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  • Vivek Kumar, Rakshit Sharma

Deciphering Market Distortion via Contracts: A Critique of INSA v. ONGC

[Vivek and Rakshit are students at Rajiv Gandhi National University of Law.]


The Section 26(6) order passed by the Competition Commission of India (CCI) in the case of In re: Indian National Shipowners Association (INSA) and Oil and Natural Gas Corporation (ONGC) absolved ONGC of allegations of abuse of dominance through onerous clauses in the contract for charter hire of offshore support vessels. This decision reflects the myopic approach of the CCI when investigating such abuses. Specifically, the CCI construes the inclusion of onerous clauses as the end of abuse of dominance instead of a means to an end. This approach might allow clauses that have the potential to cause market distortion to slip under the radar of the CCI, as has happened in this case. Currently, an appeal is pending in the National Company Law Appellate Tribunal challenging the impugned order.


This post explores the myopic approach of CCI when dealing with allegations of abuse of dominance through onerous clauses in a contract and argues that this approach can provide impunity for such conduct. Further, it sheds light on the potential anti-competitive effects that can be produced by onerous clauses in a contract between the buyer and the seller.


Prima Facie Ignorance


In 2018, INSA filed an information before the CCI alleging abuse of dominance by ONGC. The allegations pertained to inter alia certain onerous clauses contained in the Charter Hire Agreement (CHA) used by ONGC to employ members of INSA for charter hire of offshore support vessels, which included:


  1. Clause granting the right to ONGC to unilaterally terminate the CHA without providing any reason;

  2. Clause granting the right to ONGC to unilaterally terminate the CHA in case of force majeure events; and

  3. Clauses restricting the right of the informant to appoint arbitrators of its choice.


In its prima facie order, while the CCI found the clause providing the right of unilateral termination as prima facie anti-competitive, it did not do so for the other two clauses. This disregards previous decisions of CCI itself, such as Magnolia Flat Owners Association v. DLF (Magnolia Flat Owners) and Rajat Verma v. Public Works Department, where similar arbitration clauses were found to be unfair and abusive.


Although, in both decisions, the CCI did not provide any reasoning as to why such clauses have been construed as anti-competitive, it can be conjectured through a perusal of informants’ arguments that such stipulations attack the expectations of a fair and unbiased trial, thus diminishing the willingness to invoke such clauses.


However, the issue is much more fundamental. In cases where arbitration clauses have been a point of contention, such as Magnolia Flat Owners, the CCI has approached these clauses as an end in itself of abuse of dominance rather than a means to an end. In other words, CCI finds the inclusion of such clauses itself an abuse while ignoring the potential effects of such clauses on the market at large.


This difference in perspective explains why the CCI, while adjudicating such cases, might utilise contractual principles such as tests of "good faith" and "change in circumstances". Such tests are used to determine the validity of unilateral termination clauses under contract law, as seen in the Section 26(6) order passed in INSA v. ONGC. In this case, the CCI denied any violation on the part of ONGC vis-à-vis the unilateral termination clause as the tests of "good faith" and "change in circumstances" were met, and both parties had equal bargaining power.


Such an analysis appears erroneous, as the CCI will invariably find itself in one of two situations. First, if the alleged clause is invalid under contract law; it will be void and construed as an abuse in itself without analyzing its effect on the market. A penalty may be imposed for this violation. Second, if the alleged clause is valid under contract law, it will gain immunity from any further scrutiny. Even if such clauses cause market distortion, no penalty will be imposed. 


In both situations, the CCI would not investigate the effect of such clauses on the market at large, so the competition issues arising out of these clauses, if any, would remain uncovered. Any liability due to such conduct will be extinguished if the clause is found valid under contract law. This approach is patently erroneous, as CCI’s mandate is to eliminate conduct having adverse effects on the market at large, irrespective of its soundness under other laws.


Potential Fallout of Weaponized Clauses Under Competition Law


A contract, even if it conforms to contract law, can still have an adverse effect on the market. Therefore, CCI should focus on the effects its provisions can have on the market rather than restricting itself to the parties to the contract. Applying this analysis to onerous clauses, two major market distortions might be produced: first, the creation of lock-in situations deterring the consumer from switching, and second, the creation of entry barriers for new entrants in the market.


