Inquiry into the effectiveness of the
Trade Practices Act 1974
in protecting small business
Submission by the Trade Practices Committee of
the Business Law Section of the
Law Council of Australia
to the Senate Economics References Committee
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Table of Contents
1.
Introduction
7
2.
History and objectives of the Trade Practices Act
8
2.1
2.2
2.3
2.4
3.
Specific issues relating to s46
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.
5.
6.
Introduction
History of s46
Objectives of Part IV
Objectives of Parts IVA and IVB
8
8
9
10
11
Objective of s46
11
Can more than one firm have a substantial degree of market power in a market ?11
Does s46 cover predatory pricing?
16
Should s46 be expanded to cover exclusionary conduct engaged in by a firm
without a substantial degree of market power?
16
Should s46 be amended to catch predatory pricing engaged in by all firms
irrespective of market power?
19
Section 46 investigations by the ACCC – timing and efficiency
24
Prohibition on any form of price discrimination
25
Refusals to deal
26
Introducing an "effects" test
27
Proposed amendments to Part IVA of the Act
28
4.1
4.2
4.3
4.4
4.5
4.6
4.7
28
29
31
32
32
33
35
Part IVA: Extensive protection from unconscionable conduct
Successful results for small business under Part IVA
An uncertain, inefficient and unwarranted extension
Additional protection for small business
Should s51AC be expanded to expressly refer to "unfairness"?
Prohibition of unfair terms
Introducing a new Unfair Contracts part to TPA similar to the UK
Proposed amendments to Part IVB of the Act
35
5.1
5.2
5.3
35
36
37
Universal Application of the Act
Consequences of a Mandatory Code
ACCC Endorsed Codes of Conduct
Approaches adopted by other OECD countries
37
6.1
6.2
6.3
37
38
43
Introduction
Below Cost Selling
Abuse of economic dependence
Annexure A: Summary of Reid and Baird Reports
Annexure B: Current Cases under s46
Annexure C: Text of s51AC of the Act
Annexure D: Summary of successful cases under s 51AC
Annexure E: State legislation and industry codes protecting small business
Annexure F: Previous submission of Committee on proposed amendments to s51AC
of the Act
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Executive Summary
Objective of Part IV of the Trade Practices Act

The purpose of Part IV and s46 of the Trade Practices Act is to protect competition
which maximises economic efficiency for the benefit of all Australians. Vigorous
competition is desirable because it delivers economically efficient outcomes even
though it is bound to damage some competitors.

It is not the purpose of the Trade Practices Act to protect the private interest of
particular competitors, large or small.

All economic literature, as well as Australian court decisions, recognise that effective
and vigorous competition may be fatal for individual competitors and it is in fact the
ruthlessness of competition which leads to the exit of less efficient competitors from
markets, which is of itself a benefit to the market and to consumers.
Objective of Parts IVA and IVB

By contrast Parts IVA and IVB of the Act, whilst still promoting competition, provide
specific protection to small business through the prohibition of unconscionable conduct
and the promotion of fair standards of business conduct.
Industry Policy

This Inquiry raises again the tension between the claims of small business for greater
protection and the preservation of vigorous competition. If protection were limited to
anti-competitive conduct, the Trade Practices Committee would not be concerned.
However, the claims for protection seem, in some cases, to go beyond that to claims of
protection against more efficient operators.

The Trade Practices Committee welcomes the ACCC's recently announced initiatives
in relation to ACCC endorsed voluntary industry codes.

The Trade Practices Committee believes that such codes will provide an opportunity to
deal with specific industry concerns confronting small business (for example, in the
retail grocery industry) in a way which will not undermine the economic principles
underlying Part IV, specifically the preservation of competition, rather than competitors.

Accordingly, the Trade Practices Committee believes that no amendments need to be
made to the Trade Practices Act and that any concerns being raised by the small
business sector can best be addressed through greater use of industry codes.
The current state of the law: s46

The small business sector is not, however, voicing its concerns purely in the context of
the retail grocery industry. The Trade Practices Committee is concerned, however,
that the current state of the law is not being accurately represented in this debate.

For example, the Trade Practices Committee believes that the impact of the High
Court's recent decision in Boral is being exaggerated. In the Trade Practices
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Committee's view, there is no emerging ambiguity in Australian case law about the
meaning of the concept of 'market power'.

The facts of Boral were unusual. The market involved was the discrete market for the
supply of concrete masonry products which has very low barriers to entry. The court
found that Boral did not have market power in this market as it had no ability to raise
prices and in fact the court found that Boral's customers had the power to force the
price it charged "down and down".

Given the concerns being expressed about this issue the Trade Practices Committee
believes it would be of assistance to the business community if the ACCC developed
an investigation guideline about the circumstances in which the ACCC will regard the
law as providing that a firm will have a substantial degree of power in the market.

The Trade Practices Committee does not agree that the decision in Boral means that
two or more firms cannot have market power. The High Court did not have to decide
this question.

In fact the full court decision in Safeway where a majority of the Federal Court found
that Safeway had a substantial degree of market power with only 16% of the relevant
market is evidence that more than one corporation can have a substantial degree of
power in a market.

The 1986 amendments to s46 were designed to achieve a shift from "dominance" to a
"substantial degree of market power" and there is no evidence on the current state of
the law that the 1986 amendments are not effective.

Further, the High Court will have the opportunity in the short term in any appeal from
both the Safeway and Universal decisions to further clarify this issue.

The Trade Practices Committee believes that there is no evidence that s46 does not
work to catch predatory pricing by firms with a substantial degree of market power.
Accordingly the Trade Practices Committee believes that it is premature to amend s46
to expressly cover predatory pricing.

s46 was never intended to stop firms without market power engaging in vigorous
competition. This is not a gap. It is deliberate policy designed to foster competition
which recognises the structure of Australian markets. The decision in Boral has
confirmed that s46 cannot catch conduct engaged in at a time when the corporation
does not have market power.

In the Trade Practices Committee's view s46 must not be broadened so as to penalise
firms who commit resources to more efficient production that results in the failure of
less efficient competitors.

The Trade Practices Committee is concerned that s46 should not be amended to limit
aggressive competitive behaviour by those who do not have market power as it will
constrain the hitherto acceptable aggressive practices of new entrants, start-ups,
entrepreneurs and innovators battling for market share.

Some submissions have argued that the Trade Practices Act should be amended to
catch predatory pricing engaged in by all firms irrespective of market power.
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
The current position in s46 which limits predatory pricing to firms that have a
substantial degree of market power is consistent with the position in the United States
and in Europe where the thresholds respectively are monopolisation and dominance.
In fact the threshold in Australia of a substantial degree of market power is already
lower than in the US and in Europe.

The Trade Practices Committee's submission discusses below cost pricing prohibitions
in other overseas countries. Generally such prohibitions have been introduced in
response to industry specific issues such as the retail sector and airline industry. To
the extent these same concerns exist in Australia the Trade Practices Committee
recommends that they be addressed through the use of industry codes.

More importantly, however, several of these countries have experienced difficulty in
implementing a general below cost pricing prohibition and in some cases those laws
are being repealed.

The Trade Practices Committee's submission discusses several possible approaches
to introducing a general predatory pricing provision. The Trade Practices Committee
concludes that all approaches risk capturing conduct which is pro-competitive and risk
introducing a degree of uncertainty into the law with the consequence that there may
be an impact on the ongoing competitiveness of Australian business.

If the Senate Committee does believe it is necessary to have a general prohibition on
predatory pricing for firms without market power, notwithstanding the Trade Practices
Committee's concerns and the difficulties experienced overseas, the Trade Practices
Committee has proposed, for the purposes of discussion, a possible approach to this
problem.

The Trade Practices Committee is happy to discuss this approach further with the
Senate Committee, however notes that a number of members of the Trade Practices
Committee are very concerned about the ramifications of such an approach.

The Trade Practices Committee agrees with concerns expressed by small business
that improvements could be made to the speed with which the ACCC investigates and
prosecutes s46 cases. The Trade Practices Committee submits that some enquiry be
directed into the way in which s46 investigations are handled by the ACCC with a view
to encouraging speedier outcomes.
The current state of the law: s51AC

The Trade Practices Committee believes that Part IVA of the Act already provides
adequate protection for small businesses. s51AC provides robust and extensive
coverage against unconscionable conduct and the short history of litigation under
s51AC indicates that the courts are interpreting unconscionability as broader than
unconscionability at general law and as commensurate with "unfairness".

The Trade Practices Committee notes that the ACCC currently has 10 cases under
s51AC and believes it would be premature to amend the section at this early stage in
its development.
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ACCC Resourcing

The Trade Practices Committee notes that when s51AC was first introduced the ACCC
was given specific funding for 4 years to run test cases. If the ACCC needs more
resources by way of specific funding to continue to bring a sufficient number of cases
under s51AC in order to clarify its scope, the Trade Practices Committee would support
a Senate Committee recommendation that the specific 4 year funding program first
introduced in 1998-99 be reintroduced in order to provide additional funds for such
prosecution.
Other issues

The Trade Practices Committee's submission also discusses a number of specific
additional reforms being requested by the small business sector and provides details
about the approaches adopted to similar issues in several OECD countries.
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1.
Introduction
This submission is made by the Trade Practices Committee of the Business Law Section of
the Law Council of Australia (the Trade Practices Committee). This submission has been
endorsed by the Executive of the Business Law Section. It has not been considered by the
Council of the Law Council of Australia.
Membership of the Trade Practices Committee of the Council is not confined to lawyers but
includes a diverse range of people including economists, academics and lawyers. The
Trade Practices Committee has over many years provided well informed advice to
governments, regulators and others on issues of competition law and policy as well as on
matters of procedure and administration.
Importantly, membership of the Trade Practices Committee which has prepared this
submission is not confined to lawyers. Its membership is diverse and includes economists,
both those in private practice and those with academic appointments, academics in the
field of law, lawyers working in the public sector and practicing lawyers. These members
have vast experience in trade practices litigation including advising on and providing expert
evidence in such litigation and in teaching competition law. Given the breadth of the
membership of the Trade Practices Committee, the views which it expresses reflect a wide
range of perspectives of legal, economics and consumer interests. This has been reflected
in the breadth of matters on which the Trade Practices Committee has provided input and
the substance of the submissions which it has made over the course of the life of the Trade
Practices Act 1974 (Cth) (the Act).
The Trade Practices Committee welcomes the opportunity to make this submission to the
Senate Economics References Committee (the Senate Committee) on whether the Act
adequately protects small businesses from anti-competitive or unfair conduct.
The Committee would welcome the opportunity to make oral submissions to the Senate
Committee at any public hearing or to make further written submissions to the Senate
Committee prior to the Senate’s Report on 4 December 2003.
This submission specifically considers:
•
the objective of s46;
•
whether more than one firm can have a substantial degree of market power in a
market;
•
whether s46 covers predatory pricing;
•
whether s46 should be expanded to cover exclusionary conduct engaged in by a
firm without a substantial degree of market power;
•
whether s46 should be amended to catch predatory pricing engaged in by a firm
without a substantial degree of market power; and
•
whether s51AC should be expanded to expressly cover unfair conduct.
The submission also discusses other suggestions for reform to ss46 and 51AC which have
been mooted in recent press reports and in other submissions to the Senate Committee.
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Finally it also discusses Part IVB and the approach taken to similar issues in other OECD
countries.
2.
History and objectives of the Trade Practices Act
2.1
Introduction
The terms of reference for the inquiry to the Senate Committee raise the question of
"whether the Trade Practices Act 1974 adequately protects small businesses from anticompetitive and unfair conduct". Before considering whether the Act should be amended
to “protect” a particular group of the economy the Trade Practices Committee believes that
it is critical to understand both:
(a)
the history and objectives of Part IV of the Act (particularly s46); and
(b)
the objectives of Parts IVA and IVB which deal with the prohibition of
"unconscionable conduct" (both generally and in relation to business transactions)
and the promotion of fair standards of business conduct.
2.2
History of s46
The Second Reading Speech to the Trade Practices Bill 1974 stated that s46 will prohibit
an enterprise, which is in a position to control a market, from taking advantage of its market
power to eliminate or injure its competitors. However, it is clear from an examination of the
history of this provision that the focus of this provision is on the protection of competition
rather than the protection of any particular competitors, such as small businesses.
Section 46 was amended by the Trade Practices Amendment Act 1977 (Cth). It was first
amended in 1977 as a result of a recommendation of the Swanson Committee, which
proposed that it be amended to require a taking advantage of market power "for the
purpose of" a proscribed purpose, to ensure that it was clear that only a purpose to
monopolise is required and not actual proof that the monopolistic purpose has been
achieved. After the 1977 amendments, s46 provided that:
(1)
A corporation that is in a position substantially to control a market for goods or
services shall not take advantage of the power in relation to that market that it has by virtue
of being in that position for the purpose of
(a) eliminating or substantially damaging a person, being a competitor in that market or in
any other market of the corporation or of a body corporate related to the corporation;
(b) preventing the entry of a person into that market or into any other market; or
(c) deterring or preventing a person from engaging in competitive conduct in that market or
in any other market.
Prior to 1986, s46 only applied to corporations that were in a ‘position substantially to
control a market’. In 1986, this threshold was lowered so that the provision would catch
predatory conduct engaged in by a corporation with a ‘substantial degree of market power’
as originally recommended by the Blunt Committee in 1979. 1 This amendment was made
in acknowledgment of the fact that there were many corporations with a substantial degree
1
For a comprehensive history of the debate on the effects test, starting in 1979 with the Blunt Committee, see Landrigen,
Peters and Soon, “An Effects Test Under s46 of the Trade Practices Act: Identifying the Real Effects”, (2002) 9(3) CCLJ
258.
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of market power, yet, who were not in a position to effectively ‘dominate’ or ‘substantially to
control’ the relevant market, but were still engaging in conduct that would otherwise have
been construed as falling within one of the categories of conduct proscribed in ss46(1)(a)(c). The stated rationale behind the lowering of the threshold test was:
corporations with a sufficient degree of market power to seriously harm or exclude
competitors and which abuse their market power in that way will attract the operation of the
section.2
The proscribed purposes in s46 might be interpreted as promoting competition as well as
promoting economic freedom. The proscribed purposes (which on their face focus on
competitors) are consistent with the promotion of competition in the following way. The
competitive constraints confronting a business with substantial market power can come
either from incumbents that are already established in the market or from potential entrants
that have yet to enter the market. The proscribed purposes make it clear that a business
with substantial market power may not use that market power to attack either of these
forms of competitive constraints: it may not use its power for the purpose of lessening the
constraint imposed by incumbents; and it may not use its power in order to lessen the
constraint imposed by potential entrants. However, the proscribed purposes do not detract
from the fact that the purpose of s46 is to protect competition not competitors.
2.3
Objectives of Part IV
The Trade Practices Committee submits that the object of the "restrictive trade practices"
or competition provisions set out in Part IV of the Act (including s46) is to procure and
maintain competition in trade and commerce in Australia. It is not the object of Part IV of
the Act to "protect", or to advance the interests of, any particular persons or corporations in
the Australian economy, or groups of persons or corporations, such as "small businesses".
Instead, the objective of the provisions is clearly to promote competition generally (in
preference to the interests of a particular competitor or group of competitors) for the benefit
of Australian consumers. To do otherwise would not be consistent with the object of the
Act.
Section 2 of the Act states that:
The object of this Act is to enhance the welfare of Australians through the
promotion of competition and fair trading and provision for consumer protection.
The object of the competition provisions in Part IV of the Act is to procure and maintain
competition in the Australian market. This was explained by Deane J in Refrigerated
Express Lines (A/asia) Pty Ltd v Australian Meat and Livestock Corporation 3, as follows:
The general purpose and scope of the Part [IV] can be described by saying that it
contains provisions which proscribe and regulate agreements and conduct and
which are aimed at procuring and maintaining competition in trade and commerce.
2
The Trade Practices Act: Proposals for Change Paper A Explanation of Proposals in the Exposure Draft Trade Practices
Amendment Bill, 1984 at [26].
3
(1980) 29 ALR 333 (Refrigerated Express)
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This position was confirmed, for example, in the most recent High Court decision Boral
Besser Masonry4 in relation to predatory pricing allegations. Gleeson CJ and Callinan J, at
paragraph 87, said that:
The purpose of the Act is to promote competition, not to protect the private
interests of particular persons or corporations.
Gaudron, Gummow and Hayne JJ, at paragraph 160, stated:
The structure of Part IV of the Act does, despite the considerable textual
differences, reflect three propositions found in the United States antitrust decisions.
The first is that these laws are concerned with the protection of competition, not
competitors … .
The Trade Practices Committee therefore submits that, in relation to the competition
provisions of Part IV of the Act (including s46), the Senate Committee should concern itself
with whether the law, as it is developing under Part IV of the Act, and s46 particularly,
efficiently promotes competition generally among all businesses to deliver benefits to
Australian consumers. That inquiry will be principally concerned with the presence and
preservation of efficient businesses (as opposed to "large" or "small" business), effective
competition and dynamic markets (in which firms will fail occasionally). From an economic
point of view, analysis of Part IV of the Act should not have regard to whether it sufficiently
"protects small businesses from anti-competitive conduct" if it is to be consistent with the
objective of economic efficiency.
2.4
Objectives of Parts IVA and IVB
By contrast, parts IVA and IVB of the Act deal with the prohibition of "unconscionable
conduct" (both generally and in relation to business transactions) and the promotion of fair
standards of business conduct. These provisions were developed as a result of previous
enquiries into s46 by the Reid and Baird Committees, which concluded that more specific
reforms should be introduced to address small business problems rather than wholesale
changes to s46. The relevant findings of the Reid and Baird Committees are summarised
in Annexure A. The Committee supports the general approach taken in those inquiries.
In the Trade Practices Committee's view, it is only in relation to Parts IVA and IVB that
more might be done, as a matter of industry policy rather than competition regulation, to
"protect" small business. However, in the Trade Practices Committee's view, the law in
relation to unconscionable conduct in business transactions, under s51AC, should be
allowed to develop further before further legislative amendments are made. If further
specific amendments are required in an industry, then the Trade Practices Committee
believes that they could be made through specific industry codes rather than through
general amendment to the Act.
4
(2003) 195 ALR 609 (Boral).
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3.
Specific issues relating to s46
3.1
Objective of s46
As discussed in section 2 above, s46 is designed to protect consumer welfare through
competition – not individual competitors. If competitors are to be protected, that is properly
a matter for industry policy.5 Section 46, as interpreted by the High Court, appears to be
doing precisely what it was intended to do ie, protect competition.
Annexure B sets out a more detailed discussion of the objects of s46 as interpreted by the
Courts, and outlines several important cases that are currently before the Courts, which are
expected to further clarify the scope of the provision. It also examines the Dawson
Committee's recent recommendation that no amendment to s46 is necessary.
3.2
Can more than one firm have a substantial degree of market power in a market ?
Some submissions have argued that the 1986 amendments (referred to in 2.2 above)
which intended to move the section from a consideration of “dominance” to “substantial
market power”, are not achieving their objective.6
Some people have argued that as a result of the High Court's decision in Boral, it is not
clear in what circumstances there will be a finding of market power. 7 The Trade Practices
Committee does not agree with this view. In Boral the High Court held that Boral did not
have a substantial degree of power in the market for the supply of concrete masonry
products as barriers to entry to that market were very low and it had no ability to raise
prices. In fact, on the contrary, the Court found that Boral's customers had the power to
force the price charged by masonry manufacturers "down and down". (The facts in Boral
5
This distinction between competition policy and industry policy was recently highlighted by the Dawson Committee Report
Review of the Competition Provisions of the Trade Practices Act, dated 31 January 2003 (Dawson Committee) where it
concluded (at pp 36-37):
The Committee does not favour the introduction of competition measures specifically directed to particular
industries to respond to perceived shortcomings in the relevant markets. Often the complaint when analysed is not
about reduced competition but about the structure of the market which competition has produced. Concentrated
markets can be highly competitive. It may be possible to object to the structure of such markets for reasons of
policy (the disappearance of the corner store, for example), but not on the grounds of lack of competitiveness. Of
course, concentrated markets should attract scrutiny to ensure that competition is maintained, but the purpose of
the competition provisions of the Act is to promote and protect the competitive process rather than to protect
individual competitors. The competition provisions should not be seen as a device to achieve social outcomes
unrelated to the encouragement of competition. As a matter of policy those outcomes may be regarded as
desirable, but the policy will not be competition policy. Nor should the competition provisions seek the
preservation of particular businesses or of a particular class of business that is unable to withstand competitive
forces or may fail for other reasons. Those are matters which may legitimately be the subject of an industry policy,
but that is not a policy which is to be found in the competition provisions in Part IV of the Act.
6
Submission by the Fair Trading Coalition (A Coalition of Small Business for Trade Practices Act Reform) to the Senate
Economics References Committee Inquiry into the Effectiveness of the Trade Practices Act 1974 in Protecting Small
Business, August 2003 at p 11-13; Liquor Stores Association of Victoria's Submissions to the Inquiry into the Effectiveness
of the Trade Practices Act 1974 in Protecting Small Business, 15 August 2003 at p 5.
7
Liquor Stores Association of Victoria's Submissions to the Inquiry into the Effectiveness of the Trade Practices Act 1974 in
Protecting Small Business, 15 August 2003 at pp 4-5; Submission by the Fair Trading Coalition (A Coalition of Small
Business for Trade Practices Act Reform) to the Senate Economics References Committee Inquiry into the Effectiveness of
the Trade Practices Act 1974 in Protecting Small Business, August 2003 at pp 10-11, 14; Senate Economic Reference
Committee Inquiry into the Effectiveness of the Trade Practices Act 1974 in Protecting Small Business, Submissions on
behalf of the Independent Liquor Group, August 2003 at pp 4-5; Senate Inquiry, The Effectiveness of the Trade Practices
Act 1974 in Protecting Small Business, Submissions from Office Choice Limited at p 4.
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were unusual and the findings in the case are not relevant to any other market such as the
market in which cement is manufactured and supplied.)
The key to the High Court’s decision on market power is found in s46(3) and the fact that
Boral was so constrained by its competitors and customers. The Courts have also
indicated that other factors are also relevant to assessing the extent of a firm’s market
power such as the number of competitors, their strength and size, the height of barriers to
entry and the stability or volatility of demand. 8
The High Court has held that the general rule for determining whether a firm has market
power is the ability of a firm to raise prices above supply cost without rivals taking away
customers in due time.9 In Boral Gleeson CJ and Callinan J said “pricing is ordinarily
regarded as the critical test”, although “other aspects may be the capacity to withhold
supply; or to decide the terms and conditions, apart from price, upon which supply will take
place.”10
Whilst this is a general rule what the Court does is consider the relevant conduct and an
analysis of the extent to which the relevant firm’s conduct is constrained. In Boral the
relevant conduct involved pricing and as discussed the High Court found that Boral’s
pricing decisions were constrained by its customers.
By contrast, in Safeway the relevant conduct was Safeway’s market power as a purchaser
of goods. Heerey and Sackville JJ said:
The essence of market power is, as Gleeson CJ and Callinan J said in Boral … the
absence of constraint. In the case of a purchaser of goods in a market, such as
Safeway, s46(3) of the Act directs attention to the extent to which the purchaser’s
conduct is constrained by its competitors and potential competitors, or by its
suppliers and customers. Of course, market power need not be total. Section
46(1) of the Act applies where a corporation has a substantial degree of power in
a market. It is therefore not necessary for a purchaser to be a monopsonist (a
single buyer of a product or service) in order to have a substantial degree of
market power: Melway at 21. Matters of degree are involved … 11
The extract from Safeway confirms the Boral approach which involves an analysis of
constraint and expressly rejects the view that only one firm can have a substantial degree
of market power (which is discussed below).
Finally, the role of barriers to entry should also be highlighted in terms of their relevance to
an analysis of market power. Market power is a dynamic concept which must be
considered over time. The analysis requires an examination of the existing structure and
the likely structure of the market. A market may have structural barriers to entry (such as
the existence of intellectual property, capital investment, the availability of labour and
materials and the nature of technology) and strategic barriers to entry (such as economies
8
See Boral per Gaudron, Gummow and Hayne JJ at para [168].
9
Queensland Wire per Mason CJ and Wilson J at p189 and Boral per Gleeson CJ and Callinan J at para [136].
10
At para [136].
11
At para [301].
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of scale, pricing policies and capacity expansion leading to excess capacity). 12 In Boral
both structural and strategic barriers to entry were considered low with no technology
barriers and minimal capital outlay for a new plant (approximately $8 million). This enabled
McHugh J to conclude “the low barriers to entry in this market by themselves were strong
indicators that at no relevant time did Boral have substantial market power.”13
By contrast, in Safeway the majority found that there were barriers to new entry in terms of
size. Heerey and Sackville JJ held:
Any new entrant that could impinge upon or erode Safeway’s market power would
have to be able to set up a network of stores of a significant size throughout
Victoria. There was evidence that to enjoy comparable economies of scale to
Safeway, a new entrant would have to achieve a market share of eight to nine per
cent of the total grocery market, equivalent to an annual turnover of approximately
$500 million.14
The judges then observed:
We should add that the threat of a new entrant has to be assessed in a timeframe
comparable to that of the impugned conduct, which was short term, reactive
behaviour targeted at specific market activity then occurring. This conduct was
unlikely to be restrained by the theoretical arrival of a new entrant of comparable
size in the future.15
Whilst the Trade Practices Committee believes that the law on this question is clear and
continues to develop, the Trade Practices Committee believes that it may assist the
business community if the Australian Competition & Consumer Commission (ACCC)
developed an investigation guideline about the circumstances in which the ACCC will
regard the law as providing that a firm will have a substantial degree of power in the
market.16 The Trade Practices Commission had s46 guidelines, which provided a useful
overview of the section. Such ACCC guidelines could discuss possible indicia of market
power including:

