that can be used to
justify such agreements. Note that Section 19(3) is applicable to all of Section 3, including the
hard-core cartel activities listed in sub-section 3(3). It might seem that the phrase "while
determining whether an agreement has an appreciable adverse effect on competition" steers
Section 19(3) away from such activities that are presumed to be anti-competitive.15 But if this
presumption is rebuttable, then even if the rebuttal is unsuccessful, the words "while
determining" open the door to applying criteria (d)-(f) even to an anti-competitive cartel.
Further, an "Explanation" attached to Section 3(3) excludes from the presumption of
appreciable adverse effect on competition, those joint ventures that increase "efficiency in
production, supply, distribution, storage, acquisition or control of goods or provision of
services." A hard-core cartel that operates through a common sales or buying agency that
results in cost savings could exploit this proviso along with the clauses in Section 19(3). One way
or another, therefore, many cartels are likely to escape per se prohibition.16

VERTICAL AGREEMENTS

Vertical restraints are agreements or concerted practices entered into between two or more
companies each of which operates, for the purposes of the agreement, at a different level of
the production or distribution chain, and relating to the conditions under which the parties may
purchase, sell or resell certain goods or services.17 Vertical agreements at different levels of the
production or supply chains often have strong efficiency rationales and enhance competition.
However, they may also have anti-competitive effects, unfairly eliminating rivals or making
them less effective competitors, or reducing competition between buyers or sellers.18 Since
there is a great chance that vertical anti-competitive agreements may not be anti-competitive,
regulators require a systematic economic assessment of whether pro-competitive or anti-

15
Ibid.
16
Ibid.
17
European Commission’s Guidelines on Vertical Restraints (2000/C 291/01).
18
Antitrust Review 2011 - GCR - Global Competition Review.htm available at:
http://www.globalcompetitionreview.com. (Visited on 18.11.2015).

6
competitive effects of a vertical agreement will dominate when these agreements involve
enterprises with a significant market share.19

In order for any anti-competitive action to qualify as a vertical anti-competitive agreement, it is
necessary that the anti-competitive action was result of an “agreement” i.e. a concerted action
that involves two or more people and not unilateral conduct. The Competition Act defines
agreement as any arrangement, understanding or action in concert. The definition goes on to
specify that it is of no consequence whether the agreement if formal, in writing or intended to
been enforceable through legal proceedings but, as specified earlier, it has to be in concert. The
inclusion of this requirement excludes unilateral conduct on the part of say a distributor or
supplier from qualifying as anti-competitive.20 The following are the kind of vertical agreements
mentioned in Competition Act:

a) "tie-in arrangement" includes any agreement requiring a purchaser of goods, as a
condition of such purchase, to purchase some other goods;

b) "exclusive supply agreement" includes any agreement restricting in any manner the
purchaser in the course of his trade from acquiring or otherwise dealing in any goods
other than those of the seller or any other person;

c) "exclusive distribution agreement" includes any agreement to limit, restrict or withhold
the output or supply of any goods or allocate any area or market for the disposal or sale
of the goods;

d) "refusal to deal" includes any agreement which restricts, or is likely to restrict, by any
method the persons or classes of persons to whom goods are sold or from whom goods
are bought;

19
Ibid.
G R Bhatia, “Anti-Competitive Agreements under Competition Act, 2002” (Presentation on 25.09.2009).
20

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 (e) "resale price maintenance" includes any agreement to sell goods on condition that
the prices to be charged on the resale by the purchaser shall be the prices stipulated by
the seller unless it is clearly stated that prices lower than those prices may be charged.

In India, the agreements entered into amongst persons at different stages or levels of the
production chain in different market vis-à-vis production, supply, distribution, storage, sale or
price of, or trade in goods or services are not per se void provided that such agreements have
no appreciable adverse effect on competition. Such agreements are not prima facie illegal if
they are not likely to have appreciable adverse effect on competition. A vertical restraint on
trade is not per se void as such agreements may at times have pro-competitive effects.21 This is
the major distinguishing factor between horizontal and vertical anti-competitive agreements.
Vertical restraints are subject to rule of reason approach, which reflects the fact that such
restraints are not always harmful and may in certain cases produce beneficial effect in a
particular market. An adverse effect on competition can only be determined if it passes the
litmus test of agreements or arrangements that can manipulate a free and fair market.22 Rule of
reason can be summarized so as to assess the pro or anti competitive nature of vertical
agreements; the competition authority will evaluate the legality of the practice with reference
to its economic effects on the relevant market and the position of the operators in those
markets.23 According to this rule, the fact-finder must determine whether the restraint's anti-
competitive effects unreasonably outweigh its potentially pro-competitive effects.

