The Competition Tribunal in RCS Cards (Pty) Limited v The Consumer Finance Business of the JD Group Limited has affirmed that a restraint of trade clause contained in a sale of business agreement will not necessarily be considered anti-competitive. However, the restraint has to be justifiable in the circumstances and concluded for a reasonable period of time.
The case involved a sale of business agreement entered into by RCS Cards and the JD Group Limited in terms of which the Consumer Finance Business of JD Group was purchased. Although the JD Group retained its insurance business, the agreement contained a clause which restricted JD Group from offering credit life insurance to customers for a period of three years.
The Competition Tribunal considered a number of factors in determining whether the restraint in this case was reasonable. These factors included:
- the rationale for including a restraint of trade;
- whether the transaction could be concluded without the restraint;
- length or duration of the restraint;
- the ambit of the restraint;
- whether the restraint was an attempt to preserve a cartel; and
- whether competitors were entering into the restraint of trade.
The Competition Tribunal concluded that the restraint was reasonable and justifiable and also reasonable in terms of the time period, because the acquisition of the credit business also involved the acquisition of the underlying sales opportunity to provide credit life insurance to the credit customer in order to protect the underlying debt. The restraint was therefore necessary to protect a meaningful sales opportunity associated with the provision of credit.
The restraint of trade was reasonable and justifiable because it was necessary to protect the investment made through the purchase and was not for an unreasonably long period of time.
This approach affirms a number of previous decisions of the Competition Tribunal. In these prior decisions (for example Replication Technology Group v Gallo and Afgri Operations Limited v Pride Milling Company, amongst others), the Tribunal assessed the circumstances of each case and determined whether the restraint was appropriate and proportionate in light of the value of the investment made through the transaction.
However, when a restraint is not designed to protect the value of the investment, but is designed to limit competition, the Tribunal will not condone the provision. For instance, in the case of Nedschroef v CBS Fasteners (Pty) Ltd, where a restraint was agreed to by the purchaser in favour of a party that was not a party to the transaction, the Tribunal determined that, on the face of it, the clause constituted a market division arrangement in contravention of section 4(1)(b) of the Competition Act.
A firm wishing to dispose of any assets is very often likely to dispose of such assets to a competitor or potential competitor. It makes sense for that purchaser to secure a restraint from the vendor, in order to protect its position in the market, at least for a reasonable period, giving it time to establish itself. However, a restraint must be carefully structured so that it does not go beyond legitimately protecting an investment into protecting a market position. Parties to a transaction should, when in doubt, consult their competition law advisors to ensure they avoid the serious consequences of a market allocation allegation.