market share (although this cannot be determinative);

pricing discretion;

pricing in circumstances where the revenues a company reasonably expects to
receive from the supply of goods or services is less than the costs it could have
expected to save it if had not supplied those services;

exclusive intellectual property rights; and

barriers to entry.
12
Boral per McHugh J at paras [312 ff].
13
At para [318].
14
At para [306].
15
At para [318].
16
This is supported by the fact that the Fair Trading Commission has also submitted that a clarification of when a firm has a
substantial degree of market power is necessary. Submission by the Fair Trading Coalition (A Coalition of Small Business
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Some appear to have interpreted the High Court’s decision in Boral as meaning that 2
corporations cannot have market power 17 The Trade Practices Committee does not agree
with this view. In the recent full Federal Court decision in Safeway18 a majority (Heerey J
and Sackville J) held that Safeway had a substantial degree of market power with only 16%
of the market in Victoria for the wholesale supply of bread products to food retailers. Whilst
the Court was not required on the facts to decide whether other retailers in that market,
such as Coles, also had a substantial degree of market power, by inference that finding
was open to the Court. The majority specifically held it is clear that s46(1) is not concerned
only with a pure monopsony or a near monopsony (a market characterised by one or very
few buyers)19 The High Court did not have to decide this issue in Boral as the ACCC did
not argue that both Boral and Pioneer had market power.
The High Court will therefore have the opportunity to deal with this issue further in any
appeal from the Full Federal Court’s decision in Safeway20. This issue may also be dealt
with by the High Court in Universal, where the Court will need to consider whether each of
Universal and Warner, or both, had a substantial degree of market power at the time they
engaged in the conduct.21
The Trade Practices Committee also notes that this area of the debate has become
confused by some people referring to "oligopoly" and whether s46 covers oligopoly. The
term oligopoly, literally means a few sellers. The term has no particular connotation of
collusion or co-ordinated conduct. The market for concrete masonry products considered
in Boral was an oligopoly as there were few sellers: Boral, Pioneer, C&M Brick and Rocla.
Similarly Safeway was in an oligopolistic market, ie the few major purchasers were
Safeway, Coles and Franklins.
Economic theory recognises that in an oligopolistic market, there is a greater likelihood that
the few firms will act in a co-ordinated way so that their market power may be more than
would be indicated by considering each firm as an independent entity. This is sometimes
described as shared or collective market power. In the Trade Practices Committee's view,
there is nothing in any recent case which suggests that s46 cannot cover an oligopolistic
market22.
for Trade Practices Act Reform) to the Senate Economics References Committee Inquiry into the Effectiveness of the Trade
Practices Act 1974 in Protecting Small Business, August 2003 at pp 14-16.
17
Submission by the Fair Trading Coalition (A Coalition of Small Business for Trade Practices Act Reform) to the Senate
Economics References Committee Inquiry into the Effectiveness of the Trade Practices Act 1974 in Protecting Small
Business, August 2003 at pp 14-15.
18
ACCC v Safeway Stores Pty Limited [2003] FCAFC 149 (Safeway).
19
See Safeway per Heerey and Sackville JJ at [302].
20
On 28 July 2003 both the ACCC and Safeway filed applications for special leave to appeal to the High Court.
21
The Full Federal Court's decision in Universal Music Australia Pty Ltd v ACCC [2003] FCAFC 193 (Universal) was
delivered on 22 August 2003. At the time of writing this submission no application for special leave had been filed with the
High Court by either the ACCC or the parties.
22
The matter was expressly considered by Lockhart J in Dowling v Dalgety Australia Ltd (1992) 106 ALR 75 at 107:
… In my opinion, it is permissible, however, when considering the market power of a corporation, to have regard
not only to its individual power but to additional power which it has through agreements, arrangements or
understandings with others. While aggregation of the market power of a number of unrelated corporations is
impermissible, it is important to recognise that a corporation can gain a position of substantial market power
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The Senate Committee will consider whether, under s46 as presently drafted, more than
one firm can have a substantial degree of power in a market. In the Trade Practices
Committee's view, as discussed above, Safeway supports the view that two or more firms
can have a substantial degree of market power and there is nothing in Universal or Boral
which supports a different view.
If the High Court concludes in a future decision that two companies cannot both have a
substantial degree of market power so that the section is not working as intended by the
1986 amendments, then the Trade Practices Committee agrees that the section should be
amended to achieve the intent of the 1986 amendments. The Trade Practices Committee
believes however that it is premature to make those changes before the issue is clarified by
the High Court and is concerned that the effect of the Boral decision is being exaggerated
by some submissions. The Trade Practices Committee is also concerned not to amend the
section as a "knee jerk" reaction to one decision, where it is clear that the High Court will
have the opportunity to clarify these issues in Safeway in the short-term.
If however the Senate Committee believes that the concept of market power must be
addressed now before it is clarified by the High Court then the Trade Practices Committee
is very concerned that any attempt to move away from market power to define the broader
class of firms whose conduct the “small business” lobby wishes to limit is not appropriate
(other than possibly in respect of predatory pricing conduct which is discussed in 3.5
below).
Similarly, the Trade Practices Committee would be very concerned about any suggestion
to deal with this apparent concern by deleting the word "substantial" from s46 and catching
all firms with any degree of market power. Such a radical departure from the
monopolization concept would inhibit legitimate competitive behaviour.
However, a possible mid-point would be to change “substantial” to “significant” as the
threshold for when s46 will apply. The lower threshold will increase the number of firms
whose conduct is subject to s46 without changing the fundamental structure of the
section.23 Although the Council believes that on the basis of the evidence before it, the
through its agreements, arrangements or understandings with others, and market power gained through acting in
concert with others must add to the corporation’s individual market power. … In this sense jointly held power and
control in relation to a market is a matter which must be taken into account when considering the individual market
power of a corporation for the purposes of s46.
Members of the High Court in Boral expressly left open the possibility that a firm could have a substantial degree of market
power alone or in combination with others. Gleeson CJ and Callinan J at (2003) 195 ALR 609 at [138] state:
… Power in a supplier ordinarily means the ability to put prices up, not down. But if a market is not competitive,
and a firm puts prices down, seeking to eliminate a potential rival, in the expectation that it will thereafter be in a
position to raise prices without competitive constraint, its ability to act in that manner may reflect the existence of
market power … .
The judges then go on and refer to a liner conference as an example where a firm does not need to fear price competition.
Further the argument was expressly left open in the recent strike out decision of Justice Gyles in ACCC v Qantas Airways
Limited [2003] FCA 125. The Trade Practices Committee also notes that there is a substantial body of law about collective
dominance in Europe which could support the proposition that members of an oligopoly may each have substantial market
power.
23
The Explanatory Memorandum to the Trade Practices Revision Bill 1986 (the 1986 amendments referred to in section 2.2
above) contained the following explanation of the meaning of “substantial” in s46:
[I]n the context of s46, ‘substantial’ is intended to signify ‘large or weighty’ or ‘considerable, solid or big’.
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High Court would still have concluded that Boral did not have a significant degree of market
power due in particular to the power of its customers to drive prices down.
3.3
Does s46 cover predatory pricing?
Some participants in this debate have interpreted the High Court’s decision in Boral as
meaning that s46 does not cover predatory pricing. 24 The Trade Practices Committee does
not agree that this is the case. Boral was not strictly a predatory pricing case as the ACCC
also argued that in addition to below cost pricing Boral engaged in other conduct such as
expansion of capacity which meant it was in breach of s46. In the Trade Practices
Committee's view it is not incorrect to describe Boral as a predatory pricing case that failed.
In any event, more than one High Court judge expressly considered that s46 would apply
to below cost pricing by a corporation with a substantial degree of market power provided
that the firm had reasonable prospects of recouping those losses through increased prices
in the future.25
Accordingly the Trade Practices Committee believes that it is premature to amend s46 to
expressly cover predatory pricing. If in the future as a result of a predatory pricing action
being unsuccessful it emerged that s46 does not in fact cover predatory pricing then the
section could be amended at that time.
3.4
Should s46 be expanded to cover exclusionary conduct engaged in by a firm without
a substantial degree of market power?
What is clear post Boral is that s46 cannot catch conduct engaged in at a time when the
corporation does not have market power. This is clear from Justice McHugh's judgment
where he states:
As I have indicated, neither s46 nor any other provision of the Act defines or even
uses the term ‘predatory pricing’. And the terms and structure of s46 suggest that it
is not well suited for dealing with claims of ‘predatory pricing’. In the context of a
‘predatory pricing’ claim, s46 seems under- and may be over- inclusive. Conduct
The phrase ‘substantial’ was also considered by Lockhart and Gummow JJ in Eastern Express Pty Ltd v. General
Newspapers Pty Ltd (1992) 106 ALR 297 at p317 (Eastern Express) where they said:
For a corporation to have a substantial degree of market power it must have a considerable or large degree of
such power. The difficulty lies, not in defining the word ‘substantial’ but in applying the concept of a substantial
degree of market power to the circumstances of each case and in identifying whether the requisite degree of
market power exists. This is a relative concept.
24
This is the implication of the following submissions: Submission by the Fair Trading Coalition (A Coalition of Small
Business for Trade Practices Act Reform) to the Senate Economics References Committee Inquiry into the Effectiveness of
the Trade Practices Act 1974 in Protecting Small Business, August 2003 at p 14; Liquor Stores Association of Victoria's
Submissions to the Inquiry into the Effectiveness of the Trade Practices Act 1974 in Protecting Small Business, 15 August
2003 at p 4-5; Senate Economic Reference Committee Inquiry into the Effectiveness of the Trade Practices Act 1974 in
Protecting Small Business, Submissions on behalf of the Independent Liquor Group, August 2003 at pp 4-5, 9-10; Senate
Inquiry, The Effectiveness of the Trade Practices Act 1974 in Protecting Small Business, Submissions from Office Choice
Limited at p 3..
25
[2003] HCA 5 per McHugh J at [280], [291]-[292]. Further, the judgment of Lockhart and Gummow JJ in Eastern Express
includes a discussion of how predatory pricing cases will proceed under s46 and whether the US cases on predatory pricing
are capable of translation into the operation of s46.
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that is predatory in economic terms and anti-competitive may not be captured by
s46 simply because the predator does not have substantial market power when it
sets off on its course to deter or injure competitors. That may be because until it
achieves its object it has no substantial degree of market power. Or it may be that
it is a firm in a cyclical industry which has had, but does not have a substantial
degree of market power at the time of the predatory conduct. In cyclical industries
such as construction and building materials, firms may have no substantial degree
of market power at the bottom of the economic cycle when competition is fierce
and margins slender. As demand increases, however, some firms may acquire a
substantial degree of market power. Section 46 is ill drawn to deal with claims of
predatory pricing under these conditions. 26
This means the conduct in which a firm engages when it does not have market power is
not caught by s46. This is being loosely referred to as the "gap" in s46. This is not in fact
a gap. Section 46 was never intended to stop firms without market power engaging in
vigorous competition.
The Trade Practices Committee does not think this interpretation of s46 will alter in the
future due to the express language of s46 which requires a firm to take advantage of
market power it already has.
Some have argued that s46 needs to be amended to catch predatory pricing and other
exclusionary conduct engaged in by all firms, irrespective of market power. 27 Examples of
the other types of exclusionary conduct which have been mooted include, raising strategic
barriers to entry and in some circumstances expanding output (eg, in a recession or price
war).
The Trade Practices Committee believes that any change to s46 should be minimal, and it
should not tamper with the basic framework of s46: it should only apply to firms who have
power, and who use that power for a limited range of proscribed purposes. The purpose of
such an amendment would be to expand the range of firms beyond those with market
power. The Trade Practices Committee acknowledges that it is possible that small
businesses can be harmed by the objectionable exercise of other types of power, and
perhaps reform to s46 can partly fill the "gap" between the present limit of proscribed
activity and the criminal law (i.e. murder, arson, and other extreme examples of behaviour
which have the purpose of damaging competitors).
If s46 is amended to limit aggressive competitive behaviour by those who do not have
power it will constrain the hitherto acceptable aggressive practices of new entrants, startups, entrepreneurs and innovators battling for market share. Amendments may also limit
behaviour by larger and established firms which is not an exercise of market power, such
as loss leaders and plant upgrades.
In the Trade Practices Committee's view s46 must not be broadened so as to penalise
firms who commit resources to more efficient production that results in the failure of less
efficient competitors. This is a normal economic shakeout.
26
At para [269].
27
See the discussion of predatory pricing at 3.5 below.
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The Trade Practices Committee has considered various possibilities to achieve this
extension but has encountered serious issues with all proposals. For example, one
suggestion for a "simple" amendment to s46 was to expand the reach of the section by
capturing firms who will have market power as a result of conduct they engage in by
deleting the word "has" and substituting the words "have, will have or are likely to have"
market power. One weakness with this approach is that it provides no link between the
future acquisition of market power and the exclusionary conduct. Further in the Trade
Practices Committee's view this approach begs the question as to what power the firm is
exercising (if any) when it acts before it has market power. Is it financial power or some
other power? Such an approach would in turn undermine the whole basis of s46 and lead
to the consequence of prohibiting vigorous conduct which benefits consumers.
Another possibility the Trade Practices Committee discussed to cover conduct engaged in
by firms without a substantial degree of market power was to borrow the U.S. approach in
section 2 of the Sherman Act which prohibits monopolization or attempted
monopolization.28 In the U.S. there is no statutory requirement in an attempted
monoplization case that the defendant have market power at the time it initiates the
predatory conduct. However U.S. Courts have, as part of the rule of reason, dismissed
attempt cases where the defendant has only a modest (eg less than 30-40%) market share
on the ground that an attempted monoplization case requires a dangerous probability of
success and that there can be no dangerous probability of successful monopolization with
such a small market share.
Clearly the concept of attempt is part of both Australian law and is included in s76 of the
Act. However s76 refers to an attempt to breach s46 by taking advantage of existing
market power. An extension of this concept could involve an attempt to acquire a
substantial degree of market power for one of the three prohibited purposes in s46. But as
such a prohibition would catch all conduct engaged in as a result of innovation, new entry
and expansion, clearly the prohibition would need to be limited in some way, for example
by excluding conduct which was economically efficient or which was a legitimate business
response to conditions in the market.
The Trade Practices Committee believes that this suggestion is impractical. The Trade
Practices Committee is unsure whether the ACCC could ever prove that someone had
attempted to acquire market power in order to eliminate a competitor. First, evidence would
be needed that the firm was attempting to acquire market power, rather than simply trying
to damage competitors, and second that the firm's purpose for acquiring market power was
to damage competitors at a later date.
Many Australian markets are characterised by few suppliers and can therefore be
described as "concentrated" or oligopolistic. In most concentrated markets, market
participants quite legitimately seek market power or increased market power. Given that,
28
Section 2 of the Sherman Antitrust Act 15 U.S.C. §2 provides:
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or
persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall
be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a
corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said
punishments, in the discretion of the court.
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in most Australian markets nearly all participants will have a degree of market power and
will be engaging in vigorous competitive conduct to acquire a substantial degree of market
power, the Trade Practices Committee is concerned about the section 2 "attempt"
approach which would stifle this activity.
3.5
Should s46 be amended to catch predatory pricing engaged in by all firms
irrespective of market power?
In response to concerns of widening the ambit of s46 others have suggested as an
alternative to prohibiting conduct generally that s46 should be extended but only so as to
prohibit predatory pricing conduct engaged in by a firm without market power.
National Association of Retail Grocers of Australia (NARGA),29 the Australian Service
Station and Convenience Store Association, 30 the Master Grocers Association of Victoria,31
the Trade Practices Committee of Small Business Organisations in Australia, 32 and the
Pharmacy Guild33 argued in their submissions to the Dawson Committee that this type of
specific prohibition of predatory pricing was necessary because pricing below cost
undermined competition in markets where small businesses could not match these prices
or sustain them over a period of time. In addition, NARGA proposed that where an item is
offered for sale below acquisition price plus all expenses ordinarily associated with the
offering of the item for sale, that the words 'below cost' should be required to appear
together with any statement of price in relation to the item.34
It is only in the case where a dominant firm sells its products at very low prices with a view
to driving out its competitors and then charging higher prices later, that Australian
consumers will suffer. It is for this reason, that the High Court has decided in Boral that a
contravention of s46 is highly likely to occur where a firm with "substantial market power"
charges prices below cost, with a view to later charging prices which are higher than
would otherwise prevail in a competitive market.35
Absent this second limb (higher prices later), below cost prices are a boon to consumers.
Where the second limb is present, it is likely that s46 will apply.
The Trade Practices Committee notes that the current position in s46 which limits
predatory pricing to firms that have a substantial degree of market power is consistent with
29
Dawson Committee Trade Practices Act Review, Submission by the National Association of Retail Grocers of Australia,
July 2002 at pp 68-70. NARGA proposed a new prohibition against anti-competitive below cost or unreasonably low pricing.
30
Submission by the Australian Service Station and Convenience Store Association to the Review of the Trade Practices
Act, 15 July 2002 at pp 4-5, 6, 7. It supported a specific prohibition to proscribe selling at unreasonably low prices.
31
Dawson Committee Trade Practices Act Review, Master Grocers Association of Victoria Limited at p 4-5. It recommended
prohibiting anti-competitive or unreasonably low prices.
32
Trade Practices Committee of Small Business Organisations in Australia Ltd, Submissions to the Trade Practices Act
Review Dawson Committee, July 2002 at p 5. It recommended proscribing selling at below cost or unreasonably low prices.
33
The Pharmacy Guild of Australia, Submissions to the Review of the Trade Practices Act, July 2002 at pp 1, p 19. It
supported the recommendation of the Fair Trading Coalition that selling at below cost or unreasonably low prices be
proscribed.
34
Dawson Committee Trade Practices Act Review, Supplementary Submission No. 2 by the National Association of Retail
Grocers of Australia, October 2002 at pp 20-21.
35
Indeed, it is only a firm with 'substantial market power' which is likely to be able to charge supra-competitive prices later.
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the position overseas. In fact the threshold in Australia of a substantial degree of market
power is lower than in the U.S which is monoplization and in Europe which is dominance.
In relation to other overseas countries express below cost pricing prohibitions have been
mostly in response to specific issues in the retail sector and in the case of Canada the
airline industry and several countries have experienced difficulty in implementing a general
below-cost pricing prohibition even on an industry specific basis. These issues are
discussed in detail in section 6. The Trade Practices Committee believes that to the extent
that those same issues exist in the retail grocery industry in Australia those issues should
be dealt with specifically in an ACCC endorsed or mandatory Code by way of industry
policy. (These Codes are discussed further in section 5).
3.5.1
Possible approaches to the issue
Notwithstanding the concerns discussed above and the difficulties experienced overseas,
the Senate Committee may believe that it is necessary to have a general prohibition on
predatory pricing for firms without market power. One approach would be to provide that a
corporation shall not temporarily price below a specified measure of cost (for the purpose
of acquiring a substantial degree of market power) in order to charge supra-competitive
prices in the future.
There are several difficulties with such an approach. First there is no agreement amongst
economists either in Australia or in the United States of what is meant by average variable
costs. Second such a prohibition would capture all low cost pricing to the detriment of
consumers. In particular it will cover loss leading, seasonal sales, new entry/start up pricing
and expansion. For example it would cover Virgin Blue's recent entry. Third it is likely that
below cost pricing would be done for the specific purpose of taking market share away
from others. The consequence of such pricing from a more efficient new entrant might be
a shake out ie the elimination of a less efficient competitor. This type of below cost pricing
should not be prohibited.
Another approach would be to limit the prohibition to a firm with a market share above a
certain threshold (eg 15-20%) by saying that the firm has to show that it has a legitimate
business purpose whenever it engages in below cost pricing. The Trade Practices
Committee is opposed to this as market share is not a measure of market power. There
are examples both in Australia and overseas where because of very low barriers to entry or
high levels of import competition regulators and Courts have concluded that despite a high
market share a firm does not have market power. The solution is not to increase the
threshold above 20% to say 30 or 40% as the same problems would arise and arguably
some firms with a market share below 30% could have a substantial degree of market
power. (eg, Safeway where the Court found a substantial degree of market power in
circumstances where Safeway’s market share was 16% of the relevant market.
3.5.2
Trade Practices Committee approach for discussion purposes
The only reform that the Trade Practices Committee believes could be introduced to deal
with predatory pricing would be an additional prohibition which would