Contractual Lock-In


Lock-in refers to a situation where the consumer becomes dependent on a single supplier for a specific good or service and cannot switch to another supplier without incurring substantial costs or inconvenience. Switching costs is a broad phrase, comprising social, pecuniary, and even psychological costs. Therefore, any inconvenience that deters a consumer from switching vendors can be termed a switching cost.


Switching costs can have much graver implications if the incumbent is a dominant entity and the number of players in the market is limited. For instance, in the ONGC case, only four players operated in the relevant market, out of which ONGC enjoyed a market share of more than 80%. The dominance of ONGC can be appreciated when we consider that out of 48 operational offshore drilling rigs, 45 are being operated by ONGC. In this case, it would be quite difficult for any offshore support vehicle (OSV) to make an effective switch as the availability of new vendors is scarce and the possibility of being blacklisted from future contracts with the incumbent also exists.


If ONGC decides to impose onerous clauses on the OSVs, it can produce an effect similar to that of a lock-in as it would deter them from switching by virtue of various “costs” that they would perceive to be attached to such a switch. For instance, in the context of arbitration clauses, when ONGC gives itself the right to appoint ex-employees / shareholders as arbitrators, it creates the belief that the arbitral mechanism is heavily tilted in favour of the incumbent. This would affect the willingness of customers to terminate the contract, locking them in with the incumbent until the expiration of the contract.


Contracts as Barriers to Entry


Barriers to entry are factors that can deter the entry of new competitors in a market. Onerous clauses in contracts between the incumbent and the consumer can produce barriers to entry. In the case of Surinder Singh Barmi v. Board for Control of Cricket in India (Surinder Barmi), while investigating the allegations pertaining to abuse of dominance, the Director General arrived at the conclusion that various clauses in the franchise agreement granted by BCCI did have the effect of creating barriers to entry into the market. This analysis of the Director General was accepted by the CCI, and a penalty was imposed.


However, a more comprehensive analysis can be found in the landmark antitrust case of United States v. United Shoe Machinery Corp. (United Shoe), where the incumbent firm was a shoe machinery manufacturer, controlling 85% of the market. United did not sell this machinery, but it rather developed a complex leasing system.


It was found that the conduct of United imposed entry barriers in the market despite not being prima facie predatory or discriminatory, as shoe manufacturers were deterred from switching to competitors’ machines by virtue of the meticulously crafted leasing system, and offering services free of charge had exterminated any market for repair services of such machinery.


The takeaway from the decision in United Shoe is that extra costs imposed on an entrant by virtue of existing contracts between the incumbent and the customer can operate as entry barriers. In this case, the extra costs can be construed as the cost of inducing customers to surrender existing leases by offering them incentives and the cost of offering free servicing.


A superimposition of the findings in United Shoe to the ONGC case reveals a similar situation. Any entrant willing to enter the relevant market will be faced with customers who are unwilling to leave the incumbent due to the various switching costs involved, as mentioned in the previous section. The only way a customer can get out of this situation is by terminating the contract and paying damages to the incumbent, which will be financially onerous.  


In such a situation, the entrant has two options: either wait for the contract to expire or induce the consumer to terminate the contract by paying damages on its behalf. In other words, for an entrant to induce such a switch, he will have to offer a price that is lower than the incumbent’s price minus the damages that the customer will have to pay upon termination of the contract.


This situation effectively creates high entry barriers, as opting for either of the above-mentioned options leaves the entrant in a disadvantageous position as far as entry is concerned.


Conclusion


There is a jurisprudential vacuum about the potential anti-competitive effects of a contract. While the CCI might perceive the existence of an onerous clause as an abuse of dominance, as seen in Magnolia Flat Owners and other similar cases, it must not avoid appreciating the adverse effects such clauses can have on the market at large. This would allow the CCI to better appreciate the gravity and extent of violations and would prevent patently erroneous absolutions of guilt, as seen in INSA v. ONGC. There are indeed cases in India that have taken this course, such as the case of Surinder Barmi; however, such decisions have remained relatively obscure. Therefore, the decision in INSA v. ONGC, if not overturned, would become a significant setback for competition jurisprudence in India.

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