Anti-Competitive Agreements: Section 3

Section 3 is the first and the most used of the substantive prohibitions. It forbids agreements which cause or are likely to cause an appreciable adverse effect on competition within India, makes such agreements void, and then divides them into two classes that are treated very differently. Horizontal agreements between competitors of the four kinds listed in Section 3(3) are presumed to have that effect. Vertical agreements between parties at different levels of the chain, listed in Section 3(4), carry no presumption and must be shown to have it. Almost every question on this section turns on which sub-section applies and on what the presumption does.

1. The Prohibition: Sections 3(1) and 3(2)

Four elements must be established under sub-section (1). There must be an enterprise, an association of enterprises, a person or an association of persons. There must be an agreement. The agreement must be in respect of one of the listed activities, which together cover practically all commerce. And it must cause or be likely to cause an appreciable adverse effect on competition within India. The words or is likely to cause are important: the Commission need not wait for the harm to occur, and an agreement may be struck down on its probable effect.

Sub-section (2) supplies the civil consequence. The agreement is void, which means that it cannot be enforced by either party and that a court asked to enforce it must refuse. It is distinct from the penalty, which the Commission imposes under Section 27, and it operates whether or not any proceeding is brought before the Commission.

2. Agreement: The Central Concept

Section 2(b) defines agreement to include any arrangement or understanding or action in concert, whether or not formal or in writing, and whether or not intended to be enforceable by legal proceedings. The definition was drafted with cartels in mind, and it does three things.

1. It removes the need for a contract. No offer, acceptance or consideration need be shown, and the ordinary requirements of the Indian Contract Act, 1872 have no application. What is required is a meeting of minds, however informally arrived at.
2. It removes the need for writing. A verbal understanding reached at a meeting, or an exchange of messages, or a course of conduct from which a common intention can be inferred, is within the definition.
3. It removes the need for enforceability. A cartel is by its nature unenforceable, since no court would assist a member to compel another to keep the price up. The definition makes that irrelevant.

2.1 Arrangement, understanding and action in concert

These three expressions describe a descending scale of formality. An arrangement is a settled plan between parties who know what each is to do. An understanding is looser: the parties know what is expected of them without having spelled it out. An action in concert is the least formal of all and corresponds to what European law calls a concerted practice: a form of coordination which, without having reached the stage of an agreement properly so called, knowingly substitutes practical cooperation for the risks of competition.

3. Appreciable Adverse Effect on Competition

The expression is not defined. What the Act supplies instead is a list of factors in Section 19(3) to which the Commission must have due regard while determining whether an agreement has such an effect. The first three are harmful and the last three beneficial.

• (a) creation of barriers to new entrants in the market;
• (b) driving existing competitors out of the market;
• (c) foreclosure of competition by hindering entry into the market;
• (d) accrual of benefits to consumers;
• (e) improvements in production or distribution of goods or provision of services;
• (f) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.

Three features of the provision should be noted. The word appreciable requires the effect to be more than trivial, so a restriction between insignificant parties in a competitive market may fall outside the section altogether. The words all or any in the opening words of Section 19(3) mean that the Commission need not find every factor present, and may rely on those that the facts disclose. And the beneficial factors are not a defence but part of the same assessment; the Commission weighs them against the harmful ones and reaches a single conclusion, which is why India is said to have no efficiency defence in the European sense.

4. Horizontal Agreements: Section 3(3)

Section 3(3) applies to an agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise, including cartels, engaged in identical or similar trade of goods or provision of services. Four kinds of such agreement are presumed to have an appreciable adverse effect on competition.

1. Clause (a). Directly or indirectly determines purchase or sale prices.
2. Clause (b). Limits or controls production, supply, markets, technical development, investment or provision of services.
3. Clause (c). Shares the market or source of production or provision of services by way of allocation of the geographical area of the market, or type of goods or services, or number of customers in the market or any other similar way.
4. Clause (d). Directly or indirectly results in bid rigging or collusive bidding, the Explanation defining bid rigging as any agreement between enterprises engaged in identical or similar production or trading of goods or provision of services which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding.

Two qualifications appear in the sub-section itself. The proviso exempts an agreement entered into by way of a joint venture if it increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services. And after the amendment of 2023, an enterprise which is not engaged in an identical or similar trade may nevertheless be treated as a party to such an agreement if it actively participates in furthering it, which brings the hub of a hub and spoke arrangement within the presumption.

5. Vertical Agreements: Section 3(4)

Section 3(4) applies to an agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade in, goods or provision of services. Such an agreement is a contravention if it causes or is likely to cause an appreciable adverse effect on competition in India. There is no presumption; the effect must be shown, and it is shown through the Section 19(3) factors.

• Tie-in arrangement. Requiring a purchaser of goods, as a condition of the purchase, to purchase some other goods.
• Exclusive supply agreement. Restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in goods other than those of the seller or any other person.
• Exclusive distribution agreement. Limiting, restricting or withholding the output or supply of any goods, or allocating any area or market for the disposal or sale of the goods.
• Refusal to deal. Restricting by any method the persons or classes of persons to whom goods are sold or from whom goods are bought.
• Resale price maintenance. Selling goods on condition that the prices to be charged on 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.

6. Section 3(3) and Section 3(4) Compared

7. The Presumption and What It Does

The word presumed in Section 3(3) has been the subject of much argument. It does not make the listed agreements unlawful per se in the American sense, because a per se rule admits of no answer once the agreement is proved. What the presumption does is shift the burden: once the Commission establishes an agreement of one of the four kinds between enterprises in identical or similar trade, it need not prove the adverse effect, and the party must displace the presumption by showing, through the factors in Section 19(3), that the agreement does not have such an effect.

8. The Exemptions in Section 3(5)

Section 3(5) provides that nothing in Section 3 shall restrict the right of any person to restrain any infringement of, or to impose reasonable conditions as may be necessary for protecting, his rights conferred under the intellectual property statutes listed, or the right of any person to export goods from India to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export. The intellectual property saving extends only to reasonable conditions necessary for protection, and the export saving only to agreements relating exclusively to export, so an arrangement that also regulates the domestic market is outside it.

9. Related Topics and Provisions