catch unilateral predatory pricing conduct by firms with financial power but not
market power (which arguably includes many firms in oligopolies);

has the proscribed purposes in s46; and
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
an anti-competitive effect36.
The essence of this approach is contained in the draft below. The draft is offered in order
to facilitate discussion of the issues, not as a final drafted position. This draft still has
definitional difficulties such as the reference to "financial power" and "average variable
cost". The additional prohibition could provide:
Section 46 (1AA)
A corporation with substantial financial power, or a substantial degree of power in a
market, shall not take advantage of that power by selling, offering to sell, or inviting
offers to purchase goods or services [below average variable cost] for the purpose
of:
(a) eliminating or substantially damaging a competitor of the corporation or of a
body corporate that is related to the corporation in that or any other market;
(b) preventing the entry of a person into that or any other market; or
(c) deterring or preventing a person from engaging in competitive conduct in that or
any other market.
Section 46(1AB)
Section 46(1AA) will not apply to a corporation with substantial financial power (but
not a substantial degree of power in a market) unless the relevant conduct is also
likely to have the effect of substantially lessening competition in any market.
The "carve out" in s46(1AB) would permit well resourced new entrants (eg Virgin Blue)
pricing low to enter a market, it would not inhibit innovation, it avoids more difficult concepts
of justification on the grounds of economic efficiency, and it avoids any transfer of the onus
of proof to the defendant.
The effects of this reform would be to:

confirm that predatory pricing by firms with market power contravenes s46 37;

catch unilateral predatory pricing conduct by firms with financial power but not
market power (which arguably includes many firms in oligopolies) which has the
proscribed purpose AND IS ALSO anti-competitive; but

retain the subjective purpose test for all conduct that may breach s46.
This proposal would mean that both s46(1) and s46(1AA) could to apply to firms with a
substantial degree of market power who engage in predatory pricing. It would be
preferable if this approach was to be followed that s46 be amended so that a firm that was
in breach of s46(1AA) could not also be in breach of s46.
Whilst the Trade Practices Committee has put this forward as a possible approach for
discussion, some Trade Practices Committee members are very concerned about its
ramifications. Those concerns are:
36
The Trade Practices Committee is not suggesting through this approach that an effects test should be introduced more
widely into s46. It remains opposed to that suggestion. Rather the Trade Practices Committee is seeking a mechanism in
this limited instance, to distinguish conduct which should not be caught by the new provision, and which does not shift the
onus onto the corporation engaging in the conduct. The Trade Practices Committee's concern is that a legitimate business
or economic efficiency test would shift the onus.
37
Although the Trade Practices Committee believes that the section already does this.
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
the vagueness of the term 'average variable cost'. At present there is nothing in s46
which would compel the High Court to adopt this concept38 as part of Australian law
whereas the alternative above specifically directs the Court to take that approach.
Several Federal Court and High Court judges have been very careful to preserve
flexibility for Australian law to develop independently from US law and not to be bound
by strict rules about costs.39
38
The presumption that pricing which is below a firm's average variable cost should be prima facie prohibited is sometimes
referred to as the Areeda & Turner brightline test. It developed in the United States in the context of section 2 Sherman Act
predatory pricing cases. Recently the US Courts have been moving away from the test as the only determining factor in
predatory pricing cases. For example, in the decision of the US Supreme Court in Brooke Group Ltd v Brown & Williamson
Tobacco Corporation 509 U.S. 209 (1993), Justice Kennedy in delivering the opinion of the court held that [9] [10] [11] said:
… Evidence of below-cost pricing is not alone sufficient to permit an inference of probable recoupment and injury
to competition. Determining whether recoupment of predatory loses is likely requires an estimate of the cost of
the alleged predation and a close analysis of both the scheme alleged by the plaintiff and the structure and
conditions of the relevant market … If market circumstances or deficiencies in proof would bar a reasonable jury
from finding that the scheme alleged would likely result in sustained supracompetitive pricing, the plaintiff’s case
has failed.
…
These pre-requisites to recovery are not easy to establish, but they are not artificial obstacles to recovery; rather,
they are essential components of real market injuries. As we have said in the Sherman Act context, ‘predatory
pricing schemes are rarely tried, and even more rarely successful’ … and the costs of an erroneous finding of
liability are high. ‘[T]he mechanism by which a firm engages in predatory pricing – lowering prices – is the same
mechanism by which a firm stimulates competition; because ‘cutting prices in order to increase business often is
the very essence of competition … [;] mistaken inferences … are especially costly, because they chill the very
conduct the antitrust laws are designed to protect’ ... It would be ironic indeed if the standards for predatory
pricing liability were so low that antitrust suits themselves became a chill for keeping prices high.
39
For example in Eastern Express Lockhart and Gummow JJ stated at p324:
… we would observe that the expression ‘predatory pricing’ is not a statutory expression in this country, nor, it
would appear, in the United States. Caution is required in translating United States judgments, which place
glosses upon the text of the United States antitrust laws, to the interpretation of the Australian law. Our law
evinces a somewhat different approach to legislative drafting.
and further at p326:
We mention this case further to emphasis that the concept of ‘predatory pricing’ appears in various contexts in the
United States decisions, not all of which have immediate analogues in the trade practices law of this country. It
would be, in our view, an error to translate into the operation of s46 the United States decisions dealing with
‘predatory pricing’ at the expense of an independent examination of the Australian legislation as it applies to each
case.
…
No pre-ordained and fixed categories as to the level of pricing or economic theory or practice of costing
necessarily controls the drawing of that inference in any particular case.
In the recent Boral decision, Gleeson CJ and Callinan J held at para [124]:
Section 46 does not refer specifically to predatory pricing, or recoupment, or selling below variable or avoidable
cost. These are concepts that may, or may not, be useful tools of analysis in a particular case where pricing
behaviour is alleged to contravene s46. Care needs to be exercised in their importation from different legislative
contexts. In the United States, for example, predatory pricing is often discussed in the context of monopolization,
or attempts to monopolize, in contravention of the Sherman Act 1890. In Europe, Art 86 of the Treaty of Rome
prohibits conduct which amounts to an abuse of a dominant position in a market. We are concerned with the
language of s46.
Gaudron, Gummow and Hayne JJ held at para [167]:
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
the concern that “avoidable costs” may be over inclusive with the potential to label as
anti-competitive behaviour that is perfectly legitimate.40

The concepts "average variable cost" and "avoidable cost" are not part of ordinary
accounting principles or reports in any Australian business. This means ordinary
business people have no familiarity with them and the relevant cost can only be
determined by undertaking detailed activity based costing models. The Boral business
was not a complex business, with simpler cost structures than other businesses.
However, in order to respond to allegations made by the ACCC that it was pricing
below average variable costs or avoidable costs, Boral spent 6 months of detailed work
by expert forensic accountants to produce a 2 volume report on the issues.
Reference has been made above to the importance of an analysis of the issues which has as its focus the
structure of s46. That structure perhaps represents different legislative drafting techniques to those which
produced the broadly cast United States antitrust provisions. It provides answers to questions posed, for the
United States, by Chief Judge Posner and Judge Easterbrook when they wrote in 1981 as Professors at the
University of Chicago. They asked whether ‘a purely cost-based standard of predatory pricing is desirable’ and
continued:
Specifically, should sales below marginal cost, or perhaps below average cost with exclusionary intent,
be unlawful per se? Or should thre be some threshold condition, relating to market share, or number of
markets in which the defendant operates, that the plaintiff must satisfy before the question of below-cost
selling is even reached? What conditions might these be? What are the arguments for such an
approach?
Finally McHugh J held at paras [268-273, 278]:
[268]
Dawson J did not explain it. All that he said was that market power may be evidenced by a firm’s
capacity to engage in ‘predatory pricing’. Is it pricing below some level of costs such as marginal cost or average
variable cost? If so, how does it fit into the terms of s46? How is ‘predatory pricing’ distinguished from ruthless
price-cutting that is the hallmark of the competitive market? …
[269]
As I have indicated, neither s46 nor any other provision of the Act defines or even uses the term
‘predatory pricing’….
[272]
Richard A Posner, a Judge and former Chief Judge of the United States Court of Appeals for the
Seventh Circuit, has said that there are two conventional approaches to the identification of ‘predatory pricing’,
one through intent and the other through costs, neither of which is adequate. To forbid pricing targeted at
weakening or destroying a competitor forbids too much. That is because even if a seller wants to remove a
competitor from the market, there is no rational antitrust objection to such conduct if the seller is able to undersell
by reason of its lower costs. But too little may be forbidden also because intent may be impossible to prove and
inadvertent below-cost pricing may be as damaging as intentional below-cost pricing. Posner defined ‘predatory
pricing’ as ‘pricing at a level calculated to exclude from the market an equally or more efficient competitor.
[273]
In my view, what is required is not a bright line rule about costs but a more sophisticated analysis of the
firm, its conduct, the firm’s competitors, and the structure of the market not only at the time in which the firm has
engaged in conduct allegedly in breach of the Act but also before and after that conduct ….
[278]
Courts in the United States and the United Kingdom Office of Fair Trading regard the concept of
recoupment as a fundamental element of a successful ‘predatory pricing’ claim. Sound economic reasoning
justifies the policy of the Office of Fair Trading and the United States jurisprudence. As Lockhart and Gummow JJ
warned in Eastern Express, however, care must be taken in translating the United States decisions on ‘predatory
pricing’ into s46 at the expense of an independent examination of the terms of the Act. Nevertheless, to require
recoupment as a necessary element of a 'predatory pricing' claim fits in with the terms of s46. Although s46 does
not use the term ‘predatory pricing’, two of its key components are ‘a substantial degree of [market] power’ and a
taking ‘advantage of that power’.
See Section 6.2(f) for a discussion of the use of “avoidable costs” in the aviation industry as part of the Canadian
competition law and concerns that that term is over-inclusive.
40
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
The average variable cost test, as developed in the United States, is not capable of
fully taking account of the myriad alternative business strategies such as closure,
partial closure and product specialisation/diversification and alternative treatment of
common costs.

There is a risk that a Court might include a shakeout (ie the elimination of a less
efficient competitor as a result of efficient new entry) in the effects exclusion.

Standard economic textbooks would regard the theory behind such a proposal as
controversial.41
3.6
Section 46 investigations by the ACCC – timing and efficiency
There have been submissions to the Dawson Committee and other inquiries that the
administration of s46 matters is slow and expensive. 42
For example, Boral was first investigated by the ACCC in 1995. Proceedings were issued
by the ACCC in the Federal Court in 1998 – with the trial of the matter heard and resolved
in 1999. Subsequent appeals were heard in 2001 and 2002, with the High Court's final
decision handed down in February 2003.
In the Trade Practices Committee's view, the most significant delay in that process was the
2 or 3 years taken in the investigative stages.43 Once proceedings were issued, the
Federal Court managed the matter reasonably quickly to trial and judgment (inside 18
months – speedy progress for a complex case in what was then, an unsettled area of law).
Of course, subsequent appeals consumed considerable time, but an extended appellate
process may be much less likely in future cases.
Other matters reflect similarly long periods of investigation by the ACCC – eg Safeway, and
Rural Press.44
In the Trade Practices Committee's view, considerable improvements might be made to the
speed with which the ACCC investigates and brings proceedings in these sorts of matters.
This may be a matter of further resourcing required at the ACCC, or an alternative
organisational approach being adopted. The Trade Practices Committee submits that
some inquiry be directed into the way in which s46 investigations are handled by the
ACCC, with a view to encouraging speedier outcomes.
41
See F M Scherer, Industrial markets Structure and Economic performance, 2nd edition, 1980 pp 214-15; and 335-6; and
Jean Tirole, The Theory of Industrial Organization, 1988, MIT Press, pp 377-80.
42
Council of Small Business Organisations in Australia Ltd, Submissions to the Trade Practices Act Review Dawson
Committee, July 2002 at p 8; Submissions by the Fair Trading Coalition (A Coalition of Small Business for Trade Practices
Act Reform) to the Review of the Trade Practices Act, July 2002 at 32; Submission by the Fair Trading Coalition (A Coalition
of Small Business for Trade Practices Act Reform) to the Senate Economics References Committee Inquiry into the
Effectiveness of the Trade Practices Act 1974 in Protecting Small Business, August 2003 at pp 3.
43
During that process, the ACCC required the production of large amounts of documents and information from Boral within
reasonably short time frames.
44
ACCC v Rural Press Limited [2002] FCAFC 213 (Rural Press).
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3.7
Prohibition on any form of price discrimination
"Price discrimination" is simply the charging of one price to one customer or supplier, and
the charging of another price to another. In some limited cases, this may be anticompetitive, but it is much more commonly pro-competitive conduct.
NARGA,45 the Council of Small Business Organisations of Australia46 and the Master
Grocers Association of Victoria47 have each argued that the Act should be amended to
prohibit anti-competitive forms of price discrimination. They argue that this amendment is
necessary because when customers buy products from the same firm at unexplained price
differences, the level of competition between them is distorted, as one would have a price
advantage over the other.
The Act previously contained a specific provision which prohibited price discrimination in
s49. It relevantly provided:
49. (1) A corporation shall not, in trade or commerce, discriminate between
purchasers of goods of like grade and quality in relation to:
(a)
the prices charged for the goods;
(b)
any discounts, allowances, rebates or credits given or allowed in relation to
the supply of the goods;
(c)
the provision of services in respect of the goods; or
(d)
the making of payments for services provided in respect of the goods;
if the discrimination is of such magnitude or is of such a recurring or systematic
character that it has or is likely to have the effect of substantially lessening
competition in a market for goods, being a market in which the corporation
supplies, or those persons supply, goods.
Section 49 was repealed in 1995 as a result of the Hilmer inquiry which concluded:
The Committee considers that price discrimination generally enhances economic
efficiency, except in cases which may be dealt with by s45 (anti-competitive
agreements) or s46 (misuse of market power). To the extent that s49 has had any
effect it seems to have been to diminish price competition. The Committee does
not consider that competition policy should be distorted to provide special
protection to any interest group, including small business, particularly where this is
potentially to the detriment of the welfare of the community as a whole. Sectoral
assistance policy of this sort is generally most efficiently implemented by more
open and direct assistance, including budgetary and taxation measures of various
kinds. In any event, it seems clear that small businesses have not achieved any
significant benefit from the presence of s49. 48
45
Dawson Committee Trade Practices Act Review, Submission by the National Association of Retail Grocers of Australia,
July 2002 at pp 32-64; Dawson Committee Trade Practices Act Review, Supplementary Submission No. 1 by the National
Association of Retail Grocers of Australia, October 2002 at pp 2-18.
46
Council of Small Business Organisations in Australia Ltd, Submissions to the Trade Practices Act Review Dawson
Committee, July 2002 at pp 5-6.
47
Dawson Committee Trade Practices Act Review, Master Grocers Association of Victoria Limited at pp 5.
48
"National Competition Policy", Report by the Independent Committee of Inquiry, August 1993 at pp 79-80.
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The Trade Practices Committee considers that in most cases, differences in price properly
reflect pro-competitive factors such as:

volumes of product purchased (sometimes related to attendant savings in per unit
costs);

terms of trade (credit worthiness etc);and

willingness to pay, and the higher or lower "value in use" which products may have
to different users.
Even the largest firms in Australia should be free to discriminate in their pricing for these
sorts of reasons.
Moreover, as foreshadowed by the Hilmer Committee, s46 applies to certain types of price
discrimination, where it amounts to a misuse of market power. The Queensland Wire
case49 in 1989 is an example of a case in which, on one view, s46 prohibited anticompetitive price discrimination behaviour. In that case, BHP proposed to charge QWI a
very high price for "Y-bar" (the necessary raw material for making steel fence posts), so
that QWI could not compete with the BHP subsidiary which was already selling steel fence
posts in Australia. The higher "price" which BHP charged QWI had a clearly anticompetitive purpose (and effect) and was duly prohibited.
Moreover, one of the matters to which the Court may have regard, in considering whether
conduct is unconscionable within the meaning of s51AC, is the amount for which, and the
circumstances in which, the small business supplier could have supplied identical or
equivalent goods or services to a person other than the acquirer. 50
If large firms in Australian industries were prohibited, or deterred, from adjusting their
pricing in accordance with such factors, it is highly likely that prices, on average, would
rise, and that there would be greater coordination of prices among those firms over time.
This would be clearly to the detriment of Australian consumers.
For these reasons, price discrimination should not be prohibited, other than to the extent
that it is already regulated by s46. If there are special concerns about price discrimination
in the retail grocery industry these concerns could be addressed through use of an
effective retail grocery code.
3.8
Refusals to deal
The Trade Practices Committee is also aware of concerns, particularly in the retail grocery
sector, that the Act needs to be amended to prohibit refusals to deal (or constructive
refusals to deal) on the basis that the outcome of the High Court decision in Melway v
Robert Hicks (2001) 178 ALR 253 (Melway) was unsatisfactory.51
There are now two cases in which refusals to deal by firms with "substantial market power"
have been successfully prosecuted – Queensland Wire (a refusal to supply Y-bar, other
49
Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177.
50
s51AC(4)(e).
51
Although the Trade Practices Committee notes that none of the submissions lodged with the Senate Committee to date
expressly raise this issue.
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than at uncompetitive prices) and Safeway (refusals to acquire bread, due to the supplier's
product being sold more cheaply elsewhere).
That a third "refusal to deal" case brought under s46 was unsuccessful illustrates just why
an outright prohibition of refusals to deal would be dangerous.
In the Melway case, the Court found that Melway had established an efficient distribution
system for its street directories very early on in its history. As Melway's market share had
grown and its products had prospered it persisted with this distribution system. Finally,
when it had been so successful that it had acquired a position of substantial market power,
a would-be distributor was refused supply in preference for Melway's existing distribution
network.
The High Court properly found that Melway had an efficient and effective distribution
network and that its refusal to deal with another firm was simply a commercial decision it
would have made, whether or not Melway had substantial market power. Therefore, the
Court found, Melway had not "misused" its market power.
The example serves to illustrate that there are circumstances in which refusing to deal with
a customer or supplier can be efficient and pro-competitive.
There are, of course, much more common reasons for refusing to deal with another firm,
such as:

creditworthiness;

reputation and service levels of that firm;

reliability of supply; and

better prices and terms from other suppliers, or higher prices offered by other
customers.
The freedom of businesses, large and small, to pick and choose those with whom they deal
is at the heart of the competitive process.
For these reasons, refusals to deal should not be prohibited, other than to the extent that
they are already regulated by s46.
3.9
Introducing an "effects" test
The Fair Trading Coalition,52 the Independent Liquor Group53 and the Liquor Stores
Association of Victoria54 have suggested that an "effects test" should be introduced into
s46.
The Trade Practices Committee's submissions to the Dawson Committee addressed this
issue, concluding that no change to the test should be made as:
52
Submission by the Fair Trading Coalition (A Coalition of Small Business for Trade Practices Act Reform) to the Senate
Economics References Committee Inquiry into the Effectiveness of the Trade Practices Act 1974 in Protecting Small
Business, August 2003 at pp 14-16.
53
Senate Economic Reference Committee Inquiry into the Effectiveness of the Trade Practices Act 1974 in Protecting Small
Business, Submissions on behalf of the Independent Liquor Group, August 2003 at p 6.
54
Inquiry into the Effectiveness of the Trade Practices Act 1974 in Protecting Small Business, Submissions by the Liquor
Stores Association of Victoria Inc, 15 August 2003 at p 5.
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•
a change to an "effects" test would create uncertainty and may deter businesses
from competing as vigorously;
•
settled law in relation to the construction and application of s46 is just emerging;
and
•
emerging case law is satisfactory from a policy perspective.
The Dawson Committee considered the issue of an effects test in great detail before
concluding:
Normal competitive behaviour by a firm with substantial market power which
injured a competitor would be likely to satisfy an effects test. … The introduction of
an effects test would be likely to extend the application of s46 to legitimate
business conduct and discourage competition. 55
[I]t would not be in the interests of competition or consumers to change s46, given
that the cases currently before the courts offer a real prospect of developing a
better understanding of the true scope of s46. 56
4.
Proposed amendments to Part IVA of the Act
4.1
Part IVA: Extensive protection from unconscionable conduct
The Trade Practices Committee understands that the principal concerns of small business
with respect to the operation of Part IVA of the Act are that these provisions are not
working in practice, and more specifically, that the list of factors for consideration under
s51AC should be supplemented to include:
•
unfair contractual terms;
•
terms that give the stronger party the power to unilaterally vary the contract, and
•
any other matters that the Court wants to take into account.
The Trade Practices Committee believes that Part IVA of the Act already provides
adequate protection for small businesses. 57 Importantly, s 51AC was recently enacted to
protect small businesses from unconscionable conduct. In the Trade Practices
Committee's view, it would be inappropriate to enact any further amendments to Part IVA
before s51AC has been given an adequate opportunity to address these concerns. In this
respect the Trade Practices Committee notes that the ACCC presently has 10 cases under
s51AC before the Courts.
55
at p 81.
56
at p 84.
57
The Trade Practices Committee's previous submissions to the Dawson Committee on proposed amendments to s51AC of
the Act are set out in Annexure F.
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Trade Practices Committee of the Law Council of Australia
(a)
Section 51AC: Aiming to protect small business
Part IVA of the Act contains three principal sections (51AA, 51AB and 51AC) which prohibit
unconscionable conduct.
Section 51AC of the Act was introduced as a direct result of the Reid Report into small
business.58 As stated in its Second Reading Speech, the purpose of s51AC is
to better protect the legal rights of small businesses, to ensure that small business
can confidently deal with large firms in the knowledge that the rules under which
they are operating are fair, and that there will be proper redress available when
those rules are broken. 59
The Trade Practices Committee sees no justification for further amendment to Part IVA
and/or s51AC in the absence of evidence that these sections fail to protect small business
from unconscionable conduct.
(b)
Section 51AC: Broad coverage and powerful remedies
The Committee believes that s51AC, which was designed for small business protection,
provides robust and extensive coverage against unconscionable conduct.
Annexure C sets out the full text of s51AC. Section 51AC prohibits unconscionable
conduct in connection with the supply or acquisition of goods or services in transactions of
not more than $3,000,000. Under s51AC, a court may take into account an expansive list
of factors in determining whether a business has engaged in unconscionable conduct.
Importantly, according to current judicial interpretation, this expansive list of factors means
that s51AC offers broader protection than the common law, equity or s51AA. 60 As recently
as two weeks ago, the full Federal Court held that the term 'unconscionable' in s51AC
should be given a wide meaning, and was not limited to the meaning of the word at
common law or at equity.61
If a small business suffers loss as a result of unconscionable conduct that breaches
s51AC, it may seek a variety of court orders under ss80, 82 and 87 of the Act, including the
award of damages and/or injunctive relief.
4.2
Successful results for small business under Part IVA
(a)
Early signs are all positive
The short history of litigation under s51AC indicates that it is and will be an effective tool in
providing extensive protection for small business against unconscionable conduct. In
seven separate cases, the ACCC has successfully gained court orders declaring that large
businesses have engaged in unconscionable conduct in their dealings with small
businesses. These cases are summarised in Annexure D. In these cases, breaches of
Finding a Balance — Towards Fair Trading in Australia, Report by the House of Representatives Standing Committee on
Industry, Science and Technology, May 1997.
58
59
Minister for Workplace Relations and Small Business, Trade Practices Amendment (Fair Trading) Bill 1997, Second
Reading Speech, House of Representatives, 30 September 1997.
60
ACCC v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365, [31] (Sundberg J); ACCC v 4WD Systems Pty Ltd
[2003] FCA 850 (4WD); Kranz & Anor v National Australia Bank [2003] VSCA 92.
61
ACCC v 4WD Systems Pty Ltd [2003] FCA 850. See also Kranz & Anor v National Australia Bank [2003] VSCA 92.
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s51AC have resulted in the award of compensation, injunctions and court-enforceable
undertakings. Additionally, in the recent case of Automasters Australia Pty Ltd v Bruness
Pty Ltd,62 a franchisor was found to be in breach of s51AC of the Act and was ordered to
pay damages to its franchisee.
Additionally, while the High Court has not yet decided a case under s51AC, a Federal
Court judge and a West Australian Supreme Court judge have stated that s51AC is a broad
prohibition which is not limited by narrower common law interpretations of
“unconscionability”.63 Further, the ACCC and several prominent legal commentators have
also stated that s51AC offers far-reaching and effective protection for small business.64
The term “unconscionability” is used in the law in different contexts and with different
meanings. At law, and therefore for the narrow purposes of s51AA, unconscionability has
a specific meaning for the rarer cases in which a special disadvantage is involved. 65
Similarly at law, for the purposes of economic duress the term “unconscionability” has a
different meaning.66 Neither of these meanings or the cases on s51AA or economic duress
applies to the meaning of unconscionability in s51AC. As discussed earlier, the early
s51AC cases show that the judges intend to give “unconscionability” a wider meaning for
the purposes of s51AC. The Trade Practices Committee believes that the use of the term
unconscionability in different contexts may be giving rise to some confusion in the small
business sector. However, the Trade Practices Committee does not believe there is any
such confusion in the cases which have been decided to date about the breadth of the term
for the purposes of s51AC.
(b)
Precedent takes time to develop
The Trade Practices Committee is aware that, while precedent is slowly developing under
s51AC, there has not yet been a definitive High Court decision on the section. However,
in the Trade Practices Committee’s opinion, the lack of a High Court decision does not
provide a justification for amending Part IVA of the Act at this stage. Rather, development
of precedent under s51AC will necessarily take some time. As a guide, the development of
precedent under other broad proscriptions in the Act, including ss51AA and 52, suggests
that a long time can pass before new legislation is tested by the High Court. 67
62
[2002] WASC 286 (Hasluck J).
63
ACCC v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365, [31] (Sundberg J); Automasters Australia Pty Ltd v
Bruness Pty Ltd [2002] WASC 286, [361] (Hasluck J).
Professor Allan Fels, “The ACCC and Small Business”, 25 February 1999; John Martin, “Commercial Unconscionability &
The Trade Practices Act”, 15 November 2001; ACCC, Small Business and the Trade Practices Act: A Practical Guide for
Australian Small Business (2002); David D Knoll, “Protection against Unconscionable Business Conduct — Some Possible
Applications for s 51AC of the Trade Practices Act 1974” (1999) 7 Competition and Consumer Law Journal 54; W D Duncan
and S Christensen, “Section 51AC of the Trade Practices Act 1974: An ‘Exocet’ in Retail Leasing” (1999) 27 Australian
Business Law Review 280.
64
65
ACCC v CG Berbatis Holdings Pty Ltd [2003] HCA 18 (Berbatis).
66
Parras Holdings Pty Limited v Commonwealth Bank of Australia [1999] FCA 391.
67
For example, section 51AA, which was introduced in 1992, did not receive High Court consideration until a decade later in
Berbatis. Moreover, in Berbatis, a majority of the High Court left open the question of whether section 51AA extends
beyond the recognised equitable doctrine of unconscionable conduct: Berbatis [2003] HCA 18, [45]-[46] (Gummow and
Hayne JJ), [186] (Callinan J). But see Kirby J at [77] who held that section 51AA “goes further” than the decided cases and
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The Trade Practices Committee is confident that positive precedent will continue to
develop as new cases are determined under s51AC. Already, successful litigation by the
ACCC has demonstrated that s51AC is effective in protecting small businesses from
unconscionable conduct.
(c)
Other steps
Apart from actions in the courts, the provisions have already had a substantial impact on the
way that companies train their staff and respond to small business complaints. Most large
companies have a significant component in their Trade Practices Act compliance activity
addressing the impact of the Part IVA provisions on the way the organisations conduct their
business. A typical example of the training provisions is set out in the Commission's own
compliance training product (see http://www.accc.gov.au/fs_compliance.html). A number of
members of the Trade Practices Committee have been involved in developing such
programs and advising on the impact of the provisions.
(d)
ACCC Resourcing
When s51AC was introduced the Government provided the ACCC with $480,000 specific
funding per annum for case costs for each of the 4 financial years 1988-99; 1999-00;
2000-01; and 2001-02 in order to bring test cases on s51AC. The ACCC was also directed
to report quarterly to the Minister on action taken by the ACCC in relation to ss51AC and
51AD. That specific funding expired after 2001-02.
If the ACCC needs more resources by way of specific funding to continue to bring a
sufficient number of cases under s51AC in order to clarify its scope, then the Trade
Practices Committee would support a Senate Committee recommendation that the specific
funding program first introduced in 1998 be reintroduced in order to provide additional
funds for such prosecution.
4.3
An uncertain, inefficient and unwarranted extension
The Trade Practices Committee also has the following general concerns with respect to an
expansion of the operation of Part IVA of the Act at this time.
(a)
The risk of contractual uncertainty
The economic welfare of Australians depends on the healthy operation of competitive
domestic and international markets. Underlying the operation of these competitive markets
is the right of individuals to make informed commercial decisions by entering into contracts
of their choice. Laws which restrict market participants’ freedom to contract also restrict
the operation of the competitive market itself. The Trade Practices Committee believes
that any extension of Part IVA of the Act would undermine the freedom to negotiate and
contract in ordinary commercial dealings with small businesses.
(b)
Undermining competition
The Trade Practices Committee believes that any extension of Part IVA would counteract
the general principles of market competition and efficiency protected under Part IV of the
Act. Currently, Part IV offers remedies to small businesses who have suffered detriment as
a result of various types of anti-competitive conduct, including big business’ misuse of
Gleeson CJ, who, at [5]-[7], appeared to confine the prohibition in section 51AA to the principle of unconscionability
recognised in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447.
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market power. However, Part IV does not, and should not, protect inefficient small
businesses from market competition. Similarly, Part IVA should not protect inefficient small
businesses from healthy market competition. The aim of Part IVA is to promote fair dealing
within an efficient, competitive market.
(c)
Disincentives to deal with small business
There is a real risk that any further amendment to the Act would create an economic
disincentive to deal with small business. Any extension of Part IVA may discourage large
firms from dealing with small businesses for the fear that their contracts or conduct may be
in breach of the new provisions. Alternatively large firms may seek a premium from small
businesses to cover this risk.
4.4
Additional protection for small business
While the Trade Practices Committee considers that Part IVA of the Act adequately
protects small business against unconscionable conduct, it notes that small business
receives additional protection from state legislation and industry codes. Annexure E
outlines some of the state legislation and industry codes protecting small business.
Importantly, small business retailers and franchisees are protected from unconscionable
conduct under state retail tenancy legislation and the national Franchising Code of Conduct
respectively. In addition, Victorian small businesses are protected by an extensive
legislative regime which includes the Fair Trading Act 1999 (Vic) and the Small Business
Commissioner Act 2003 (Vic).
The Trade Practices Committee believes that amendments to Part IVA of the Act would
ignore the significant developments in state legislation and industry codes which have
enhanced the protection of small businesses against unconscionable conduct in specific
contexts and in specific industries.
4.5
Should s51AC be expanded to expressly refer to "unfairness"?
The Pharmacy Guild has submitted that the word "unconscionable" in s51AC should be
replaced with the word "unfair" in line with the Reid Report. 68 Further, NARGA has
submitted that the scope of s51AC should be broadened so that it applies to any conduct in
trade or commerce, rather than just small business transactions.69 NARGA argues that this
amendment would bring s51AC into line with s52, and ensure that it caught all
unconscionable conduct.
The Trade Practices Committee does not believe that any expansion of s51AC is
necessary at this stage. The Federal Court has recognised that s51AC is broader than
s51AA. In the recent 4WD case Selway J considered the High Court decision in Berbatis
and stated that:
French J sitting at first instance in Australian Competition and Consumer
Commission v CG Berbatis Holdings Pty Ltd [2000] FCA 1376 suggested that
s51AC was of a wider ambit than s 51AA in that it was not limited to equitable or
68
The Pharmacy Guild of Australia Submission to the Review of the Trade Practices Act, July 2002 at pp 12-16.
69
Dawson Committee Trade Practices Act Review, Supplementary Submission No. 2 by the National Association of Retail
Grocers of Australia, October 2002 at pp 17-18.
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common law notions of unconscionability. Section 51AC did not arise in that case
and his Honour's comment was not considered in the subsequent appeal to the
Full Court or by the High Court in Berbatis. But on the face of it, it would seem that
French J must be correct - the word `unconscionable' in s 51AC of the TPA bears
its ordinary or dictionary meaning. Sundberg J in Australian Competition and
Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR
253 (`Simply No-Knead') concluded (at [37]) that: `[w]hether conduct is
unconscionable for the purpose of s 51AC is at large.' In that case his Honour
concluded (at [51]) that the evidence disclosed `an overwhelming case of
unreasonable, unfair, bullying and thuggish behaviour in relation to each franchisee
that amounts to unconscionable conduct...' In my view the comment by French J
and the decision of Sundberg J are plainly correct. The word `unconscionable' in s
51AC of the TPA is not limited to the meaning of the word at common law or at
equity.70
Further, in Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd, Finkelstein J
specifically referenced the concept of unconscionability in s51AC to the concept of
unfairness, and held:
I take as the measure of unconscionability, conduct that might be described as
unfair.71
Accordingly, although s51AC is a relatively new provision, in the Trade Practices
Committee's view, this early judicial interpretation indicates that the section will be
interpreted broadly, and no expansion of its terms is necessary.
Further, as there are currently 10 cases before the Courts, the Trade Practices Committee
considers that it is too early for legislative amendment. If in the future, as the 10 cases
move through the Courts, it becomes apparent that s51AC is being interpreted narrowly,
the Trade Practices Committee believes it may be appropriate to revisit this issue at that
time.
Moreover, the Trade Practices Committee queries whether this amendment would
potentially move the arena of inquiry from the negotiation process, which is where s51AC
largely focuses its attention, to the terms of the contract itself. The fact that some firms
emerge from negotiations in a better position than others does not necessarily evidence
conduct that needs to be governed by the Act, especially in the absence of any conduct at
the "negotiations" stage, which would fall within the scope of the current prohibition on
"unconscionable" conduct. All firms value individual terms differently and will be prepared
to “trade” terms for other protection they value more highly.
4.6
Prohibition of unfair terms
A number of small business organisations have also proposed that s51AC should proscribe
as per se offences:
(a)
unilateral variation of contract;
(b)
"take it or leave it" or "standard form" contracts;
70
ACCC v 4WD Systems Pty Ltd [2003] FCA 850 at [183].
71
(1999) ATPR 41-704 at 43,016.
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(c)
terminating contracts without just cause or due process; or
(d)
introducing policies, after entering into a contract, which bind the other party to that
contract.
These amendments have been supported by parties including the Fair Trading Coalition
(FT Coalition),72 the Council of Small Business Organisations of Australia, 73 the Pharmacy
Guild74 and the Australian Service Station and Convenience Store Association. 75 These
organisations argue that a per se prohibition is necessary in relation to these specific forms
of conduct because there is no clear statement in the law as to what constitutes
"unconscionable conduct". Moreover, they argue that measures are needed to curb these
"unacceptable" behaviours, which are the "root causes" of unconscionable conduct.
Ultimately, these organisations appear to be arguing that s51AC sets too high a threshold,
and that tying its operation to specific forms of conduct would make the provision more
accessible.
First, as discussed above, the Trade Practices Committee does not agree that the meaning
of “unconscionability” for the purposes of s51AC is not capable of clear and precise
meaning. Second, the Trade Practices Committee is concerned that the introduction of
these per se prohibitions, and in particular, the proposed prohibition of standard form
contracts, would significantly increase transaction costs. The impact of these additional
costs would be particularly significant in relation to consumer and small business
transactions where the size of the transaction itself is small. Indeed, standard form
contracts are one of the only practical ways to contract efficiently with thousands of
customers. Moreover, while the conduct highlighted by various small business
organisations may, in practice, breach s51AC, amending the Act to prohibit these specific
forms of conduct would be likely to lead to inefficiency and avoidance.
The Trade Practices Committee notes that some small business lobby groups made
submissions to this effect to the Dawson Inquiry. The Dawson Committee referred the
concerns of two of the largest groups, the FT Coalition and Australian Consumers
Association (ACA), to the Trade Practices Committee. In response, the Trade Practices
Committee made a supplementary submission to the Dawson Inquiry, entitled
“Unconscionable Conduct and Unfair Terms” (October 2002). This supplementary
submission is reproduced in Annexure F.
72
Submissions by the Fair Trading Coalition (A Coalition of Small Business for Trade Practices Act Reform) to the Review
of the Trade Practices Act, July 2002 at pp 42-44.
73
Council of Small Business Organisations in Australia Ltd, Submissions to the Trade Practices Act Review Dawson
Committee, July 2002 at p 17.
74
The Pharmacy Guild of Australia, Submissions to the Review of the Trade Practices Act, July 2002 at p 3, 20. The
Pharmacy Guild supported the recommendation of the Fair Trading Coalition.
75
Submission by the Australian Service Station and Convenience Store Association to the Review of the Trade Practices
Act, 15 July 2002 at p 6, 10. The Australian Service Station and Convenience Store Association supported the
recommendation of the Fair Trading Coalition.
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4.7
Introducing a new Unfair Contracts part to TPA similar to the UK
The ACA has submitted that the Act should be amended to include a new Unfair Contracts
Division along the lines of the UK Unfair Contracts Regulations. 76 The ACA argues that
unfair contracts do not enhance the welfare of the smaller party, and that specific
prohibition is necessary. However, the Trade Practices Committee is concerned that the
definition of "unfair terms" in the UK Regulations is unclear, and does not, at this stage,
consider that any additional protection is necessary, especially in light of early judicial
interpretation which equates unconscionability for the purposes of s51AC with unfairness.
Again, this issue was addressed in some detail in the Committee's supplementary Dawson
Committee submission reproduced in Annexure F.
5.
Proposed amendments to Part IVB of the Act
Paragraph 1(c) of the Senate Committee Terms of Reference asks whether Part IVB of the
Act operates effectively to promote better standards of business conduct, and, if not, what
further use could be made of Part IVB in raising the standards of business conduct
through industry codes of conduct.
5.1
Universal Application of the Act
The Trade Practices Committee has always argued for the universal application of the Act.
Legislating for a particular industry or section of industry, whether through codes of conduct
or otherwise, defeats this principle. The point made by the Dawson Committee in relation
to Part IV conduct is equally applicable in respect of industry codes of conduct which might
be mandated under Part IVB:
The competition provisions should apply generally and consistently to business
conduct without regard to the nature of the industry in which the conduct occurs.
Efficiency, and consequently welfare, may suffer if the regulation of competition is
not uniform. Differing regulatory treatment of different sectors of the economy will
provide differing incentives for investment and effort by discouraging participation
in particular sectors and will detract from the ability of markets to allocate
resources in an efficient manner. Productivity, growth and welfare may then all
suffer.77
As is reiterated below, the imposition of mandatory codes of conduct results in greater cost
and complexity for suppliers in the industry sectors which are the subject of the codes. The
more difficult and costly it is to deal with other downstream participants in a particular
industry, the less likely it is that the suppliers in that industry will be prepared to deal with
as broad a spectrum of potential participants downstream as they would otherwise. The
effect will be that entry to the market will become tighter. This may well disadvantage small
business in as much as suppliers in an industry subject to a code may well find dealing with
the larger players in a market as being less problematic and less costly than dealing with
76
Submissions on the Review of the Competition Provisions of the Trade Practices Act 1974, Australian Consumers
Association, July 2002 at pp 38-40.
77
At p36.
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the smaller players. Thus, the direct result of the imposition of a mandatory code may well
be disadvantageous to small business and, perhaps, anti-competitive in the long run.
5.2
Consequences of a Mandatory Code
Having said that the Trade Practices Committee believes that it is not generally realised
just how extensive are the consequences of a code being made mandatory under Part IVB.
A contravention of a mandatory code does not involve a criminal offence, but it does
potentially activate all the other very extensive remedies available in private actions under
the Act. These include damages under s82 (in circumstances where no damages would
be available at common law), orders under s87 (which can include what effectively amount
to orders for rescission of contracts in circumstances where rescission would almost
certainly not be available under the general law), and under the power to make "nonpunitive" orders now available under s86C, even community service and probation orders.
These consequences are potentially dramatic indeed and the Trade Practices Committee
believes that a very strong case would have to be made before what amounted to a sector
specific regime of regulation should be adopted under Part IVB. There is a very strong
argument that if problems in a particular industry are so great that there is a need for
specific rules over and above those general rules on commercial conduct applicable to all
under the Act (or the corresponding provisions of the ASIC Act), then legislation rather than
what amounts to the exercising of an extensive regulation making power would be the
appropriate route. In this context, it is interesting to note that legislation very recently
enacted by the NSW Parliament (Fair Trading Amendment Act 2003) repealed the
provisions of the Fair Trading Act 1987 relating to mandatory codes of conduct. This
follows the National Competition Policy Review of the Fair Trading Act 1987 and the Door
to Door Sales Act 1967 (Final Report 2002) in which it was concluded that a convincing
case had not been made that, as a matter of regulatory policy and practice, mandatory
codes justified their anti-competitive effect78.
The Trade Practices Committee sees no justification for further amendment to Part IVB of
the Act at this stage, and does not now wish to enter into debate as to whether it is
appropriate that a mechanism for prescribing mandatory codes of conduct should be a part
of the Act. Rather, the Trade Practices Committee’s point is that the fact that little use of
this mechanism has been made under the Act (and similar provisions in the State and
Territory Fair Trading Acts) suggests that no pressing need has been felt for adding to the
only mandatory code (the Franchising Code of Conduct) to have been prescribed since
Part IVB was added to the Act in 1998. In making these comments, the Trade Practices
Committee is aware of the procedures intended to be followed to scrutinise any proposed
regulations under Part IVB (see Prescribed Codes of Conduct - Policy Guidelines on
making industry codes of conduct enforceable under the Trade Practices Act, May 1999).
If there are any specific proposals being considered to prescribe further Part IVB
mandatory codes of conduct, the Trade Practices Committee would of course be happy to
comment on these once it receives the necessary information.
78
See pages 40-45.
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In making these comments, the Trade Practices Committee has not considered the
provisions in Part IVB (so far not exercised at all) for the prescription of so-called
"voluntary" industry codes, except to the extent that the ACCC proposes to “endorse”
particular Codes. Again, if any specific proposal is before the Senate Committee, the
Trade Practices Committee we would be happy to comment on receiving details.
5.3
ACCC Endorsed Codes of Conduct
The Trade Practices Committee believes that the ACCC's announcement that it will
endorse high standard voluntary codes of conduct will provide an appropriate mechanism
to address the concerns of small business. In a speech on 11 August 2003, the ACCC
Chairman, Graeme Samuel, announced this initiative as a "half way measure between
industry self regulation and mandatory government regulation" to achieve increased
compliance and reduced regulatory costs.79
Mr Samuel has subsequently confirmed that through endorsing industry codes, the ACCC
was raising the bar, rather than lowering it, stating that:
Business wanting to implement codes must build on the requirements enshrined in
the act, which will continue to be enforced vigorously.80
Mr Samuel also confirmed that ACCC endorsement would only be given if it enhanced and
ensured that competition and consumer welfare was to the fore, and if the codes included
strong industry enforcement mechanisms.
The Trade Practices Committee supports the perspective taken by the ACCC, that
endorsement of industry codes, which would be in effect a form of co-regulation, would
provide a viable alternative to industry self regulation on the one hand and government
regulation which was viewed by business as "heavy-handed, inflexible and bureaucratic"
on the other. This alternative should, at the very least, be given the opportunity to work
before more extensive government regulation is considered.
6.
Approaches adopted by other OECD countries
6.1
Introduction
Paragraph (d) of the Terms of Reference for the Senate Committee’s inquiry invite the
Senate Committee to consider how other OECD countries have dealt with these issues.
Where those countries have introduced specific reforms, the Senate Committee then
needs to consider whether it is appropriate for similar reforms to be introduced in Australia.
There are several OECD jurisdictions, particularly in Europe, that have competition laws
which afford special protection for small businesses. These laws fall into two major
categories:
(a)
prohibitions on selling below cost; and
(b)
prohibitions on the abuse of “economic dependence”.
79
Graeme Samuel, "The Big Issues and the Big Ideas", Speech to the Australian Industry Group National Industry Forum,
Parliament House, Canberra, 11 August 2003.
80
Graeme Samuel, “ACCC Plan will Raise the Standard”, Australian Financial Review, 14 August 2003, p63.
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In this section we discuss the following laws in other OECD countries:

below cost selling in Germany, France, Ireland, Italy, Spain, the United Kingdom and
Canada; and

abuse of economic dependence in Europe and Canada.
These special protections appear to spring from particular cultural approaches to
“protecting” small retailers and suppliers, notwithstanding the clear social costs and
inefficiencies that result.
A general observation is that the issue of how much competition law protection small
businesses require, if they require special protection at all, depends on the particular
circumstances in the jurisdiction in question. Caution must be taken where conclusions are
to be drawn from legislation protecting small businesses in foreign jurisdictions.
Further, European law arises out of the Treaty of Rome, which has as its primary focus the
establishment of a common market, and the removal of barriers to the free movement of
goods, rather than the promotion of competition. Accordingly, discounting by dominant
firms has been deemed an abuse of dominance because it led to the partitioning of
national markets, in situations where the conduct would not lessen competition.
The special protections for small business described below have attracted criticism,
including from regulators and regulatory review bodies within countries which have adopted
them. It is argued by those bodies that these protections are not necessary in light of the
general competition law prohibitions that already apply in these jurisdictions. They are also
not consistent with the underlying goals and objectives of competition law. The Trade
Practices Committee agrees with the observation that, to the extent that these prohibitions
are motivated by a desire to protect competitors, they run against the grain of current
trends in antitrust enforcement and have no established theoretical basis to stand. 81
The Trade Practices Committee also notes that in most of the jurisdictions discussed
below, the prohibition was designed to deal with concerns in relation to the retail grocery
sector and in Canada the airline industry. The Trade Practices Committee repeats its view
that if those concerns are also present in Australia, the ACCC endorsed Code which is
available under Part IVB of the Act would be the appropriate mechanism to deal with these
issues relating specifically to one industry, rather than through general amendments to the
Act which would have widespread ramifications.
6.2
Below Cost Selling
(a)
Germany
In Germany the Act Against Restraints of Competition (the AARC) explicitly deals with
below cost pricing. Section 20(1) of the AARC prohibits "dominant" firms from hindering
other firms in an "unfair manner", and s20(4) of the AARC deems that an "unfair hindrance"
within the meaning of s20(1) of the AARC occurs where a firm offers goods or services
below its cost price by dominant firms.
These two sections of the AARC can be translated as follows:
81
See OECD roundtable report, Buying Power of Multiproduct Retailers, DAFFE/CLP (99)21, (July 1999), p 42.
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Section 20
(1) Dominant undertakings ... shall not directly or indirectly hinder in an unfair
manner another undertaking ... or treat it differently from similar undertakings
without any objective justification.
...
(4) An unfair hindrance ... exists in particular if an undertaking offers goods or
services not merely occasionally below its cost price, unless there is an objective
justification for this.
Section 20(4) was introduced into the AARC on 1 January 1999 by the German Social
Democrat Government in response to extensive lobbying by small business industry
groups. The provision particularly aims at protecting the traditional German "grocery
corner shops". A recent case demonstrates the ambiguity inherent in the concept of
"objective justification".
In September 2000, the German Federal Cartel Office (BKartA) prohibited three major
German supermarket chains Wal-Mart, Aldi and Lidl from offering milk and vegetable fat at
prices below cost. Wal-Mart appealed against the BKartA decision and, on 12 November
2002, the German Federal Supreme Court (BGH) upheld the BKartA decision.82
The factual background of the BGH's Wal-Mart decision can be summarised as follows.
On 1 June 2000, Wal-Mart reduced its retail prices for milk and vegetable fat below the
retail prices of the products of its competitors Aldi and Lidl. In response to Wal-Mart's price
initiative, Aldi and Lidl lowered their milk and vegetable fat retail prices below "net
acquisition cost". Wal-Mart did not match these prices, but did not increase its retail prices
when the cost to Wal-Mart of the milk and vegetable fat products increased and, as a
result, Wal-Mart's prices fell below "net acquisition cost". Whereas the cost of milk
increased because of market factors, the costs of vegetable fat increased because WalMart's competitors Lidl and Aldi had influenced their common supplier to raise the prices it
charged Wal-Mart.
The BGH held that s20(4) of the AARC neither requires an "appreciable" lessening of
competition nor a causal connection between dominant position and below cost pricing.
Further, the BGH held that the issue of "objective justification" requires a weighing up of
the legitimate interests of small and medium sized firms against the interests of the firm
engaging in below cost pricing.
In relation to the milk prices, the BGH held that the application of s20(4) of the AARC does
not require a price reduction by the firm. Instead, the provision also applies where prices
are maintained despite an increase in supply costs and, as a result, prices fall below net
acquisition cost. The BGH did not accept as an "objective justification" for below cost
pricing that Wal-Mart maintained its low prices to match those of its competitors, arguing
that the legislative intent of s20(4) of the AARC was to protect small and medium sized
firms in preference to where larger firms engage in below cost pricing in "self-defence".
In relation to vegetable fat, the BGH found that Wal-Mart had an "objective justification" for
below cost pricing because the "sudden" increase of supply costs for vegetable fat was
caused by an "artificial intervention" by its competitors. Wal-Mart was entitled to maintain
82
BGH, 12 November 2002, Az.: KVR 5/02.
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its low price for a short time while searching for a new supplier. In such a case, the BGH
argued, it cannot reasonably be expected that Wal-Mart would raise its prices while its
competitors continued to price below cost. In an obiter dictum, the BGH expressed the
view that a sudden, unforeseeable increase in supply prices may be an "objective
justification" for below cost pricing.
In this case two different instances of below cost pricing by the same firm were treated very
differently by the court. The concept of an “objective justification” clearly provides little
guidance as to what conduct is or is not caught by the general prohibition on below cost
selling.
(b)
France
In France, a prohibition of excessively low prices was introduced on 1 July 1996 in Article
43 of Order 86-1243 ("Order relating to the freedom of prices and competition"). The
prohibition was directed at the pricing practices of large hypermarkets and discounters. A
number of exceptions existed to the general prohibition. For example, the prohibition did
not apply:
•
to products sold below cost during the final period of a seasonal sale;
•
to food products sold in a store of a surface of less than 300 square metres where
the price of the product is aligned to the price legally charged for the same product
by a retailer in the same business area; and
•
to non-food products sold in a store of a surface of less than 1,000 square metres
where the price of the product is aligned to the price legally charged for the same
product by a retailer in the same business area.
Article 43 was repealed by Order 2000-912 on 21 September 2000.
(c)
Ireland
Prior to 1991, Irish restrictive trade practices legislation prohibited a number of practices in
specific industries. In 1991 the Competition Act introduced non-sector specific competition
rules. All the sector-specific restrictive trade practices legislation was repealed at this time,
with the exception of the Restrictive Trade Practices (Groceries) Order 1987 (the
Groceries Order). The Groceries Order prohibits below “invoice price” selling by retailers,
and was retained as a result of intense lobbying by small retailers and suppliers.
In 2000 the government-appointed Competition and Mergers Review Group (Review
Group) published its final report, addressing the effectiveness of Irish competition
legislation and “associated regulations”. 83
The Review Group considered the ban on below invoice price selling in the Groceries
Order and the consequent restriction on a retailer’s ability to discount.
The Review Group was conscious of the possibility of a significant imbalance between the
power of large retailers and suppliers. It noted that the reality may be that a producer will
be adversely affected if a particular retail outlet very deeply discounts the price of a
particular product because other competing retail outlets will simply cease to stock the line
in question for so long as the discount promotion remains in operation. However, the
83
The report is available on the internet at http://www.entemp.ie/tcmr/cmrg1.pdf .
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majority of the Review Group did not see that this would have an adverse effect on
competition, as distinct from the suppliers in question. 84
The majority of the Review Group recommended that the Groceries Order be repealed,
and that any legislation or regulation introduced in relation to the grocery trade not include
a ban on below cost selling.85
The Irish Competition Authority welcomed and endorsed this recommendation. It published
its own discussion paper responding to arguments put forward by supporters of the
Groceries Order86, noting that:
•
it had not been established that the Groceries Order had resulted in increased
levels of employment and production in the groceries sector, or in lower food
prices;
•
the Groceries Order seemed to have as its primary objective the promotion of
competitors rather than competition;
•
the assumption that certain Irish suppliers need special treatment in the Irish
domestic market would only serve as an impediment to the same suppliers
achieving the scale and efficiency needed to compete in a pan-European market;
•
the Groceries Order may be having the effect of deterring legitimate competitive
pricing behaviour, rather than deterring predatory pricing. Firms may be
discouraged from competing on the merits as a result.
The relevant Minister declined to implement the recommendation of the Review Group and
the Irish Competition Commission to repeal the Groceries Order. This failure has not gone
unremarked. In 2001 the OECD conducted a review of regulatory reform in Ireland. 87 The
OECD singled out the Groceries Order as an anti-competitive special interest rule that
inhibited efficient competition, and recommended that it be repealed.
(d)
Italy
Until the mid 1980s, restrictive planning regulations impeded the growth of large retailers in
Italy. The regulation of retail distribution in Italy was significantly reformed by Act no. 114 of
March 1998, which simplified the procedures for obtaining approval to open medium and
large sized retail outlets. This Act also introduced a prohibition on sales below cost in
response to lobbying from branded goods manufacturers and small retailers.
In a submission to the OECD the Italian competition authority identified a number of
problems with the below cost selling prohibition 88:
•
In some cases, sales of individual products at a price below cost are the result of
promotional strategies aimed at increasing a retailer’s total sales. The competitive
84
Final Report, paragraph 10.4.11.
85
Final Report, paragraph 10.4.17.
86
Irish Competition Authority, Reponse to the Competition and Merger Review Group Report on the 1987 Groceries Order,
Discussion Paper No 10 (February 2000). Available on the internet at http://www.tca.ie/discpap.html .
87
OECD, Regulatory Reform in Ireland (July 2001).
See OECD roundtable report, Buying Power of Multiproduct Retailers, DAFFE/CLP (99)21, (July 1999), pp 183 – 188.
This report is available on the internet at http://www.oecd.org/dataoecd/1/18/2379299.pdf .
88
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impact of such a strategy should be evaluated by taking the retail price of the
average “basket” of products into account.
•
The definition of sales below cost for an individual product is problematic.
Contractual relations between suppliers and retailers are complex, and usually
include discounts and promotional contributions depending on a wide range of
conditions (assortment, turnover, shelves devoted to the sale of the relevant
products, total amount of sales in a given time). Discounts and promotional
contributions are often not related to an individual product, but on the whole basket
of products sold to a retailer. The prohibition on sales below cost may in fact
prevent these from being passed onto consumers in the form of lower retail prices.
•
It would be dangerous to require businesses to publicise their purchasing
conditions, as this could foster collusive behaviour by both retailers and
manufacturers.
In a submission to the government regarding Act no. 114 the Italian Competition Authority
highlighted that sales below cost would only result in consumer harm where a retailer with
a dominant position in a market could price below cost to eliminate actual and potential
competitors, and then raise prices to recover previous losses.89 Accordingly, the Italian
Competition Authority argues that the specific sales below cost rules are not necessary, as
the general prohibition in competition law of abuse of a dominant position is sufficient to
inhibit anti-competitive conduct in the retail sector.
(e)
Spain
In Spain, the retail sector has changed significantly over the past 15 years as large retail
groups and new retail forms (such as “hypermarkets” and discounters) increased their
market share.90 After complaints from “traditional” retailers regarding the pricing practices
of these firms, a prohibition of below cost selling was introduced through Law 7/1996 on
the Regulation of Retail Trade.
The Spanish competition authority indicated to the OECD that this prohibition is
problematic.91 In particular, it has been difficult to enshrine a consistent definition of below
cost selling in Spanish law. The practice is defined differently in the Unfair Competition Act
and Law 7/1996 on Regulation of Retail Trade.
89
Referred to in the Italian submission to the OECD roundtable report, Buying Power of Multiproduct Retailer, page 186.
90
See OECD roundtable report, Buying Power of Multiproduct Retailers, DAFFE/CLP (99)21, (July 1999), pages 207-210.
91
See OECD roundtable report, Buying Power of Multiproduct Retailers, DAFFE/CLP (99)21, (July 1999), page 209.
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(f)
United Kingdom
In October 2000 the United Kingdom Competition Commission released A Report on the
Supply of Groceries from Multiple Stores in the United Kingdom.92 This report was
commissioned in response to critical comments on the prices and profits of United
Kingdom supermarkets during the late 1990s, and a perception that the prices of many
consumer goods (including groceries) were higher in the United Kingdom than in other EC
countries and the United States.
The Competition Commission considered whether it would be appropriate to introduce a
prohibition on “persistent below cost selling”. The purpose of such a prohibition would be
to preclude major grocery retailers from gaining a competitive advantage over smaller
rivals because of their ability to cross-subsidize their losses from below cost selling from
the revenue on other products in their range.
The Competition Commission found that the following “formidable difficulties” would be
associated with the introduction of a below cost prohibition 93:
•
The outcome of a below cost prohibition could well be a net increase in overall
prices. While competing retailers would benefit from this, consumers would pay
more for their shopping basket.
•
It would be difficult to identify products persistently sold at a negative gross margin.
•
Legitimate exceptions, to the general prohibition, such as the selling of end-ofshelf-life stock and promotions would need to be unambiguously identified.
•
Those grocery chains with market power could be in a position to circumvent the
legislation by forcing down supplier prices to levels that allowed them to set retail
prices at very low levels by, for example, paying the supplier a higher price on
other goods.
The Competition Commission concluded that it was not appropriate to introduce a below
cost prohibition. Such a prohibition would have “unintended and undesirable effects and
would require such a degree of intervention and monitoring by the regulatory authorities as
to be disproportionate to the adverse effects they would be intended to cure.”94
(g)
Canada
General provisions
Under the Canadian Competition Act (CCA) predatory pricing and regional predatory
pricing are criminal offences. Subsection 50(1) relevantly provides:
50. (1) Every one engaged in a business who
…
(b) engages in a policy of selling products in any area of Canada at prices
lower than those exacted by him elsewhere in Canada, having the
92
Available on the internet at http://www.competition-commission.org.uk/rep_pub/reports/2000/446super.htm#full .
93
United Kingdom Competition Commission, A Report on the Supply of Groceries from Multiple Stores in the United
Kingdom, paragraphs 2.561-2.562.
94
United Kingdom Competition Commission, A Report on the Supply of Groceries from Multiple Stores in the United
Kingdom, paragraph 2.565.
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effect or tendency of substantially lessening competition or eliminating a
competitor in that part of Canada, or designed to have that effect, or
(c) engages in a policy of selling products at prices unreasonably low,
having the effect or tendency of substantially lessening competition or
eliminating a competitor, or designed to have that effect,
is guilty of an indictable offence and liable to imprisonment for a term not
exceeding two years.
The Canadian Parliamentary Committee (the Committee) on Industry, Science and
Technology's report on Canada's competition regime95 noted in relation to s50(1)(c) that
both the elements of "policy" and "unreasonably low" have caused difficulties of
interpretation. The Committee observed that predatory pricing is very difficult to distinguish
from aggressive price competition and that economic theory, as a practical guide to
enforcement of predatory pricing, "leaves something to be desired". It noted that modern
thinking questions whether the marginal costs concept is an appropriate test for predatory
pricing. The Committee stated that s50(1)(c) has been inactive and ineffectual, with only
two contested cases, and that the Committee could not therefore accept that the provision
had a deterrent effect. The Committee recommended that ss50(1)(b) and 50(1)(c) be
repealed and that predatory pricing be included as an anticompetitive act within the abuse
of dominant position provisions found in s79 of the CCA (discussed below). The would
result in allegations of predatory pricing being dealt with by the Competition Tribunal, which
the Committee said was better equipped than a court to engage in the intricate economic
analysis required to distinguish between predatory pricing and aggressive pro-competitive
pricing.
The Canadian Government has indicated that it will consider these recommendations in the
consultation process for the next round of amendments.96
Aviation industry specific legislation
The CCA also contains aviation industry specific provisions which apply to pricing below
avoidable costs. The CCA provides in s79(1) that:
(1) Where, on application by the Commissioner, the Tribunal finds that
(a) one or more persons substantially or completely control, throughout Canada
or any area thereof, a class or species of business,
(b) that person or those persons have engaged in or are engaging in a practice
of anti-competitive acts, and
(c) the practice has had, is having or is likely to have the effect of preventing or
lessening competition substantially in a market,
the Tribunal may make an order prohibiting all or any of those persons from
engaging in that practice.
Section 78(1) specifies a number of types of conduct that will be anti-competitive for the
purposes of s79. These include 'selling articles at a price lower than the acquisition cost
for the purpose of disciplining or eliminating a competitor' in s78(1)(i) and in s78(1)(j) acts
or conduct of a person operating a domestic air service 97 as specified in regulations.
A Plan To Modernise Canada’s Competition Regime, Report No. 8 of the Standing Committee on Industry, Science and
Technology, House of Commons (April 2002).
95
96
Government Response to the Report of the House of Commons Standing Committee on Industry, Science and
Technology, 'A Plan to Modernize Canada's Competition Regime'' at p 9..
97
'Domestic service' is defined in s55(1) of the 'Canada Transportation Act 'as an air service between points in Canada,
from and to the same point in Canada or between Canada and a point outside Canada that is not in the territory of another
country' .
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The Regulations Respecting Anti Competitive Acts of Persons Operating a Domestic
Service, (the Regulations) which were registered in August 2000, provide that:
(1) For the purposes of paragraph 78(1)(j) of the Competition Act, the following acts
or conduct of a person operating a domestic service, as defined in subsection
55(1) of the Canada Transportation Act, are anti-competitive acts:
(a) operating capacity on a route or routes at fares that do not cover the
avoidable cost of providing the service;
(b) increasing capacity on a route or routes at fares that do not cover the
avoidable cost of providing the service;
(c) using a low-cost second-brand carrier in a manner that is described in
paragraph (a) or (b)
…
Prior to the introduction of the Regulations the term "avoidable cost", which is not defined
either by the Regulations or in the CCA, had never been used in the CCA. 98
On 5 March 2001 the Commissioner of Competition filed a notice with the Competition
Tribunal alleging abuse of dominant position by Air Canada. The Commissioner alleged
that Air Canada responded to the entry of two smaller airlines into a number of routes by
increasing its capacity and/or decreasing its fares in a manner that did not cover the
avoidable costs of operating the flights on the affected routes.
The Tribunal ordered that the application be heard in two phases. The first phase dealt
with the application of the avoidable costs tests to two sample routes and a decision has
been handed down. The second phase will consider the balance of the application.
The Tribunal noted that even if a person has 'failed' the avoidable costs test (ie they are
pricing at below avoidable cost), and even if the conduct which fails the test constitutes an
anti-competitive act under the Regulations, this will not lead to a conclusion that the party
engaged in an abuse of dominant position under s79 of the Act. 99 The other elements of
s79, including a "practice" and effect on competition, must be demonstrated. These issues
were left for determination in the second phase of the hearing.
After considering expert evidence, the Tribunal determined that the definition of avoidable
costs to be used for the purpose of the avoidable costs test for determining predation is:
All costs that can be avoided by not producing the good or service in question. In
general the avoidable costs of offering a service will consist of the variable costs
and the product-specific fixed costs that are not sunk.100
In this case, the Tribunal found that the avoidable costs were passenger revenues plus
cargo revues, less variable expenses (passenger expenses, traffic expenses, "capacity
flying", such as flight crew labour, and "capacity ground", such as aircraft servicing labour)
and less product-specific fixed costs (market value / aircraft ownership and aircraft
insurance).101
The Tribunal noted that the avoidable costs test does not require a comparison of an
incumbent's costs with those of an entrant or potential entrant, nor does it require, in the
98
Commissioner of Competition v Air Canada 2003 Comp. Trib. 13 at [21].
99
Commissioner of Competition v Air Canada 2003 Comp. Trib. 13 at [4].
100
Commissioner of Competition v Air Canada 2003 Comp. Trib. 13 at [76].
101
Commissioner of Competition v Air Canada 2003 Comp. Trib. 13 at [144].
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context of litigation, an assumption that a potential entrant will be at least as competitive as
the named competitor. It requires that the incumbent's revenue (price) be in excess of the
average avoidable cost. If the revenue is not in excess of avoidable costs, then it may be
inferred that the incumbent is engaging in predatory pricing. 102
The Tribunal found that Air Canada had operated or increased capacity at fares that did not
cover avoidable costs on the two routes considered.
The Canadian law firm Stikeman Elliott has criticised the Tribunal's decision as overinclusive and argues that it has the potential to label as anti-competitive behaviour that is
perfectly legitimate.103 Stikeman Elliot note that under the Tribunal's test, all of Air
Canada's non-overhead costs should be considered avoidable. Apparently only 10% of Air
Canada's costs are characterised as overhead, therefore for the purposes of the test about
90% of Air Canada's costs, including aircraft ownership, are avoidable.
Stikeman Elliott contrast the Tribunal's decision with a decision of the US Court of Appeal
(10th Circuit) in a case against American Airlines where the Court rejected as a test for
predatory pricing a test very similar to that used by the Tribunal in the Air Canada case.
Stikeman Elliott comment that the approach adopted by the Tribunal in the Air Canada
case has important repercussions because the Commissioner has indicated that the
avoidable cost test will be used by the Competition Bureau in its approach to abuse of
dominance generally.104
6.3
Abuse of economic dependence
(a)
Europe
Some European countries, including Portugal, Italy, and Spain, prohibit abuse by a buyer
of a position of economic dependence.105 In the manufacturer-retailer context, a supplier
would normally be considered to be economically dependent if it did not have access to an
equivalent retailer for the sale of its goods. Examples of an abuse of economic
dependence could include a refusal to acquire or the imposition of discriminatory
conditions.
These prohibitions have been subject to criticism even from within these countries.
The Portuguese submission to the OECD roundtable report on Buying Power of
Multiproduct Retailers notes that what is intended to be sanctioned is the abuse of a
dependence situation, rather than the practices and behaviours dictated by a desire to
accept better options. However, treading this fine line is fraught with difficulty:
It is impossible to keep a supplier or client when the market offers better
alternatives to sell or buy the same product. Moreover, restricting the ability to
accept better terms would cut across the main principle of the market economy
102
Commissioner of Competition v Air Canada 2003 Comp. Trib. 13 at [82].
103
Katherine L Kay and Danielle K Royal, 'Canadian ruling on "avoidable cost" test divergs dramatically form US approach'.
104
The Competition Bureau's Enforcement Guidelines on Abuse of Dominance Provisions indicate that "dominance" is the
term commonly used to refer to the "substantially or completely control" threshold in s79.
105
Article 4 of the Decree Law 371/93 (Portugal), Section 9 of Act no. 192 of June 22, 1998 (Italy), Article 16.2 of the Unfair
Competition Act 3 1991 (Spain).
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which is based on the autonomy of the economic actors to define their own
commercial policy. Such restraints would favour the maintenance of dependent
undertakings and hamper the entry of potential competitors in the market. 106
The Spanish competition authority does not consider the prohibition on abuse of economic
dependence an appropriate means of addressing buyer power. It notes that any attempt to
redress the “balance of power” in the retail sector has the potential to bring about perverse
effects such as increased barriers to entry, barriers to exit and inefficiency. 107
The OECD notes that
Abuse of economic dependence prohibitions appear to have disappointed their
proponents, but perhaps the very small number of cases, and frustrating failure in
most of those, should have been predicted. 108
(b)
Price Discrimination in Canada
Sections 50(1)(a) and 51 of the Canadian Competition Act, (CCA) set out criminal offences
for price discrimination and non-proportionate advertising allowances. A concern to protect