Section 3(1) of the Competition Act prohibits any agreement "which causes or is likely to cause
an appreciable adverse effect on competition within India" and Section 3(2) holds such
agreements to be void.24 As for vertical restrictions, Section 3(4) of the Act holds that any such
agreement, including five specific types (tying, exclusive supply, exclusive distribution, refusal

21
Ibid.
22
Ittai Paldor, “The Vertical Restraints Paradox: Justifying the Different Legal Treatment of Price and Non-Price
Vertical Restraints” 58 U. Toronto L.J. 317.
23
Amitabh Kumar, “Economics of Competition Law” (Presentation, Seminar on Competition Policy and Law,
organized by PHD CCI 06 October, 2005, Chandigarh).
24
Ibid.

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to deal, and resale price maintenance), shall be in contravention of the prohibition in Section
3(1) if it results in an appreciable adverse effect on competition.

In devising a rule of reason for this entire range of potentially anti-competitive agreements, the
CCI will presumably be guided by criteria (d)-(f) of Section 19(3). But these are problematic.25
They appear to be a simplistic adaptation of Article 81(3) of EC Treaty which permits
exemptions for efficiency-enhancing agreements and concerted practices. The EC provisions,
however, impose additional conditions: they require that the agreement or practice allows
consumers to share in the benefits, does not impose restrictions that are unnecessary to
attaining the efficiency objective, and does not substantially eliminate competition.26 All of
these conditions are mandatory, whereas those in the Indian Competition Act are permissive.
The European Commission, moreover, has given "block exemptions" to certain kinds of
agreements. In India, under Section 54 of the Competition Act, the Government (not the CCI)
can exempt "any class of enterprises if such exemption is necessary in the interest of security of
the State or public interest," or "any practice or agreement arising out of" any obligation under
an international treaty. Efficiency-enhancing agreements do not figure here so they can only be
subject to case-by-case consideration, in a context in which there is very little comprehension
of the economics of such agreements.27

DIFFERENCE BETWEEN HORIZONTAL AND VERTICAL AGREEMENTS

In horizontal agreements, the parties to the agreement are enterprises at the same stage of the
production chain engaged in similar trade of goods or provision of services competing in the
same market For e.g. agreements between producers or between wholesalers etc. In vertical
agreements, the parties to the agreements are non-competing enterprises at different stages of
the production chain, for instance, agreements essentially between manufacturers and
suppliers i.e. between producers and wholesalers or between manufacturers and retailers, etc.

25
Amitabh Kumar, “Anti competitive Agreements” (Presentation, IIPA 17 Nov. 2006).
26
Ibid.
27
Aditya Bhattacharjea, “India's New Competition Law: A Comparative Assessment” 4 J. Competition L. & Econ.
609.

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Horizontal anti-competitive agreements are entered into between rivals or competitors.
Vertical anti-competitive agreements are entered into between parties having actual or
potential relationship of purchasing or selling to each other. The ‘rule of presumption’ is applied
to horizontal anti-competitive agreements. The ‘rule of reason’ is applied to vertical anti-
competitive agreements.

Horizontal anti-competitive agreements that determine prices or limit/control production or
share market/sources of production by market allocation or result in bid rigging or collusive
bidding are presumed to have an appreciable adverse effect on competition. Vertical anti-
competitive agreements are not presumed to have an appreciable adverse effect on
competition and automatically prohibited. Whether a vertical agreement is anti-competitive or
not is to be decided on a case by case basis considering the consequences of the agreement
and whether they substantially restrict competition or not. The burden of proof is on the
defendant to prove that the agreement is not anti-competitive. The burden of proof is on the
party alleging the anti-competitive practice to prove that the agreement is anti-competitive.

ANTI-COMPETITIVE AGREEMENTS: INDIAN CONTRACT ACT, 1872

The Indian Contract Act follows the general principle of common law regarding agreements
restricting trade or profession and declares all agreements in restraint of trade as void subject
to an exception. Section 27 of the Indian Contract Act provides:

1. Agreement in Restraint of Trade are Void – Every agreement by which any one is restrained
from exercising a lawful profession, trade or business of any kind, is to that extent void.
However, there are exceptions. One who sells the goodwill of a business may agree with the
buyer to restrain from carrying on a similar business, within specified local limits, so long as the
buyer, or any other person deriving title to the goodwill from him, carries on like business
therein, provided that such limits appear to the Court reasonable, regard being had to the
nature of the business. So according to Section 27, the restraint can be imposed on the seller of
the goodwill till the buyer of the goodwill or a person deriving title under him continues the

10
same business. Thus, it appears to be without time limit and unreasonable. This law provided in
the Contract Act was modified by the Indian Partnership Act, 1932 which makes a specific
stipulation regarding agreements in restraint of trade, which finds mention in four provisions
i.e. Section 11, Section 36, Section 54 and Section 55. The provisions under the Indian
Partnership Act read as follows:

a) Section 11(2): Notwithstanding anything contained in Section 27 of the Indian Contract
Ac (9 of 1872), such contracts may provide that a partner shall not carry on any business
other than the firm while he is a partner.

