The Hindu Business Line : Putting the foot down on competition

POLY Ltd (the `seller'), a manufacturer of footwear, entered into an agreement with City Traders (the `purchaser') for sale of its products. The agreement includes, among others, the following clauses:

i) That the purchaser shall not deal with goods, products, articles, by whatever name called, manufactured by any person other than the seller.

ii) That the purchaser shall not sell the goods manufactured by the seller outside the municipal limits of the city of Secunderabad.

iii) That the purchaser shall sell the goods manufactured by the seller at the price as embossed on the price label of the footwear. However, the purchaser is allowed to sell the footwear at prices lower than those embossed on the price label.

You are required to examine with relevant provisions of the Competition Act, 2002, the validity of the above clauses. (7 marks)

Section 3 provides that no enterprise or person shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India. This rule applies to association of enterprises and association of persons while entering into any such agreement [Section 3(1)].

Any agreement entered into in contravention of the provisions contained in Section 3 (1) shall be void [Section 3 (2)].

Any agreement entered into between competitors — which a) directly or indirectly determines purchase or sale prices; b) limits or controls production, supply, markets, technical development, investment or provision of services; c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way; d) directly or indirectly results in bid rigging or collusive bidding — shall be presumed to have an appreciable adverse effect on competition.

An agreement which causes or is likely to cause an appreciable adverse effect on competition, includes the following agreements too: a) tie-in;

b) exclusive supply; c) exclusive distribution; d) refusal to deal; and e) resale price maintenance.

Tie-in arrangements include any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods. For example, requiring the purchaser of a scooter to buy a helmet too. Likewise, refusing to give gas connection unless the buyer purchases gas stove too.

Exclusive supply agreement includes any agreement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person. For example, insisting that a dealer of BPL products will not deal in Samsung or LG products.

Exclusive distribution agreement includes any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area or market for the disposal or sale of the goods. In other words, the dealer is not allowed to distribute his products in an area other than the one allotted to him.

Refusal to deal includes any agreement which restricts, or is likely to restrict, by any method, the persons or classes of persons to whom goods are sold or from whom goods are bought.

Resale price maintenance includes any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged [Section 3 (4)].

Exclusive supply agreement is deemed to have an appreciable adverse effect on competition.

On the basis of these, the practices stated in questions (i) and (ii) are anti-competitive, being exclusively supply agreement and exclusive distribution agreement, respectively, and are thus void. However, the practice stated in the question under (iii) is not anti-competitive since the dealer is allowed to sell those goods at prices lower than those embossed on the footwear.

Compensation to MD

MR DOUBTFUL was appointed as managing director of Carefree Industries Ltd for a period of five years with effect from April 1, 2000, on a salary of Rs 12 lakh per annum with other perquisites. The board of directors of the company on coming to know of certain questionable transactions, terminated the services of the MD from March 1, 2003. Mr Doubtful termed his removal as illegal and claimed compensation from the company. Meanwhile, the company paid Rs 5 lakh on ad hoc basis to Mr Doubtful pending settlement of his dues. Discuss whether:

i) The company is bound to pay compensation to Mr Doubtful and, if so, how much.

ii) The company can recover the amount of Rs 5 lakh paid on the ground that Mr Doubtful is not entitled to any compensation, because he is guilty of corrupt practices.

According to Section 318, compensation can be paid for loss of office but only to a managing director or a whole-time director. The compensation payable is limited to the average remuneration actually earned by such director during the three-year period immediately preceding the date on which he ceased to hold the office and multiplied for the unexpired period of his term or for three years, whichever is shorter.

Further, no compensation will be payable to such a director if the company goes into winding-up within a period of 12 months from the date of cessation of his office. [Proviso to sub-section (4) of Section 318].

Again, the company is not bound to pay compensation to Mr Doubtful if he had been found guilty of any fraud or breach of trust or gross negligence and mismanagement of the affairs of the company [Section 318 (3) (e)].

However, it is not proper for the company to withhold the payment of compensation on the basis of allegations alone unless there is a proper finding on the involvement of Mr. Doubtful in corrupt practices. The compensation payable is Rs 25 lakh, that is, at the rate of Rs 12 lakhs per annum for unexpired period of two years and one month.

Regarding the ad hoc payment of compensation to Mr Doubtful, it will be difficult to recover the amount already paid. In the Bell vs. Lever Brothers (1932 AC 161) case, it was held that the director was not bound to refund the money because he failed to disclose his fiduciary obligation. In the said case, Lever Bros. removed the managing director by paying him compensation.

Later on it was discovered, that the managing director could have been removed without paying any compensation for the breach of duty and corrupt practices committed by him. Action was initiated for recovery of the compensation money paid.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Plug the variables in the right place

Putting the foot down on competition

An escape route now closes for contractors

How to retain facts

Baskets of 'X'

Predict the winner

Who should be paid more, rep or techie?

Business-a-Verse

Failure and success are not episodes, but trajectories

Beyond profit, there's value in transformations

Cartoon Corner