the interests of small independent retailers was the historical impetus for the enactment of
both of these provisions. The criminal sanction against price discrimination has been a
component of Canada’s competition law since 1935 and was seen as an attempt to
address small business concerns resulting from the development of retail chain stores who
extracted price concessions from suppliers. In 1960, the prohibition against nonproportional advertising and display allowances was enacted in response to an apparent
concern that shortcomings in the price discrimination provisions enabled grocery chains to
obtain a competitive advantage not available to independent stores.
The Canadian Parliamentary Committee on Industry, Science and Technology
(Committee) released on 23 April 2002 a report containing recommendations for
enhancing Canada’s competition law regime.109 Influenced, in large measure, by the 1999
VanDuzer Report110 the Committee noted that price discrimination may not be anticompetitive and recommended repealing the criminal offences contained in ss50(1)(a) and
51, and replacing such prohibitions with amendments to the civil abuse of dominance
provisions contained within the CCA. The abuse of dominance provisions require a finding
that a person is dominant (ie has market power) and that the examined activity has or is
likely to substantially lessen competition.
The Canadian government responded to the Committee’s report by indicating that the
recommendations would be considered during a consultation process in respect of possible
amendments to the CCA. In June 2003, the Canadian government published a discussion
paper outlining certain options/proposals for amending the CCA and, concurrently,
launched a public consultation process on the proposals contained within the discussion
106
See OECD roundtable report, Buying Power of Multiproduct Retailers, DAFFE/CLP (99)21, (July 1999), page 204.
107
See OECD roundtable report, Buying Power of Multiproduct Retailers, DAFFE/CLP (99)21, (July 1999), page 210.
108
See OECD roundtable report, Buying Power of Multiproduct Retailers, DAFFE/CLP (99)21, (July 1999), page 42.
A Plan To Modernise Canada’s Competition Regime, Report No. 8 of the Standing Committee on Industry, Science and
Technology, House of Commons (April 2002).
109
110
J.A. VanDuzer & G. Paquet, Anti Competitive Practices and the Competition Act:Theory, Law and Practice
(Hull:Competition Bureau, 1999).
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paper. These proposals included the Committee’s recommendations with respect to the
repeal of the CCA’s price discrimination provisions.
The view that the price discrimination provisions be repealed has, seemingly, widespread
professional support in Canada principally on the basis of the Committee’s conclusion that
economic analysis supports the view that price discrimination is often not anti-competitive.
The apparent momentum in Canada with respect to the repeal of the price discrimination
provisions suggests that the Canadian legislation should not be the basis for potential
legislative reform in Australia.
Price discrimination legislation in Canada
Price discrimination within s50(1)(a) of the CCA refers to a situation where a supplier
grants pricing concessions to a purchaser over and above that granted to competitors in
respect of sales of articles of like quality and quantity. Volume discounts are therefore
permitted.
Section 50(1)(a) states:
Everyone engaged in a business who is a party or privy to, or assists in, any sale
that discriminates to his knowledge, directly or indirectly, against competitors of a
purchaser of articles from him in that any discount, rebate, allowance, price
concession or other advantage is granted to the purchaser over and above any
discount, rebate, allowance, price concession or other advantage that, at the time
the articles are sold to the purchaser, is available to the competitors in respect of a
sale of articles of like quality and quantity, …
is guilty of an indictable offence and liable to imprisonment for a term not
exceeding two years.
Section 51(2) prohibits the granting of advertising allowances except on proportional terms.
Section 51(2) states:
Everyone engaged in a business who is a party or privy to the granting of an
allowance to any purchaser that is not offered on proportionate terms to other
purchasers in competition with the first-mentioned purchaser, which other
purchasers are in this section called ‘competing purchasers’, is guilty of an
indictable offence and liable to imprisonment for a term not exceeding two years.
Promotional allowances include discounts, rebates, price concessions or other advantages
provided for advertising or display purposes that are collateral to a sale or sales of
products.111
In respect of the specific requirements which must be made out for a s50(1)(a)
contravention to be found it is noted that:
111
(a)
the provision applies only to the sale of goods and not the sale of services;
(b)
non-price related advantages will not be covered by the section;
Section 51(1).Proportionate terms are defined within Section 51(3) of the CCA.
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(c)
the provision only applies in respect of discrimination between competitors, and as
such different prices and different concessions may be offered to customers who
are not competitors with one another; and
(d)
the consideration as to the “availability” of a price concession is dependant upon
the circumstances.
In respect of availability it would appear that the Commissioner of Competition (who is
responsible for the administration of the CCA) has adopted an enforcement policy such
that if a seller unilaterally decides to offer a price concession, it should be communicated to
competing purchasers of like quality and quantity. However, broad disclosure need not be
required where a seller grants the concession as a result of negotiations initiated by the
purchaser who provides a service in exchange for the concession.. In such circumstances,
a concession will be available to competing purchasers who request similar concessions
on similar terms.112
Most significantly, and most controversially, the Canadian price discrimination provisions
do not require that price discrimination has or is likely to have a negative effect on
competition.
Like price discrimination harm to competition is not required for a conviction under s51. It is
noted that, in contrast to s50(1)(a), the CCA requires with respect to promotional
allowances that they be offered to customers on a proportional basis, rather than merely be
made available, and that the s51 prohibition covers allowances in respect of both articles
and services.
Canadian criticism of price discrimination provisions and recommendations for
amendment
The Committee in recommending the repeal of the price discrimination provisions
specifically approved the analysis of the VanDuzer Report which concluded that:
There is no question that the current criminal price discrimination provision is not
adequate to address anti-competitive price discrimination. The economic
analysis… concludes that price discrimination is not anti-competitive in many
circumstances. Whether there is any possibility that price discrimination will have
an anti-competitive effect will depend on the facts of each case. The current
provision does not require the discriminating supplier to have market power, a
prerequisite to true discrimination, nor does it require any assessment of the effect
of discrimination on competition.113
In a 2000 submission to the Commissioner of Competition the Canadian Bar Association
indicated its general support for the VanDuzer criticisms of the price discrimination
provisions and specifically endorsed the view that price discrimination should be dealt with
under the abuse of dominance section of the CCA (which requires the demonstration of
anti-competitive effects).114 The authors of a forthcoming article to be published in the
See P. Collins & V. Etrides “An Analysis of the Proposal to Decriminalise the Anti-Competitive Pricing Practices under the
Competition Act” forthcoming World Competition Journal.
112
113
Supra note 2 at p.72.
National Competition Law Section Canadian Bar Association “Submission on Anticompetitive Pricing Practices and the
Competition Act: Theory, Law and Practice” at p.7.
114
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World Competition Journal also specifically endorse the recommendations of the
Committee noting that “shifting price discrimination to the abuse of dominance provisions
would ensure that this practice was subject to a full rule-of-reason analysis, which is long
overdue”.115
Conclusions on price discrimination in Canada
Within Canada a consensus appears to be building that the price discrimination provisions
should be repealed as an inaccurate tool for addressing anti-competitive behaviour and as
they impose unnecessary compliance and monitoring costs on business.
Insofar as Canada’s abuse of dominance provisions resemble the misuse of market power
provisions contained within the Trade Practices Act (TPA) it is noted that Canada’s price
discrimination provisions were examined in the context of the Dawson Committee Report
which concluded that s46 of the Act “provides an appropriate means to tackle anticompetitive price discrimination”. 116
115
Supra, note 5.
116
Dawson Report at p.96.
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Annexure A: Summary of Reid and Baird Reports
1.1
The Reid Report and s46
In May 1997 the House of Representatives Standing Committee on Industry, Science and
Technology delivered the Reid Report, "Finding a Balance - Towards Fair Trading in
Australia".
The Committee made a number of recommendations directed towards further protection of
small businesses in the area of:
•
retail tenancies;
•
franchising;
•
misuse of market power by larger competitors; and
•
small business finance.
Various recommendations were taken up and implemented through reform to state based
retail tenancy laws and through the Franchising Code of Practice.
The Committee's recommendation that the ACCC be given power to take representative
actions under s46 was implemented by amendments to s87 of the Act in 2001.
The Reid Committee also recommended the ACCC give priority to investigation of
complaints and enforcement of the law in relation to the misuse of market power in the
retail sector.
In its consideration of s46, the Reid Committee noted complaints about areas of:
•
price discrimination against smaller retailers by wholesalers not selling at a
common wholesale price;
•
predatory pricing;
•
film distribution through independent cinemas;
•
roof tiling; and
•
exclusivity in major shopping centres.
In this Committee's view, of these complaints, s46 is, as a matter of general principle, only
really relevant to predatory pricing - the others raise quite distinct issues and require
different responses.
1.2
Harsh or unconscionable conduct and s46
The Reid Committee concluded that s46 did not address many of the problems
encountered by small business in dealing with powerful suppliers and competitors and nor
should it; rather there should be a strengthening of the provisions of the Act concerned with
harsh or unconscionable conduct. This was done in 1998 with the introduction into Part
IVA of ss 51AC and 51AD, dealing with industry codes.
The Reid Committee concluded that there was no need for further legislative protection in
s46 against predatory pricing and did not support introduction of an "effects test".
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1.3
The Baird Retail Inquiry and s46
In August 1999 the Joint Select Committee on the Retailing Sector report "Fair Market or
Market Failure? A review of Australia's retailing sector", also considered reform to s46.
In presenting the report to Parliament, Mr Bruce Baird, Chair of the Committee noted that
the Committee had found that the retailing market in Australia was heavily concentrated
and oligopolistic in nature. Woolworths, Coles and Franklins each had a significant degree
of economic influence on market power which has placed significant pressures on small
independent retailers. Nevertheless Mr Baird noted that the Committee had found that,
despite the growth of the major chains, consumers seem to have benefited from the
competitive forces of the current market structure. Since 1986, prices had fallen in real
terms for an average basket of foods at supermarkets; economies of scale had driven
prices down in supermarkets; the range of products carried had never been greater and the
convenience of one stop shopping and significant extent of shopping hours throughout
Australia had generally been welcomed by the Australian consumer. As a result, the
Committee did not seek to invoke protectionist measures for small independent retailers
but rather recommended measures which would enhance competition in the market place.
The Recommendations of the Baird Committee included the establishment of a Retail
Industry Ombudsman; amendments to s50, the introduction of a Retail Industry Code of
Conduct, the raising of the transaction limitation in s51AC to $3 million, and the
implementation of a uniform Retail Tenancy Code. Apart from the last step, all of these
steps were taken.
The Baird Committee recommended that it be reconstituted within 3 years to review further
changes to s46 of the Act.
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Annexure B: Current Cases under s46
1.4
Object of s46
The object of s46 (and Part IV of the Act generally) is clearly aimed at consumer benefits.
The High Court in Queensland Wire Industries Pty Ltd v BHP (1989) 167 CLR 177 (Qld
Wire) stated the object of the provision:
... to protect the interest of consumers, the operation of the section being
predicated on the assumption that competition is a means to that end. 117
… as the protection and advancement of a competitive environment and
competitive conduct. 118
Since then, in Eastern Express Pty Ltd v General Newspapers Pty Limited (1992) 35 FCR
43 (Eastern Express), Lockhart and Gummow JJ stated:
Part IV of the [Trade Practices Act] is designed to promote competition, and the
role of s46 is to maintain competitive markets by restraining misuses of market
power that will produce a non-competitive market.119
In Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 178 ALR 253 (Melway), the
High Court confirmed the position in Qld Wire that (shortly put) an illegal misuse (or "taking
advantage") of market power will be made out, where:
•
a corporation with substantial power in a market;
•
has taken advantage of that market power, in the sense that it has engaged in
conduct in which it would not have engaged (in the "reality of the market") if it did
not have substantial market power120;
•
for one or more of the proscribed purposes set out in paragraphs46(1)(a), (b) or
(c).
In the most recent High Court decision in relation to s46, Boral, the High Court confirmed
this position.121 Particularly, the Court has confirmed that a company must have
"substantial market power" in order to contravene the provision. This confirms, in the
Trade Practices Committee's view, that the provision, practically speaking, already
regulates "powerful" firms in their dealings with less powerful firms and consumers.
However, to achieve its proper objectives, s46 must also accommodate and encourage
vigorously competitive behaviour by all firms (large and small) in all markets - with more
efficient and effective competitors (whether large or small) taking sales from others, with
lower prices and better products. On the approach to s46 outlined by the High Court in Qld
117
per Mason CJ and Wilson J at p191.
118
per Deane J at p194.
119
At p58.
120
An alternative and broader formulation of the "take advantage" element was accepted by the Court to some extent,
namely that the impugned conduct need only be "materially facilitated" by the substantial market power the company
enjoyed.
121
Boral Masonry v ACCC (2003) 195 ALR 609 per McHugh J (Boral) at paragraph 262.
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Wire, Melway, and Boral, the current law seems to achieve this. As the High Court
observed in Qld Wire:
Competition by its very nature is deliberate and ruthless. Competitors jockey for
sales, the more effective competitors injuring the less effective by taking sales
away. Competitors almost always try to "injure" each other in this way. ... these
injuries are the inevitable consequence of the competition s46 is designed to
foster. 122
A more interventionist approach to regulating "powerful" firms and their impact on
competition in a market, risks fostering a reluctance by those firms to engage in vigorous
competition, which in turn results in inefficiency and higher prices for consumers.
Most suits brought under s46 originate from competitor complaints. A competitor's
interests, however, are often inconsistent with the interests of Australian consumers, which
are more aligned with the promotion of vigorous, efficiency-enhancing competition. As the
Full Federal Court has warned in relation to this issue in the context of predatory pricing
allegations under s46:
[T]he Court should be vigilant to ensure that its jurisdiction is not invoked to
interfere with normal and legitimate competitive pricing activities ... under the guise
that such activities are predatory.
123
In the same context, the Supreme Court of the United States has also observed that:
It would be ironic indeed if the standards for predatory pricing liability [under s2 of
the Sherman Act, the US equivalent to s46] were so low that anti-trust suits
themselves became a tool for keeping prices high.
124
For these broad policy reasons alone, the Trade Practices Committee considers that the
terms of s46 should not be amended to provide any greater "protection" for small
businesses. Section 46 is currently oriented towards fostering "competition" generally, for
the benefit of Australian consumers. If that orientation is further biased towards "small
businesses" than is presently the case, it is highly likely that Australian consumers will
suffer at the hands of greater inefficiency and less competition in the Australian economy.
Further, the authorities on s46 show a number of cases in which small businesses have
been able to use s46 as protection against a misuse of market power by a larger player,
including:
•
Australian Competition & Consumer Commission v Australian Safeway Stores Pty
Ltd (2003) 198 ALR 657
•
Australian Competition & Consumer Commission v Universal Music Australia Pty
Ltd (2002) ATPR 41-855
•
McDermott v BP Australia (1997) ATPR 41-547
•
O'Keefe Nominees Pty Ltd v BP Australia Ltd (1990) ATPR 41-057
122
per Mason CJ and Wilson J at p191.
123
Eastern Express, per Lockhart and Gummow JJ at p604.
124
Brooke Groups Ltd v Brown and Williamson Tobacco Corp 509 US 209 (1993) (Brooke)at pp226-7.
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•
Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177
•
Victorian Egg Marketing Board v Parkwood Eggs Pty Ltd (1978) 33 FLR 294
•
Pont Data Australia Pty Ltd v ASX Operations Pty Ltd (1990) 21 FCR 385
•
Midland Milk Pty Ltd v Victoria Dairy Industry Authority (1988) 82 ALR 279
•
Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd (1987) 75 ALR 581
•
McLean v Shell Chemical (Aust) Pty Ltd (1984) 2 FCR 589
In short therefore, the Trade Practices Committee considers that if further "protection" for
"small businesses" in the Australian economy is required, it should not be undertaken by
amending s46.
1.5
The current law is quickly becoming clearer with more cases being decided.
While the law in relation to s46 is unquestionably still developing, it is currently workably
clear.
Further, resolution of the several cases currently before the Courts is expected to clarify
further the construction adopted by the High Court to date.
Cases currently before the Courts include:
ACCC v Universal Music Australia Pty Limited [2001] FCA 1800, and on appeal to the
Full Federal Court [2003] FCAFC 193
The ACCC alleged that Universal, a wholesaler of music CDs, in the latter half of 1998, had
implemented a policy whereby it would review its trading policy with retailers if they stocked
parallel imports (that is CDs supplied by independent wholesalers from overseas sources).
This included refusal to supply CDs in some instances.
The trial judgment handed down on 14 December 2001 found that although Universal
Music did not have market power in the overall recorded music market, it did have
"temporary" market power in the narrower chart music market. The judge went on to find
that Universal Music had taken advantage of this market power for the purpose of
preventing entry of another person into the market. In making this decision the argument
that the respondent's purpose was not a proscribed purpose but rather was an attempt to
prevent "free-riding" on its own promotional efforts was dismissed.
This decision was controversial, particularly with respect to market definition and market
power. The Full Federal Court judgment published on 22 August 2003 reversed the trial
judgment. The High Court’s decision in Boral was delivered between the trial judgment
and the Full Federal Court’s judgment. Accordingly, the Full Federal Court reversed the
trial judge’s findings that Universal and Warner had a substantial degree of market power
principally because of the approach taken by the trial judge. That approach involved
findings that the ability to engage in exclusionary conduct establishes market power and
also that temporary monopoly power is sufficient to establish a substantial degree of
market power was “shut out” by the High Court’s decision in Boral and because it was
critical to find market power at the time the conduct was engaged in. Market definition was
not in dispute before the Full Federal Court.
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ACCC v Australian Safeway Stores Pty Limited (No 2) [2001] FCA 1861, and on
appeal to the Full Federal Court [2003] FCAFC 149.
The ACCC alleged that, between May 1994 and November 1995, Safeway engaged in a
policy whereby it removed, or threatened to remove, brands of bread from its stores if the
bread was being sold at a discount to independent stores who retailed the bread at a lower
price, unless Safeway was offered the same discount. The ACCC contended that this
conduct was taking advantage of market power for the purpose of damaging competitors or
deterring or preventing competitive conduct.
The trial judgment handed down on 21 August 2001 held that there had been no
contravention of s46. Safeway was found to have a substantial degree of market power as
an acquirer of bread from bread manufacturers in Victoria. However, its actions were not
seen as taking advantage of market power, as it would have been able to engage in the
same policy in an otherwise competitive market (as it could readily access alternative
suppliers of bread).
The Full Federal Court judgment published on 30 June 2003 reversed the trial judgment.
The Full Federal Court held that Safeway took advantage of its market power on four
occasions, by refusing to purchase bread from plant bakers to stop them providing
discounted bread to independent retailers, for the purpose of deterring or preventing both
the plant bakers and the independent retailers from engaging in competitive conduct.
It has been appealed to the High Court.
ACCC v Rural Press Ltd [2001] FCA 1065 and [2002] FCAFC 213
The ACCC alleged that between July 1997 and May 1998, Rural Press took advantage of
its market power in the market for the supply of regional newspapers in the Murray Bridge
market for the purpose of preventing entry of another person into the market and/or
deterring or preventing competitive conduct. It was alleged Rural Press threatened a
competitor, which was expanding its coverage into the relevant market, with retaliatory
entry into the competitor's market.
The trial judgment handed down on 1 March 2001 found that Rural Press had contravened
s46. Rural Press accepted that it did possess market power in the relevant market but
argued that it had not taken advantage of this market power for an anti-competitive
purpose. Rather it was "taking advantage" of its financial resources which allowed it to
establish a new publication. The trial judge did not accept this argument and found that
Rural Press' financial resources were related to its market power. He found that its actions
could be characterised as taking advantage of market power for a proscribed purpose.
On appeal, the Full Federal Court confirmed that Rural Press had market power in the
Murray Bridge area, but it reversed the trial judgment because it found that Rural Press
had not taken advantage of that power by threatening to expand its coverage into the
Riverland area. The Full Federal Court allowed the appeal on the s46 allegations.
The matter has been appealed to the High Court was argued before the Court on 12
August 2003 in Adelaide.
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ACCC v Qantas Airways Limited [2003] FCA 125
This case will deal with the issue of predatory pricing or "capacity dumping", and is
currently set down for trial in the Federal Court in November 2003.
Upon these cases being concluded and the judgments published, it is expected that there
will be significantly greater clarity in the application and enforcement of s46, for the benefit
of those seeking to enforce the provision in private litigation, and for the benefit of the
ACCC in its role as regulator (and in taking "representative proceedings" under s87 of the
Act). Further, these decisions are expected to bring greater certainty for those businesses
to which the provision may apply, and their advisers. This will significantly enhance the
certainty with which businesses may regulate their own operations and their ability to
ensure compliance with the law.125
In the Trade Practices Committee's view, it would be useful to many Australian businesses,
large and small, for the ACCC to publish guidelines or informative materials in relation to
the operation of s46, as these cases are resolved and greater certainty emerges.
Particularly, some explicit guidance on when a business is likely to have “substantial
market power” would be very helpful to many businesses as it is at that point that s46
“bites” in relation to a business’ competitive behaviour.
1.6
The Dawson Committee recommended not to change s46
On 31 January 2003, the Dawson Committee submitted its report on the "Review of the
Competition Provisions of the Trade Practices Act" to the Treasurer. The Dawson Report
and the Government's response to it were released on 16 April 2003. The Government
accepted virtually every one of the Committee's recommendations.126
In relation to s46, the Dawson Committee found that it would not be appropriate to amend
the section and recommended:
•
no amendment should be made to s46;
•
the ACCC should give consideration to issuing guidelines on its approach to Part
IVA;
•
the ACCC should consult with industry and issue guidelines on the application of
Part IVA to intellectual property.
125
The judgments to be published in these appeals are expected to address the "problem" identified by Professor Warren
Pengilly in his submission to the Senate Legal and Constitutional References Committee Inquiry into s46 and s50 of the Act,
where he submitted:
I firmly believe that the major problem of s46 is not whether or not it needs to be "beefed up" but the complete
uncertainty of what the law means. This uncertainty is not fair to business decision-makers and leads to
considerable inefficiencies. It is not fair to small business or consumers either because unpredictability of result
can involve unreal or non-achievable expectations and the futile expenditure of significant resources.
The High Court took up this issue in its approach to resolving the issues in Melway,
There is some force in the suggestion ... that provisions such as section 46 should, if such a construction is fairly
open, be construed in a way as to enable the monopolist, before he enters upon a line of conduct, to know with
some certainty whether or not it is lawful. at p255.
126
If requested, the Trade Practices Committee will make a copy of its submission and supplementary submissions to the
Dawson Committee available to the Senate Committee, although the issues before the Senate Committee are not identical
to those which were considered by the Dawson Committee.
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The recommendations of the Dawson Committee were based on the conclusions that:
•
existing case law on s46 does not substantiate the view that purpose is an
unnecessarily onerous hurdle;
•
the addition of an effects test would increase the risk of regulatory error and render
purpose ineffective as a means of distinguishing between pro-competitive and anticompetitive behaviour;
•
overseas experience, so far as it is of assistance, does not indicate that the
introduction of an effects test would be appropriate.
•
Cases presently before the Courts provide an opportunity for the section to be
further clarified and it would not be in the interest of consumers or competition to