b) Section 36: Rights of Outgoing Partners to Carry on Competing Business- A partner
may make an agreement with his partners that on ceasing to be a partner, he will not
carry on a business similar to that of the firm within a specified period or within
specified local limits; and notwithstanding anything contained in Section 27 of the
Indian Contract Ac (9 of 1872), such agreement shall be valid if the restrictions imposed
are reasonable.

c) Section 54(2): Parties may, upon or in anticipation of the dissolution of the firm, make
an agreement that some or all of them will not carry on a business similar to that of the
firm within a specified period or within specified local limits; and notwithstanding
anything contained in Section 27 of the Indian Contract Ac (9 of 1872), such agreement
shall be valid if the restrictions imposed are reasonable.

d) Section 55(3): Sale of Goodwill after Dissolution: Any partner may, upon the sale of the
goodwill of the firm, make an agreement with the buyer that such partner will not carry
on a business similar to that of the firm within a specified period or within specified
local limits; and notwithstanding anything contained in Section 27 of the Indian Contract
Ac (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable.

11
So after an analysis of the provisions we find that the Act envisages such contract at various
stages of the partnership i.e. while it is commenced, while it is continuing, upon anticipation of
the dissolution or at the time of dissolution. Therefore, all agreements in restraint of trade will
be valid provided they are reasonable in the interests of the parties and in the public interest.

The law relating to agreements in restraint of trade recognizes the general principle of equity
i.e. benefit to one must not result in harm to another. The law requires that the restriction must
only be imposed upon the business of a similar nature to that being “carried on by the earlier
firm”. So if no erstwhile partner is continuing the erstwhile business then a restriction cannot
be imposed upon a partner who chooses to do so, in spite of the fact that he had entered into a
non-competition agreement with his partners. This is so because in such a situation, the
contending partner has no interest capable of being protected. The approach of the modern
law towards partnership agreements is of minimum interference and thus, it gives recognition
to those agreements, entered into between the parties, even if they restrict an individual’s
trade liberty, because the partnership agreements create rights and duties in personam which
bind the parties and the law presumes that the proficient businessmen determine their rights
and obligations according to their needs.

CONCLUSION

Anti-competitive agreements do harm the competition in the market as it could lead to
monopoly or provides unfair advantage to the business enterprise. However, these competitive
agreements are not always injurious to business and at times such agreement may result in
consumer welfare. The role of competition commission is of great importance with respect to
anti-competitive agreements. The problem which could be faced by CCI is the investigation of
these agreements or arrangements. This is probably because of lack of investigating power
given to the Director General (DG). Power to inspect records of enterprises without a court
warrant creates time delay in investigation of such an agreement. The role of CCI is much closer
or similar to the role of a referee in a football match. He has to regulate the game, prevent and
punish on foul play and further has to run along with the players. Similarly CCI has control on

12
competition in the market and has to function in accordance with the ever changing dynamics
of market. Prohibition on anti-competitive agreements is very much similar to the rule of ‘off-
side’ in football. Like as per off-side rule, one cannot pass the ball to his own player unless and
until a defenders is there to stop such a pass. Similarly, an enterprise cannot form an
agreement that prohibits its competitors from entering or stopping him to have unfair
advantage of the market that will ultimately harm the consumers.

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 BIBLIOGRAPHY


STATUTES & GUIDELINES

1) Competition Act, 2000

2) Indian Contract Act, 1872

3) Indian Partnership Act, 1932

4) European Commission’s Guidelines on Vertical Restraints (2000/C-291/01)

ARTICLES & PRESENTATIONS

1) Aditya Bhattacharjea, India's New Competition Law: A Comparative Assessment, 4 J.
Competition L. & Econ. 609

2) Advocacy Booklet on Intellectual Property Rights under Competition Act, 2002 available
at: www.competitioncommission.gov.in.

3) Amitabh Kumar, Anti-Competitive Agreements (Presentation, IIPA, 17 Nov 2006)

4) Amitabh Kumar, Economics of Competition Law (Presentation, Seminar on Competition
Policy and Law organized by PHD CCI 06 October 2005, Chandigarh)

5) Antitrust Review 2011 - GCR - Global Competition Review.htm available at:
http://www.globalcompetitionreview.com (Visited on 18.11.2015)

6) Augustine Peter, “Anti-competitive agreements including Cartels” (Presentation at India
International Centre, Annex 27-11-2008)

7) G R Bhatia, “Anti-Competitive Agreements under Competition Act, 2002” (Presentation
on 25.09.2009)

14
 8) Farhad Sorabjee, Anti-Competitive Agreements: What can we Expect from the
Competition Commission? available at: www.indiancorporatelaw.com (Visited on
18.11.2015)

9) Ittai Paldor, The Vertical Restraints Paradox: Justifying the Different Legal Treatment of
Price and Non-Price Vertical Restraints, 58 U. Toronto L.J. 317

10) P. K. Singh, “Enforcing Section 3 Experiences of CCI” (Presentation made at CCI)

11) Pralika, “Anti Competitive Practices in India” available at: www.legalserviceindia.com
(Visited on 18.11.2015)

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