One of the main elements of competition law is the prohibition of agreements between competitors that have a harmful impact on competition such as agreements to fix prices, allocate markets or collude on tenders. Such agreements, also known as “hard-core cartels” in the United States, are per se prohibited. In other words, there is a presumption where such an agreement has been found to exist that it is anticompetitive and respondents would not be permitted to justify or defend their conduct. This prohibition is enshrined in section 4(1)(b) of the Competition Act No. 89 of 1998, as amended (the “Act”).
In order to establish whether conduct falls within the ambit of section 4(1)(b) of the Act, such conduct must be the type of conduct the legislature envisioned to condemn per se. This exercise is known as characterization. The principle was first introduced into South African competition law in the Supreme Court of Appeal judgment of American Soda Ash Corporation and another v Competition Commission and others (“ANSAC”). It is used to assess whether an impugned conduct is of the character contemplated in section 4(1)(b).
In the subsequent decision of the Competition Appeal Court (“CAC”) in Competition Commission v South African Breweries Ltd & others (“SAB”), the CAC crystalized the principle when it said that conducting a characterization exercise under the Act requires ascertaining: “(i) whether the parties are in a horizontal relationship, and if so (ii) whether the case involves direct or indirect fixing of a purchase or selling price, the division of markets or collusive tendering within the meaning of section 4(1)(b)”.
The Competition Tribunal (the “Tribunal”) recently grappled with this principle in the Competition Commission’s (“Commission”) referral of a complaint against WACO Africa (Pty) Ltd, Tedoc SGB-Cape JV, Superfecta SGB-Cape JV, Mtsweni SGB-Cape, Tedoc Industries (Pty) Ltd, Superfecta Trading 129 CC and Mtsweni Corrosion Control (Pty) Ltd. The Commission was alleging that these firms engaged in price fixing and collusive bidding in contravention of section 4(1)(b)(i) and (iii) of the Act and sought an administrative penalty against them in terms of section 58(1)(a)(iii).
On 15 March 2015, Eskom issued an invitation to tender inviting prospective bidders to participate in a tender for the supply, transportation, delivery, installation and dismantling of scaffolding and thermal insulation for its various coal fired power stations valued at approximately R240 million for a period of 5 years. In assessing the bids, it was raised as a concern that four bids were signed by the same person and contained similar or the same documents.
Eskom’s internal forensic and auditing team referred the matter to the Commission for investigation of collusive tendering. The Commission investigated the matter and referred a complaint to the Tribunal alleging that the respondents, while being firms in a horizontal relationship, entered into an agreement or engaged in a concerted practice to fix prices and tender collusively.
SGB-Cape had been informed by Eskom in that it had to improve its empowerment status failing which its prospects of continuing to receive commercial opportunities at Eskom’s power stations would be endangered. Eskom subsequently issued an invitation to tender requiring, amongst others, bidders to have 51% black ownership in accordance with section 2(1)(d-f) of the Preferential Procurement Policy Framework Act, No. 5 of 2000.
SGB-Cape, having regard to the mandatory requirement of black economic empowerment, made a decision to bid in its own name and to submit alternative bids with empowerment join venture partners (“JVs”) and communicated this decision to Eskom.
SBG-Cape approached potential empowerment JVPs with this proposal and Tedoc SGB-Cape JV, Superfecta SGB-Cape JV and Mtsweni SGB-Cape JV were formed for the purpose of bidding for the tender. JV agreements were drawn up providing for the supply of goods and related services to be subcontracted to SGB-Cape and the supply of skilled, semi-skilled and unskilled labour to be subcontracted to the respective JVPs. During April 2015, the bids were unilaterally completed and submitted on behalf of the three JVs to Eskom.
The referral was dismissed on the grounds that the relationship between the SGB-Cape and the empowerment JVs could not be characterized as horizontal. The Tribunal held that the JVs existed only for the purposes of bidding for the tender and that since SGB-Cape alone was the controlling mind in devising all the key components of the tender, it followed that it could not collude with itself.
It could be argued that the Tribunal’s characterization was, to some extent, aggressive. There is a noticeable thread in case law detailing real competition risks when companies bid for tenders in their own name as well as with an empowerment partner whether or not the JV with an empowerment partner is formed only for purposes of bidding for a particular tender.
A cautious approach to this risk is for a company to select and stick to one strategy for a particular tender. It should choose to either bid in the company’s name or bid with an empowerment partner. If, however a company intends to submit alternative bids for any reason, competition law advise should be sought before any decision is taken to avoid penalties that could possibly devastate the business.
The Commission is appealing the Tribunal’s decision.
Lwandise Mkam BCom LLB (Wits) is a Candidate Attorney in the Competition Law Department
 2005 158 (SCA) (“ANSAC”).
 2014 2 CPLR 339 (CAC) (“SAB”).
 Ibid para 37.