change the section at this stage.
Further, the Dawson Committee appears to have had particular regard to the position of
"small businesses" in arriving at these conclusions. For example, in relation to the
introduction of an "effects test" into s46, the Committee concluded:
... the operation of an "effects test" ... could extend to small businesses as well. An
effects test could, in the view of the Committee, discourage legitimate competitive
practices by small businesses having the effect of injuring a competitor or
discouraging a potential competitor, in the same way as with larger businesses. 127
The Trade Practices Committee supports the recommendations of the Dawson Committee
in relation to s46 and endorses the views on which they are based. Further, the Trade
Practices Committee notes that both the Reid and Baird inquiries into s46 have
recommended against changing the provision (see Annexure A).
The Commonwealth Government, in its response to the Dawson Committee's Report,
agreed with the Dawson Committee's recommendation not to amend s46.
It should also be noted that the Treasurer asked the Dawson Committee to reaffirm its
recommendations following the High Court's decision in Boral. The Federal Government
noted in its response to the Report, that:
In March 2003, the Committee reaffirmed its recommendations in light of the High
Court decision in Boral v ACCC, maintaining that no amendment should be made
to s46, although the position could be reviewed after a number of other cases are
determined, such as Safeway, Rural Press and Universal Music. The Committee
noted and endorsed observations by the High Court in the Boral case that the
purpose of s46 is to promote competition and that successful competition is bound
to cause damage to some competitors.
127
Page 81 of the Report.
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Annexure C: Text of s51AC of the Act
Section 51AC: Unconscionable conduct in business transactions
(1) A corporation must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person (other than a listed
public company); or
(b) the acquisition or possible acquisition of goods or services from a person (other than a
listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
(2) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a corporation (other than a listed
public company); or
(b) the acquisition or possible acquisition of goods or services from a corporation (other
than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
(3) Without in any way limiting the matters to which the Court may have regard for the purpose of
determining whether a corporation or a person (the supplier) has contravened subsection (1) or (2)
in connection with the supply or possible supply of goods or services to a person or a corporation
(the business consumer), the Court may have regard to:
(a) the relative strengths of the bargaining positions of the supplier and the business
consumer; and
(b) whether, as a result of conduct engaged in by the supplier, the business consumer was
required to comply with conditions that were not reasonably necessary for the protection of
the legitimate interests of the supplier; and
(c) whether the business consumer was able to understand any documents relating to the
supply or possible supply of the goods or services; and
(d) whether any undue influence or pressure was exerted on, or any unfair tactics were
used against, the business consumer or a person acting on behalf of the business
consumer by the supplier or a person acting on behalf of the supplier in relation to the
supply or possible supply of the goods or services; and
(e) the amount for which, and the circumstances under which, the business consumer
could have acquired identical or equivalent goods or services from a person other than the
supplier; and
(f) the extent to which the supplier's conduct towards the business consumer was
consistent with the supplier's conduct in similar transactions between the supplier and
other like business consumers; and
(g) the requirements of any applicable industry code; and
(h) the requirements of any other industry code, if the business consumer acted on the
reasonable belief that the supplier would comply with that code; and
(i) the extent to which the supplier unreasonably failed to disclose to the business
consumer:
(i) any intended conduct of the supplier that might affect the interests of the
business consumer; and
(ii) any risks to the business consumer arising from the supplier's intended conduct
(being risks that the supplier should have foreseen would not be apparent to the
business consumer); and
(j) the extent to which the supplier was willing to negotiate the terms and conditions of any
contract for supply of the goods or services with the business consumer; and
(k) the extent to which the supplier and the business consumer acted in good faith.
(4) Without in any way limiting the matters to which the Court may have regard for the purpose of
determining whether a corporation or a person (the acquirer) has contravened subsection (1) or (2)
in connection with the acquisition or possible acquisition of goods or services from a person or
corporation (the small business supplier), the Court may have regard to:
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(a) the relative strengths of the bargaining positions of the acquirer and the small business
supplier; and
(b) whether, as a result of conduct engaged in by the acquirer, the small business supplier
was required to comply with conditions that were not reasonably necessary for the
protection of the legitimate interests of the acquirer; and
(c) whether the small business supplier was able to understand any documents relating to
the acquisition or possible acquisition of the goods or services; and
(d) whether any undue influence or pressure was exerted on, or any unfair tactics were
used against, the small business supplier or a person acting on behalf of the small
business supplier by the acquirer or a person acting on behalf of the acquirer in relation to
the acquisition or possible acquisition of the goods or services; and
(e) the amount for which, and the circumstances in which, the small business supplier
could have supplied identical or equivalent goods or services to a person other than the
acquirer; and
(f) the extent to which the acquirer's conduct towards the small business supplier was
consistent with the acquirer's conduct in similar transactions between the acquirer and
other like small business suppliers; and
(g) the requirements of any applicable industry code; and
(h) the requirements of any other industry code, if the small business supplier acted on the
reasonable belief that the acquirer would comply with that code; and
(i) the extent to which the acquirer unreasonably failed to disclose to the small business
supplier:
(i) any intended conduct of the acquirer that might affect the interests of the small
business supplier; and
(ii) any risks to the small business supplier arising from the acquirer's intended
conduct (being risks that the acquirer should have foreseen would not be apparent
to the small business supplier); and
(j) the extent to which the acquirer was willing to negotiate the terms and conditions of any
contract for the acquisition of the goods and services with the small business supplier; and
(k) the extent to which the acquirer and the small business supplier acted in good faith.
(5) A person is not to be taken for the purposes of this section to engage in unconscionable
conduct in connection with:
(a) the supply or possible supply of goods or services to another person; or
(b) the acquisition or possible acquisition of goods or services from another person;
by reason only that the first-mentioned person institutes legal proceedings in relation to that supply,
possible supply, acquisition or possible acquisition or refers to arbitration a dispute or claim in
relation to that supply, possible supply, acquisition or possible acquisition.
(6) For the purpose of determining whether a corporation has contravened subsection (1) or
whether a person has contravened subsection (2):
(a) the Court must not have regard to any circumstances that were not reasonably
foreseeable at the time of the alleged contravention; and
(b) the Court may have regard to circumstances existing before the commencement of this
section but not to conduct engaged in before that commencement.
(7) A reference in this section to the supply or possible supply of goods or services is a reference to
the supply or possible supply of goods or services to a person whose acquisition or possible
acquisition of the goods or services is or would be for the purpose of trade or commerce.
(8) A reference in this section to the acquisition or possible acquisition of goods or services is a
reference to the acquisition or possible acquisition of goods or services by a person whose
acquisition or possible acquisition of the goods or services is or would be for the purpose of trade
or commerce.
(9) A reference in this section to the supply or possible supply of goods or services does not
include a reference to the supply or possible supply of goods or services at a price in excess of
$3,000,000, or such higher amount as is prescribed.
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(10) A reference in this section to the acquisition or possible acquisition of goods or services does
not include a reference to the acquisition or possible acquisition of goods or services at a price in
excess of $3,000,000, or such higher amount as is prescribed.
(11) For the purposes of subsections (9) and (10):
(a) subject to paragraphs (b), (c), (d) and (e), the price for:
(i) the supply or possible supply of goods or services to a person; or
(ii) the acquisition or possible acquisition of goods or services by a person;
is taken to be the amount paid or payable by the person for the goods or services; and
(b) paragraph 4B(2)(c) applies as if references in that paragraph to the purchase of goods
or services by a person were references to:
(i) the supply of goods or services to a person pursuant to a purchase; or
(ii) the acquisition of goods or services by a person by way of purchase;
as the case requires; and
(c) paragraph 4B(2)(d) applies as if:
(i) the reference in that paragraph to a person acquiring goods or services
otherwise than by way of purchase included a reference to a person being
supplied with goods or services otherwise than pursuant to a purchase; and
(ii) a reference in that paragraph to acquisition included a reference to supply; and
(d) paragraph 4B(2)(e) applies as if references in that paragraph to the acquisition of
goods or services by a person, or to the acquisition of services by a person, included
references to the supply of goods or services to a person, or the supply of services, to a
person, as the case may be; and
(e) the price for the supply or possible supply, or the acquisition or possible acquisition, of
services comprising or including a loan or loan facility is taken to include the capital value
of the loan or loan facility.
(12) Section 51A applies for the purposes of this section in the same way as it applies for the
purposes of Division 1 of Part V.
(13) Expressions used in this section that are defined for the purpose of Part IVB have the same
meaning in this section as they do in Part IVB.
(14) In this section, listed public company has the same meaning as it has in the Income Tax
Assessment Act 1997.
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Annexure D: Summary of successful cases under s 51AC
Summaries of s 51AC cases involving the ACCC are reported in Commonwealth Office of
Small Business, Annual Review of Small Business 2001 (2002) 34–8, Australian Consumer
and Competition Commission, Annual Report 2001–2, chapter 3, and on the ACCC’s
Media Release website (http://www.accc.gov.au/media/mediar.htm). It is noted, however,
that apart from the Simply No-Knead case (below), the results in each proceeding have not
been reported in an official or unofficial law report series.
1.
ACCC v Leelee
In ACCC v Leelee Pty Ltd, the ACCC commenced action against Leelee, a commercial
landlord. The ACCC alleged that Leelee had acted unconscionably towards a commercial
tenant by increasing the rent payable under a lease, failing to protect the tenant’s rights
under the lease and forcing the tenant to charge its customers with uncompetitive prices for
meals. The Federal Court made a declaration with the consent of Leelee that Leelee had
acted unconscionably by specifying the price at which the tenant sold its meals and by
approving another tenant’s infringement on the tenant’s menu entitlements. The Federal
Court granted injunctions against Leelee and its managing director.
2.
ACCC v Suffolke Parke Pty Ltd
In ACCC v Suffolke Parke Pty Ltd, the ACCC alleged that a company and its director had
engaged in unconscionable conduct in relation to leasing arrangements. The company
had refused to allow a tenant to sublet a part of the premises as a result of a dispute
between the parties. By consent of the parties, the Federal Court found that the conduct
was unconscionable and issued injunctions and compensation orders against the company
and its director.
3.
ACCC v Avanti Investments Pty Ltd
In ACCC v Avanti Investments Pty Ltd, the ACCC alleged that a landlord had engaged in
misleading or deceptive conduct and unconscionable conduct by representing to lessees
from non-English speaking backgrounds that
(a)
they were entitled to terminate their leases and, if they did not, they would have to
vacate the land; and
(b)
the terms of old and new leases were the same, when in fact they were
substantially different.
The landlord also sold water available under the leases which meant that the lessees
received excess water bills. By consent of the landlord, the Federal Court made orders
against the landlord on the basis that the landlord had engaged in unconscionable conduct.
4.
ACCC v Australian Industries Group (Half Price Shutters)
In ACCC v Australian Industries Group (Half Price Shutters), the ACCC alleged that a
company had engaged in misleading or deceptive conduct, unconscionable conduct and
contravention of the Franchising Code of Conduct (under s51AD). By consent of the
parties, the Federal Court declared that the company had acted unconscionably towards its
installers who operated under license agreements.
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5.
ACCC v Cheap as Chips Franchising Pty Ltd
In ACCC v Cheap as Chips Franchising Pty Ltd, the ACCC alleged that a company and its
director had engaged in unconscionable conduct in relation to dealings with their
franchisees and had breached the Franchising Code of Conduct. The Federal Court
declared, by consent of the parties, that the company and its director had engaged in
unconscionable conduct by failing to negotiate with franchisees, terminating a franchise
without following the Code procedures and attempting to breach the Code.
6.
ACCC v Daewoo Heavy Industries & Machinery Pty Ltd & Daewoo Australia Pty Ltd
In ACCC v Daewoo Heavy Industries & Machinery Pty Ltd & Daewoo Australia Pty Ltd, the
ACCC alleged that Daewoo had breached ss 51AA, 51AC and 52 of the Act. By consent
of the parties, the Federal Court declared that Daewoo had breached ss 51AC and 52 of
the Act by entering into a purportedly exclusive dealership agreement with a small
business when in fact Daewoo never intended the small business to be its exclusive dealer
and had even appointed another business as a dealer.
7.
ACCC v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365; (2000) 178 ALR 304
In ACCC v Simply No-Knead (Franchising) Pty Ltd (a reported decision of the Federal
Court of Australia), the ACCC successfully sought a declaration from the Federal Court that
a franchisor had engaged in unconscionable conduct and had breached the Franchising
Code of Conduct. The ACCC alleged that the franchisor had refused to deliver products to
various franchisees, had deleted the telephone numbers of several franchisees without
their knowledge or consent, had produced and distributed advertising and promotional
material that omitted the names of franchisees, had sold products in breach of a noncompete clause, and finally had refused to provide disclosure documents in response to
written requests from franchisees. The Federal Court held that the circumstances of the
case disclosed an overwhelming case of unreasonable, unfair, bullying and thuggish
behaviour in relation to each franchisee that amounted to unconscionable conduct
purposes of s 51AC.
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Annexure E: State legislation and industry codes protecting small business
1.
Retail tenancy legislation
A large proportion of complaints that the ACCC receives for alleged breaches of s51AC of
the Act relate to retail tenancy disputes.128 While some of these complaints may amount to
breaches of s51AC, retail tenants may be reluctant to pursue a s51AC claim because of
the time and considerable expense involved with contesting matters in the Federal
Court.129
Under State and Territory retail tenancy legislation, protection is available to retail tenants
against unconscionable conduct. The relevant provisions are:
State
Retail Tenancy Legislation
Unconscionable Conduct
Provision
Australian Capital Territory
Leases (Commercial and
Retail) Act 2001 (ACT)
section 22
New South Wales
Retail Leases Act 1994
(NSW)
section 62B
Queensland
Retail Shop Leases Act
1994 (Qld)
section 46A
Victoria
Retail Leases Act 2003
(Vic)
section 77
Northern Territory
Residential tenancies Act
1999 (NT)
section 22
Tasmania
Fair Trading Code of
Practice for Retail
Sch 1 Part 2, section 3(1)
Tenancies) Regulations
1998 (TAS)
South Australia
Retail Shop Leases Act
1995 (SA)
No equivalent provision
Western Australia
Commercial Tenancy (retail
Shops) Agreement Act
No equivalent provision
1985 (WA)
Retail tenancy legislation in most states provides dispute resolution mechanisms which
allow matters involving unconscionable conduct to be dealt with in a timely and cost
effective way.
In most state jurisdictions parties may settle the dispute by mediation/conciliation. If
mediation/conciliation fails, the dispute may be determined by a non-judicial tribunal such
128
John Martin, “Commercial Unconscionability & The Trade Practices Act”, 15 November 2001.
E Webb, “The 2001 amendments to the Trade Practices Act 1974 (Cth): Retail Tenancy: Ramifications” (2001) 28(8)
Brief 9–12.
129
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as the Administrative Decisions Tribunal of New South Wales (“ADT”) or the Victorian Civil
and Administrative Tribunal (“VCAT”).
It is generally accepted that state tribunals provide a more cost effective forum for hearing
tenancy disputes that involve allegations of unconscionable conduct than the Federal
Court. Accordingly, it may be argued that such disputes are better dealt with at a state
level. It should be left to the state Parliaments to continue to strengthen the protection
offered to retail tenants against unconscionable conduct.
2.
Fair Trading Act 1999 (Vic) and Fair Trading Act 1990 (TAS)
Section 8A of the Fair Trading Act 1999 (Vic) (“the Fair Trading Act”) contains a
prohibition on unconscionable conduct in small business transactions which is very similar
to s51AC of the Act.130 However:
3.
(a)
the prohibition in s8A of the Fair Trading Act also applies to transactions between
unincorporated entities; and
(b)
Part 9 of the Fair Trading Act gives VCAT jurisdiction to hear and determine all
matters arising under s8A.
Small Business Commissioner Act 2003 (Vic)
The Small Business Commissioner Act 2003 (Vic) establishes the position of Small
Business Commissioner in Victoria. Under the Small Business Commissioner Act 2003
(Vic), the Commissioner has the power:
4.
(a)
to encourage the fair treatment of small businesses in their commercial dealings
with other businesses in the marketplace;
(b)
to receive and investigate complaints by small businesses regarding unfair market
practices and mediate between parties involved in the complaint;
(c)
to make representations to an appropriate person or body on behalf of a small
business that has made a complaint; and
(d)
to intervene at any stage in proceedings brought before VCAT:
(e)
concerning a retail tenancy dispute (within the meaning of Part 10 of the Retail
Leases Act 2003 (Vic)); or
(f)
concerning an allegation of unconscionable conduct in a small business
transaction (under s8A of the Fair Trading Act 1999 (Vic)).
Petroleum marketing legislation
Major business conduct issues arise in the petroleum distribution industry because of the
disparity in power between some distributors and major oil companies.131 The Petroleum
Retail Marketing Franchise Act 1980 (Cth) and the Petroleum Retail Marketing Sites Act
1980 (Cth) were enacted to provide protection for petroleum distributors against abuses of
market power by the major oil companies. Any need for legislative intervention to improve
130
In Tasmania, section 15A of the Fair Trading Act (Tas) also largely replicates the prohibition on unconscionable conduct
in section 51AC of the Act.
Finding a Balance — Towards Fair Trading in Australia, Report by the House of Representatives Standing Committee on
Industry, Science and Technology, May 1997.
131
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protection against unconscionable conduct in this industry sector should be directed at
amending these Acts rather than the Act.
5.
Codes of Conduct
Section 51AC of the Act expressly provides that a court may have regard to the
requirements of any applicable industry codes when determining whether certain conduct
is unconscionable. 132 Accordingly, industry codes serve as a mechanism for compliance
with this section of the Act.
6.
Franchising Code of Conduct
The ACCC receives a large number of complaints for alleged breaches of s51AC in relation
to franchising.133 Most complaints concern alleged breaches of the Franchising Code of
Conduct (“the Code”). The Franchising Code of Conduct is a mandatory code prescribed
by regulations made pursuant to s51AE of the Act. 134
The Code aims to prevent franchisors from abusing the power imbalance inherent in the
franchising relationship. In this way, the Code provides a measure of protection to
franchisees against unconscionable conduct. Additionally, contravention of the Code
activates significant remedies under the TPA, including ss 80, 82 and 87.
Therefore, s51AC merely reinforces the protection of small business franchisees provided
by the Code and s51AD. Accordingly, if the franchisees are not adequately protected
against the unconscionable conduct of franchisors, it is the Code which should be
amended, not s51AC.
7.
Retail Grocery Industry Code of Conduct
The Retail Grocery Industry Code of Conduct was introduced to address the business
conduct problems arising from the high degree of market concentration in the retail grocery
sector.135 It is a voluntary code that applies to primary producers, manufacturers,
wholesalers, distributors and retailers. It sets out guidelines with respect to produce
standards, supply contracts, labelling, packaging and preparation, and dispute resolution.
Although the Code does not have legislative force, it aims to promote fair and equitable
trading practices amongst industry participants.
8.
Film Distribution and Exhibition Code
The Film Distribution and Exhibition Code of Conduct was implemented to address the
imbalance of bargaining power that exists between small film exhibitors and the large film
distributors. It is a voluntary code which provides objective benchmarks for access to films
and terms and conditions such access will be granted on. It helps to deter unconscionable
conduct on the part of major film distributors.
132
See section 51AC(3)(g) of the Act.
133
John Martin, “Commercial Unconscionability & The Trade Practices Act”, 15 November 2001.
134
The code is set out in the Schedule attached to the Trade Practices (Industry Codes - Franchising) Regulations 1998
(Cth).
135
Fair Market or Market Failure?, Report of the Joint Select Committee on the Retailing Sector, August 1999.
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Annexure F: Previous submission of Committee on proposed amendments
to s51AC of the Act
1.
Unconscionable Conduct and Unfair Contract Terms
The Committee has also asked the Trade Practices Committee to express its view on the
submissions made by the Fair Trading Coalition (FT Coalition) and the Australian
Consumers Association (ACA). The FT Coalition’s recommendations are essentially that
s51AC of the Act be amended to include a number of per se offences, relating in part to
specific types of contract terms. The ACA’s recommendations are that regulatory
intervention should occur to deal with the increasing use of onerous or unjust contract
terms in contracts which affect consumers (including business consumers).
The Trade Practices Committee’s view is that amendment to s51AC would be premature at
this stage. The provision is relatively new, having only been introduced in 1998, and the
operation of all of the statutory prohibitions on unconscionable conduct is still very much
developing. Both s51AA and 51AC have been considered in a number of recent Federal
Court cases,136 one of which (relating to s51AA) is currently on appeal to the High Court. 137
Further, the Trade Practices Committee is concerned that as the unconscionable conduct
provisions do not fall squarely within the Committee’s terms of reference, relevant
stakeholders have not had adequate opportunity to consider the ramifications of the
proposed amendments or contribute to the debate.
1.1
FT Coalition Submission
The FT Coalition recommend that s51AC should be amended to add as per se offences:
•
unilateral variation of contract or associated documents;
•
the termination of contracts by one party without just cause or due process;
•
the bringing into existence of documents or policies after the signing of the contract
which are then binding and which can also be used to vary the original agreement
or contract; and
•
the presentation of ‘take it or leave it’ contracts or agreements.
Further, the FT Coalition recommended that misuse of market power should be listed as
one of the matters for consideration under s51AC.
(e)
Per se prohibition of specific forms of conduct
The Trade Practices Committee is particularly concerned by the FT Coalition’s proposal to
prohibit per se all ‘take it or leave it’ contracts. This would appear to prohibit outright all
standard form contracts. The Trade Practices Committee acknowledges that there is
136
Including ACCC v CG Berbatis Holdings [2001] FCA 757, ACCC v Samton Holdings Pty Ltd [2002] FCA 62, GPG
(Australia Trading) Pty Ltd v GIO Australia Holdings [2001] FCA 1761.
137
The ACCC was granted leave to appeal the full Federal Court decision in ACCC v CG Berbatis Holdings [2001] FCA 757
on 31 May 2002.
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greater scope for unconscionable conduct to arise in the context of standard form contracts
than in contracts where the terms are individually negotiated between the parties.
However, as Trebilcock has pointed out, they facilitate a dramatic reduction in transaction
costs, and may be vulnerable to change under consumer pressure. 138
The Trade Practices Committee considers that the strength of s51AC is that it applies to
‘conduct’ that is unconscionable, and is able to cover both substantive and procedural
unfairness. As a result, it is flexible enough to consider whether a specific contractual term
is, in all the circumstances, unconscionable. The per se prohibition of specific contractual
terms (or entire contracts) would impose restraints on business which would not
necessarily be to the benefit of consumers in all circumstances, or indeed, prevent their
being treated unconscionably. In the Trade Practices Committee’s view, the current
approach, which lists types of conduct likely to indicate unconscionable conduct as matters
for consideration by the Court in ‘all the circumstances’, should be retained.
(f)
Inclusion of misuse of market power as a matter for consideration
One of the reasons that the Reid Committee recommended the introduction of s51AC was
that s46 was seen to be beyond the reach of small business. 139 As a result, the factors for
consideration under s51AC(3) and (4) already include matters which would also indicate a
misuse of market power.140 In the Trade Practices Committee’s view, specific reference to
‘misuse of market power’ as a matter for consideration under s51AC(3) and (4) would be
superfluous.
1.2
ACA Submission
The ACA has submitted that s51AC is insufficient, and that harsh and unfair contract terms
need to be addressed more directly, and in a way that facilitates action by the ACCC at a
general or systemic level. It has submitted that a new Part entitled “Unfair Terms” should
be inserted into the Act, modelled on the UK Unfair Terms in Consumer Contracts
Regulations (1999) (the UK Regulations).
(g)
The UK Regulations: background
Importantly, the UK Regulations only apply to standard terms (that is, terms that have not
been individually negotiated) in consumer transactions.141 Terms that are not covered by
the UK Regulations include:

