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The pressing need to introduce a criminal
cartel offence arose primarily because of the fact that the activities of
cartels or agreements to form such cartels were proving grossly detrimental to
the competition in the economy of UK. A healthy competition is indispensable for
the growth of the economy and if that is stifled, the whole economic structure
is destroyed and the growth of the country is bound to become unsteady.
A ‘cartel’ is basically, a union of
producers, distributors, sellers, service providers or traders, who by contracts
between themselves try to control the production, distribution, sale or price of
or trade in certain goods or provision of services. In other words, they try to
control or manipulate the market for their benefit. A cartel has been defined
under section 188 of the Enterprise Act, 2002 which states that
an individual
will be guilty of an offence if he dishonestly agrees with one or more other
persons to make or to implement or to cause to be made or to be implemented
arrangements between at least two undertakings that are described as prohibited
activities. These are price fixing, the limitation of production or supply,
market sharing; and bid rigging.
Thus a cartel, as understood under this Act
is such an association whose chief and primary motive is to practice
anti-competitive activities which affect sound competition, adversely.
Otherwise, agreements forming cartels are not null and void per se . It is only
when the persons/enterprises form it with mala fide intentions and works
dishonestly to suppress competition, is it considered unlawful and void . In the
case of Mogul Steamship Company v. McGregor Gow & Co., the Court of Appeal has
pronounced that "the right of the individual to carry on
his trade or business in the manner he considers best in his own interests
involves the right of combining with others in a common course of action,
provided such common course of action is undertaken with a single view to the
interests of the combining parties and not with a view to injure others"
But initially in England cartel agreements
were not held void. They were merely regarded as criminal conspiracies which
were indictable only when the element of dishonesty was present. The case of
Attorney - General of the Commonwealth of Australia v. Adelaide Steamship Co.
Ltd, clarifies this fact. Thus the parties were free to act upon the terms of
the contract, even if it was unenforceable under law. But subsequently, there
was a shift in the outlook and cartel practices came to be recognized as
improper and illegal and no irrelevant defenses were entertained. This view was
upheld in the case of Scott v. Brown, Doering, McNab &Co.
However, there are certain cartels which are
approved by the UK government and are granted exemptions from regulatory
penalties. These are ‘Joint Venture agreements’ for the production of new
products which cannot be produced without the contribution of both the parties
to the agreement. But some restrictions are imposed on the market share of the
joint venture agreement too.
The problem faced by the UK government was
that it was getting extremely difficult to control the activities of cartels
which were impairing the competition and were proving destructive for the
economy. The cartels mainly try to limit competition by engaging in
anti-competitive practices like exclusive supply agreement, tie-in-arrangement,
resale price maintenance, bid-rigging, price-fixing, etc. They aim at driving
their competitors out of the market in order to have full control over the
market. Once they acquire the said control in particular goods or services, they
tend to unreasonably raise the prices of goods/services; restrict the production
or distribution thereof and perform such other practices which make the very
existence of a cartel an illegal exercise. Despite the fact that the Competition
Act which was in force and imposed heavy fine on the enterprises engaged in
cartel activities, these enterprises continued their dealings undaunted even
after being exposed. To control such a ruthless behavior government decided to
take severe measures.
Moreover, the biggest lacuna in the
Competition Act, 1998 was that it sought to punish the enterprise, while the
persons comprising it went scratch-free and because of this loophole, cartels
multiplied and were not afraid of the liability/punishment under the Act. The
prevailing situation was that once a cartel was ordered to terminate its
activities or to close down altogether, it resumed its dealings or a fresh
cartel was formed, respectively, within a short span of time, rudely ignoring
the order. Thus, controlling them had become a Herculean task and stringent and
stern action was the need of the hour. Hence the Parliament enacted the
Enterprise Act, 2002. The idea of formation of criminal cartel offence was first
proposed by the ‘DTI White Paper: A World Class Competition Regime.’ This paper
mainly talked about the pharmaceutical cartel formed to fix prices and share
markets in the sale and distribution of certain vitamins. The cartel went
unnoticed for a decade and it produced $ 500 million in US alone. But when the
sinister practice was exposed the directors were successfully prosecuted and
fine of $1 billion was imposed along with a term of imprisonment.
