Charter Hire Agreements: Abuse of Dominance in a Monopsonist Procurer Market

[B.V.S. Aditya Santosh is a 4thYear BBA.L.L.B. (Hons.) Student at ICFAI Law School, Dehradun]

In Indian National Shipowners’ Association Vs. Oil and Natural Gas Corporation Limited (order dated 12 June 2018), the Competition Commission of India (CCI) dealt with abuse of dominant position of an enterprise in a monopsonist procurer market (buyer’s monopoly)  by virtue of unfair charter hire agreements.

For the sake of brevity, the facts of the present case are that the  Indian National Ship Owners Association (referred to as the “informant”), which consists of representatives of various Indian ship-owners for growth and development of Indian mercantile marine sector, filed information under section 19(1) of Competition Act, 2002 inter alia alleging that the Oil and Natural Gas Corporation Limited (“ONGC”) has abused its dominant position through imposition of unfair terms and conditions in the Charter Hire Agreements (“CHA”) entered into between the informant and the ONGC, which governs the contractual relationship between them.

The principal clause in question (clause 14.2) of the CHA, which has been alleged to be one-sided and unfair is of the Special Contract Conditions (‘SCC’), which award ONGC the  unilateral right of termination without assigning any reason. The same is reproduced below:

Clause 14.2: Notwithstanding anything contained herein the Charterer shall have its exclusive right to terminate the contract for the chartered vessel operating under the contract by giving to the Contractor thirty (30) days written notice without assigning any reason therefor. However, this clause would apply after first 12 months of the contract. Nevertheless, in case of performance of the Contractor not found satisfactory, provisions of clause 18.4 of general conditions of contract shall apply.

Other clauses which were averred to be unfair and abusive were:

  1. Clauses 18.2 and 23 of the General Contract Conditions : Unilateral termination in case of force majeure;
  2. Clause 27.1.2 and 27.1.4 of the General Contract Conditions: Onerous clauses in relation to appointment of arbitrator and
  3. Persistent verbal threats to terminate the contract if costs charged by informant is not reduced.

Considering the above facts and circumstances, the informant has alleged that the CHA stands in contravention of the provisions of section 4(2)(a)(i)and sought modification of abusive clauses and monetary penalty.

Ascertaining the Dominance

Since the allegations against ONGC pertain to abuse of dominant position, it is crucial to delineate the relevant market and relevant product. While examining position of strength, section 4 has to be read in conjunction with section 19(4)of the Act. Scrutiny of abuse of dominance will only be done when ONGC is determined to be dominant in the relevant market by the Commission.

Procurer Market as Relevant Product Market

Section 2(t) of the Competition Act, 2002 prescribes that the determining factor for defining a relevant product market is demand side interchangeability/substitutability of the product, which is to be ascertained on the basis of the factors such as physical characteristics, end-use of goods, price of goods or service, consumer preference, exclusion of in-house production, existence of specialized producer, and classification of industrial products outlined under section 19(7)of the Competition Act.

Generally the averred dominant player is always the seller of goods or services adversely effecting either the market competitors or buyers’ market. But the instant case pertains to a scenario where the opposite party ONGC is the procurer of services and is alleged to be affecting the selling side of the market, i.e. the supplier of services of offshore support vessels (“OSV”)  and member companies of the informant.

As radical as the aforementioned case may be, it is not the first of its kind. this procurer market question of law was exhaustively dealt by the Commission in AdCept Technologies Pvt. Ltd. v. Bharat Cooking Coal Limited. The conclusive view of the Commission was that:

in cases which concern allegations against a dominant buyer/buyer power, it is the procurement market, not the supply market which has to be defined. The demand-side oriented market concept is applied inversely and, from supplier’s point of view, the market definition is based on their ability to switch to alternative sales opportunities. The definition focuses on the products offered by the supplier or would be able to offer to alternative buyers without any significant problems.

The international jurisprudence with respect to procurement market and buyer’s power is very meagre but, the European Competition Regulatory Authority (EC) has witnessed few practices of these types. It is noteworthy here to cite the Serbian National Competition Authority which fined two dairy food companies – Mlekara and Imlek – for abusing its dominant position with regard to the purchase of raw milk. The undertakings imposed several contractual clauses that were deemed abusive and anticompetitive.

Several European Member States have adopted European Commission rules dealing with abuse of relative dominance, for example the Latvia the Competition Authority fined RIMI Latvia Ltd., for abusing its dominant buying position in retail trade for unjustifiably requesting its dependent suppliers to pay for the placement of their products in RIMI’s low price shops (slotting allowances).

The Commission in the present case was of the opinion that offshore vessels are of specialized nature and held that the vessels were not interchangeable. Hence the relevant market product market is defined as “market for Charter hire of OSVs”.

Relevant Geographical Market

Section 2(s) of the Competition Act, 2002 enumerates relevant geographic market as “a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighboring areas”.

“Market for charter hire of OSVs in Indian Exclusive Economic Zone” (“EEZ”) was defined as the relevant geographical Market by the Commission reasoning section 7(4)(a)of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 which enables the Government of India and ONGC the sovereign right for exploitation of natural resources from two hundred nautical miles from the coastline and the regulatory regime governing the oil and natural gas. Hence, in the view of the foregoing arguments, it was decided that EEZ conditions of competition were homogenous.

Lastly, the Commission while deciding the ancillary issues suspended the force majeure clause and held the clauses not to be abusive citing that there were sufficient safeguards to protect the OSVs and the clause pertaining to partially exclusive right to appoint arbitrators by ONGC was held not be prima facie abusive.

It is pertinent here to mention that the aforementioned order was passed under section 26(1) of Act, which means the present order is not an expression of final opinion on the merits of the case. Thus no monetary penalty or other penalties enshrined under section 27 were exercised and the Director General, who is the investigative arm of the Commission, was directed to probe into the matter and submit a detailed report for finally disposing the case.

In an interesting development in the present case the Commission disposed the prayer made by informant under section 33 for grant of interim relief in affirmative restraining ONGC from invoking its power to invoke the termination of Charter Hire Agreements.

Conclusion

After the notification of section 4 of Competition Act by Ministry of Corporate Affairs, the Commission has set itself on a marathon to penalize enterprises abusing their dominant position. While the erstwhile Monopolies and Restrictive Trade Practices Act, 1969 provided blanket immunity for government affiliated agencies and public sector units like ONGC, the current competition regime is antithetical to such a distinction. The SVS Raghavan Committee Report recommended the abrogation of such immunity, which provided the impetus for extension of the jurisdiction to government agencies alike. Progressive decisions like these underline a very fundamental rationale behind competition law, i.e., to ameliorate economic efficiency and prevent practices having adverse effect on the competition.

B.V.S. Aditya Santosh 

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