core terms, that is terms which set the price and terms which define the product being
acquired or supplied;

terms which reflect the law;

specially negotiated terms;

terms in business to business agreements;
138 Michael J. Trebilcock, The limits of freedom of contract, Cambridge, Mass, Harvard University Press, 1993, at 119
139
In particular, it focussed on the position of small business retailers as against that of shopping centre owners, who might
not be in a position of substantial market power.
See Philip Tucker, “Too much Concern Too Soon? Rationalising the Elements of Section 51AC of the Trade Practices
Act” (2001) 17 JCL 120 at 146
140
141
“Consumer” is defined in cl 3(1) as an individual who is not acting for the purposes of his or her business or profession.
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
terms in sales by private individuals; and

terms in non-consumer contracts such as employment contracts, agreements dealing
with succession rights, family law, etc.
For the purposes of the UK Regulations, a contractual term is regarded as unfair if:
contrary to the requirements of good faith, it causes a significant imbalance in the
parties’ rights and obligations, to the detriment of the consumer. 142
Unfair terms are not binding on the consumer, however, the contract will continue to bind
the parties if it is capable of continuing in existence without the unfair term. 143
For the individual consumer, the UK Regulations mean that if a business refuses to accept
that a term is unfair, the consumer can ask for the help of the court. In addition, the
Director General of Fair Trading (and other qualifying bodies listed in the Regulations) has
enforcement powers under the UK Regulations. Although the Director General of Fair
Trading cannot take up consumers’ individual cases for them, it is under a positive duty to
consider complaints in relation to unfair terms, and to provide reasons for taking or
declining to take action.144 Ultimately however, only the courts can finally decide whether a
term is or is not unfair.
In practice, the Office of Fair Trading issues information and advice concerning the
operation of the UK Regulations. This includes guidance arranged according to categories
of unfair term listed in Schedule 2 to the UK Regulations, using examples of unfair terms
from cases it has considered and providing examples of how those terms have been
amended. While these do not have statutory force or effect, they are indicative of the
approach the Office of Fair Trading is likely to take with respect to standard form contract
terms which are notified to it.
(h)
Incorporation of UK Regulations
In the Trade Practices Committee’s view, s51AC has not been given sufficient opportunity
to operate and build up precedent to decide that it is necessary to supplement it with
additional provisions based on the UK Regulations. Further, as the UK Regulations only
relate to consumer contracts, the Trade Practices Committee would be reluctant to see
these sorts of provisions extended to business transactions.
Moreover, implementation of provisions like the UK Regulations would involve a major shift
in the operation of the Act, and would have implications for a wide range of parties, both
business and community based. In addition, it would have enormous implications for the
ACCC (and ASIC) in terms of funding and staffing. It should be noted that the Office of
Fair Trading has an Unfair Contract Terms Unit whose staff deal solely with complaints
relating to the UK Regulations, and input is required from the Legal Advisers to the Director
General who assist the Unfair Contract Terms Unit in their dealings with companies which
are the subject of consumer complaints.
142
UK Regulations, cl 5(1)
143
UK Regulations, cl 8(1) and 8(2)
144
UK Regulations, cl 10
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The Trade Practices Committee is concerned that as the proposed amendments do not fall
squarely within the scope of the Committee’s terms of reference, relevant stakeholders
have not had the opportunity to contribute to the debate.
1.3
Access to the courts and dispute resolution procedures
The Trade Practices Committee does recognise that there are problems with access
regarding the current provisions. Although the ACCC have received specific funding to be
used to bring proceedings under s51AC, 145 and they have in fact done so successfully on
two occasions,146 there is a good argument that it needs to be easier for private parties to
initiate proceedings. The ACCC, quite correctly, only initiates proceedings in matters with
broad community impact. This means that unconscionable conduct that only affects
individuals or small segments of the community, is unlikely to become the subject of an
ACCC action.
Better access to courts and other dispute resolution processes is needed to ensure that the
unconscionable conduct provisions are, in practical terms, able to protect the interests of
these individuals and groups and, moreover, able to be applied in a wide range of cases.
In the Trade Practices Committee’s view, while ss51AA-AC clearly need to build up greater
precedent to operate effectively, this may be achieved quite quickly. Hence, as stated
earlier, it should be worth waiting to see if this is effective.
As Carter and Harland have pointed out, there is scope within the Act to enable injunctions
to be sought to restrain unconscionable conduct by a corporation in general, and not just in
relation to a specific party.147 Injunctions can be sought pursuant to s80 by the Minister,
the ACCC or ‘any other person’. Further, in New South Wales, the Contracts Review Act
NSW (1980) provides a mechanism for review of unfair contract terms, and empowers the
Courts to grant general orders, prescribing the terms on which a person may enter into
contracts of a specified class where ‘a person has embarked, or is likely to embark, on a
course of conduct leading to the formation of unjust contracts’. Indeed, in Minister for
Consumer Affairs v WW Vallack Real Estate Pty Ltd,148 this provision was used to allow the
Court to order that a real estate agent not use a particular term in its standard form agency
contract with vendor clients in the future.
1.4
Recommendation
Ultimately, the Trade Practices Committee considers that determination of whether a
corporation’s conduct is unconscionable should remain with the Courts. The Trade
Practices Committee’s view is that the Committee should not recommend the introduction
of outright bans on specific types of unfair contractual terms in the unconscionable conduct
provisions, nor should misuse of market power be listed as one of the matters for
consideration under s51AC.
The Trade Practices Committee has no objection, in principle, to greater attention being
paid to unfair standard contract terms in dealings between businesses and consumers,
145
Refer to ACCC Media Release, “ACCC acts against landlord for alleged unconscionable conduct”, 4 February 1999.
146
ACCC v Leelee Pty Ltd (2000) ATPR 41-742, and ACCC v Simply No Knead (Franchising) Pty Ltd 178 ALR 304
147
JW Carter and DJ Harland, “Contract Law in Australia”, Butterworths, 2002, at 549
148
(1986) ASC 55-478
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however in the Trade Practices Committee’s view, the current unconscionable conduct
provisions have been given inadequate opportunity to achieve this end. The proposal by
the ACA to incorporate provisions along the lines of the UK Regulations into the Act would
have far reaching consequences, and would need to be considered by a range of
interested parties. If the Committee considers that a review of s51AC or Part IVA is
necessary, this should be the subject of a separate inquiry, perhaps in 12 months time, to
give the Courts adequate opportunity to clarify the existing provisions, and to give all
interested parties adequate opportunity to contribute.
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