The Enterprise Act, 2002 mainly concentrates
on imposition of criminal liability on the individuals. The principle of
independent corporate existence as enunciated in the case of
Salomon v. Salomon
& Co. implies that after incorporation an enterprise acquires its own corporate
existence. It becomes a body corporate and is distinct and separate from the
members constituting it. However, this principle cannot be stretched to
unnatural limits. It must not be forgotten that an enterprise is comprised of
individuals only, who are the brains behind its workings. A business does not
have any hands or brains of its own to work so it cannot be held responsible for
any dishonest, illegal activities. With the enactment of the Enterprise Act in
2002, the persons working behind the ‘corporate veil’ are caught hold of and
strict sanctions are imposed on them. This certainly has a strong deterrent
effect because earlier, only fines were imposed on cartels for engaging in
illegal activities, but now the persons engaging in them are punished with fine
or imprisonment or both and in some cases disqualification orders are passed
against individuals, the effect of which is that such individual cannot engage
further in any other business. It is pertinent to mention that the current Act
does not supplant, but supplements the earlier enactment. Thus the regime of the
Competition Act would continue alongside the criminal cartel offences.
According to the Act of 2002 cartel offence
is aimed at those involved in:
1. Price-fixing agreements;
2. Agreements to limit supply or production of goods or services;
3. Agreements to share out markets or customers;
4. Bid-rigging agreements.
For holding a person liable under this Act,
it is significant to prove two elements. Firstly, that he has acted
‘dishonestly’ while he is a member of a cartel i.e. he has bad intentions to
injure the competition, economy, consumers, etc. Mere negligence is not
sufficient to convict him for a cartel offence. The test of dishonesty has been
best explained in the case of R v. Gosh.
The second element is ‘reciprocity’
in the
horizontal cartel agreements [i.e." agreements relating to products or services
at the same level in the supply chain" ]. This means that a person cannot be
punished if he tries to control prices alone; he is punished if he commits a
cartel offence in collusion with other persons. Vertical cartel agreements
[which operate at different supply chains between the undertakings e.g. between
a distributor and a retailer or a manufacturer and distributor] do not come
under the purview of the Act. Thus, an agreement to form a cartel between two or
more persons must exist. Further, under the Act it is absolutely not necessary
to show that an implementation of the cartel agreement was done, even if it is
shown that the cartel agreement was entered into with dishonest intent, the
parties to such contract/agreement cannot escape liability.
Under, both the new and the old Act,
exemptions are granted to ‘whistle blowers’ against prosecution and punishment.
Whistleblowers, basically, are the persons who assist the OFT in nabbing the
persons involved in prohibited acts. In the event of investigation, the OFT does
not prosecute some persons, who otherwise are liable to prosecution for a cartel
offence. They are prevented from being prosecuted because of the ‘no-action’
letters issued to them for which the condition precedent is that the person to
whom it is issued has not instigated or compelled other persons for involving
themselves in cartel offences or he had not played a chief role in the formation
of the cartel. He is a person who now wants to cooperate with the OFT to nab
other perpetrators. This is also termed as the ‘leniency and no-action policy’
of OFT.
Prior to the enactment of the Enterprise
Act, the Competition Act, 1998 was in force and by way of that Act only civil
liability was imposed on the enterprises engaging in cartel activities. Since
the latter was found incapable of preventing cartel activities, the Enterprise
Act, 2002 was formed to assist it in such prevention. Earlier, when an
enterprise was found distorting or disturbing competition or abusing its
dominant position, financial liability was imposed on it. The punishments were,
a heavy fine imposed which amounted to 10% of the annual worldwide turnover of
the enterprise. But prior to such imposition, the OFT had to prove that the
enterprise was engaged in an illegal activity. Another method to restrain
enterprises was the "Naming and shaming" policy. This is basically resorted to,
to adversely affect the reputation of the enterprises so that consumers and the
government get alert. It does play an efficacious role in stopping illegal
interference in economic advancements, yet has not a very strong curb. Thirdly,
the persons affected by the cartel activities could only sue for damages for the
loss suffered by them. A few of these still continue to be used as punishments.
Despite the afore-mentioned liabilities, the cartels were not dissuaded from
continuing with their dealings. Where a cartel was forced to close down, its
members within a short span of time opened up another one and continued with
their illegal activities.
The criminalization of cartel agreements and
involvement in cartel activities has indeed played an important role in
restricting illegal exercises in UK. Since the sanctions under the former Act
were proving inadequate in curtailing them, the government enacted the
Enterprise Act under which cartel offences were formed. Under the criminal law
the guilt of the accused has to be proved beyond reasonable doubt and not ‘on
the balance of probabilities’ as is required under the civil law.
In the end the author has to state briefly
that the introduction of criminal cartel offence is an achievement and in the
long run would save the economy of UK against the illegal activities of cartels.
These cartels really have the potential to harm the country’s economy very badly
and they may not even be traced for a long time like the pharmaceutical cartel
could not be traced for a decade. Thus stringent and stiff action was needed to
curb the criminal cartel offences from being performed by the individuals who
constitute the enterprises, who went unnoticed prior to the enactment of the Act
of 2002. |
The
author can be reached at: neetisuri1985@legalserviceindia.com
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