Outcome of discussion paper
The Assistant Treasurer and Minister for Competition Policy and Consumer Affairs, Chris Bowen MP, released a discussion paper entitled the ‘Meaning of ‘Understanding’ in the Trade Practices Act 1974 (Cth)’ on 8 January 2009. Submissions regarding the adequacy of the current interpretation of the term ‘understanding’ in section 45 of the Trade Practices Act 1974 (Cth) (‘TPA’) to capture anti-competitive conduct closed on 31 March 2009. The Treasury has released a statement that it received 15 submissions in total however, no further comment as yet has been made on the discussion paper.
Ultimately, the paper questioned whether there is a need to clarify or define the meaning of ‘understanding’ in the TPA and the scope of any such clarifications or definitions as the Australian Competition and Consumer Commission (‘ACCC’) seek to avoid the restrictive consequences of the current interpretation. The ACCC also raised concerns about the courts readiness to draw inferences from evidence in determining whether parties have reached an ‘understanding’. Franchise systems, particularly where agreements , or understandings exist with third parties, such as suppliers, manufacturers, between franchisees or even with service providers need to ensure that they carefully monitor compliance with the law in this area.
1. Meaning of the term ‘understanding’ in the TPA
Section 45 of the TPA prohibits a corporation from making or giving effect to a provision of a contract, arrangement or understanding that restricts dealings or substantially lessens competition. Whilst the terms ‘contract’, ‘arrangement’ and ‘understanding’ are not defined in the TPA, they have received a degree of interpretation in court decisions over the years. The concern is that the court decisions over time have narrowed the conduct that is caught by the term ‘understanding’, allowing corporations to implement a broader range of anti-competitive dealings than originally intended in legislation.
In the recent case of ACCC v Leahy Petroleum Pty Ltd  FCA 794, the Court interpreted ‘contract, arrangement and understanding’ as representing a spectrum of consensual dealings in that an ‘understanding’ is considered less precise than an ‘arrangement’, and an ‘arrangement’ less precise than a ‘contract’.
Courts have always required, as necessary elements for conduct to come within section 45, that there be a meeting of the minds of the parties to the alleged ‘understanding’ and some form of consensus and commitment by the parties to the alleged ‘understanding’. The difficulty arises in determining the nature and content of what is required to satisfy the element of commitment as it seems to require that at least one party to an alleged ‘understanding’ be understood by the other to be committed to act in a certain way.
2. Proof of the term ‘understanding’ in TPA
The ACCC, as noted previously, expressed a concern that courts have been reluctant to find that a respondent came to an ‘arrangement’ or ‘understanding’ based on circumstantial evidence due to the potential consequences to the parties.
3. Narrowing the conduct caught by the term ‘understanding’
The court in Top Performance Motors Pty Ltd v Ira Berk (Queensland) Pty Ltd (1975) 24 FLR 286 held that an ‘understanding’ simply required a meeting of the minds of the parties to the ‘arrangement’ in which one of them is understood, by the other or others that the ‘understanding’ exists so long as conduct between both continues in the manner contemplated.
Although early cases suggested that a moral obligation is what gave rise to the ‘commitment’ between the parties, ambiguity has arisen since the case of ACCC v CC (NSW) Pty Limited (1999) 92 FCR 375 in which Justice Lindgren found that more was needed then a ‘mere expectation’, but rather that one of the parties had assumed an obligation or given an assurance or undertaking as to the ‘understanding’. This has been a recurrent problem for the ACCC as ultimately most cases will be supported by only circumstantial evidence and not hard facts unless one of the parties comes forward and confesses to collusion.
Some suggest that more recent decisions have given the concept a ‘life of its own’ and as such have further narrowed the concept of understanding.
In Apco Service Stations Pty Ltd v ACCC (2005) 159 FCR 452, Justices Heerey, Hely, and Gyles found the evidence insufficient to prove that Apco was party to an ‘understanding’. Rather that the information provided by party A did not procure any commitment to rely upon it and both parties were free to make independent decisions as to whether to act on the information or not. A similar approach was taken in ACCC v Leahy Petroleum Pty Ltd & Ors.
These cases demonstrate that where an ‘understanding’ has arisen, it must be as to future matters, and where a party is free to act inconsistently then this will fall short of the commitment requirement.
4. Summary of submissions
Whilst submissions were received supporting both the decision to give ‘understanding’ a statutory definition and the decision to retain the status quo, the weight of support was behind the current position. Reasons for this decision included:
There is no evidence to suggest that the current interpretation of the term ‘understanding’ limits the ability of the TPA to properly address competitive conduct.
Any difficulties the ACCC had faced were a result of failures of proof rather than statutory shortcomings was argued.
Changing the current interpretation would entrench uncertainty by allowing the courts to determine whether an ‘understanding’ exists without the accepted commitment interpretation.
Those who disagreed with a statutory definition however were not all in favour of the current definition with one submission suggesting the term be guided by economic theory or US or European law.
Those who sided with the option of a new statutory definition claimed reasons such as:
The spectrum approach is a literalist approach which diverts attention away from the more fundamental inquiry as to the proper scope of liability for co-operation between competitors.
The current position undermines the object of the TPA and its effectiveness and thus clarification is needed as the courts may currently feel constrained to an inappropriate degree in their ability to draw inferences from the evidence in determining whether or not an ‘understanding’ exists.
5. Outcome of the discussion paper and likely changes to law
It would appear that the bulk of the submissions indicate a preference for no statutory definition of the word ‘understanding’ and that the current judicial interpretation may remain the law on this notion.
The ACCC by seeking to insert a statutory definition into the Act is seeking to construct an ‘understanding’ by process of deduction through permitting the courts to disregard the absence of direct evidence of a commitment. This would in effect require the court to infer the existence of something which has not been objectively established.
The weight of submissions indicates a change is unnecessary as the current judicial interpretation is adequate and effective and even if it is not, others have expressed the view that any prescribed meaning of ‘understanding’ will only create uncertainty with the impending enactment of the cartel legislation. As yet the government if yet to announce its view on the submissions.
6. How does this co-exist with the new anti-cartel legislation?
The Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2009 (Cth) (‘the Cartel Act’) was given royal assent on 26 of June 2009 introducing new civil and criminal offences having effect as of 24 July 2009.
The Cartel Act amends the TPA by introducing two new criminal cartel offences and two new civil cartel offences. The new criminal sanctions are however expected to have the largest impact with individuals convicted of criminal cartel offences now facing a maximum sentence of 10 years’ imprisonment and a fine of up to $220,000 for each offence. The maximum fine for corporations found to have committed a criminal cartel offence remains the same as the existing competition law penalties being the greater of
These offences involve making or giving effect to a ‘contract, arrangement or understanding’ with a competitor that contains a ‘cartel provision’ where the parties intend to enter into a ‘contract arrangement or understanding’ and have knowledge or belief that it contains a ‘cartel provision’.
Due to this recent introduction of harsh criminal penalties for cartel behaviour, stability in the definition of ‘understanding’ is critical to maintain clarity about the application of the law. How the Minister chooses to act in light of the submissions received to the paper should be a matter of keen interest for all businesses given the potential application in the cartel offences now introduced.
The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
© DibbsBarker 2009