Vertical Agreements

UMANG GHILDYAL
Regulation of Vertical agreements

 Vertical agreements were prohibited per se earlier while rule of reason is being
preferred by the Court now to evaluate vertical restraints.
 The Indian Competition law is in tune with US competition law as far as applicability
of rule of reason is concerned. Tata Engineering and Locomotive Co. Ltd. v Registrar
of Restrictive Trade Agreement is a landmark decision of Supreme Court of India
which aptly illustrated the applicability of rule of reason in cases of restrictive trade
practices.
 The SC, in this case, held that the following three issues should be considered to
determine whether a restraint suppressed or promoted competition:
i. Facts peculiar to the business to which the restraint is applied;
ii. The condition before and after the restraint is imposed;
iii. Nature of restraint and actual and probable effects.
Types of Vertical Agreements:
1. Tie-in-arrangements
 Tie-in-arrangements includes any agreement requiring a purchaser of goods, as a
condition of such purchase, to purchase some other goods. This is an arrangement by
which a seller agrees to sell a product known as the tying item only on the condition
that buyer agrees to buy a second product known as the tied product from the seller.
Such arrangements not only reduce or eliminate the competition completely but also
remove buyer’s resistance to the tied product.
 Following tie-in arrangements were held to be in restraint of trade:
 In re Hindustan Motors Ltd. case, requiring the buyers of cars to pay towards the
servicing of cars with the sale price.
 In re Anand Gas case, requiring customer to buy gas stove while giving gas
connection
2. Exclusive supply agreements

 Exclusive supply agreements includes any agreement restricting in any manner the
purchase in the course of his trade from acquiring or otherwise dealing in any goods
other than those of the seller or any other person.
 In Jindal Steel v SAIL, an exclusive supply agreement through a memorandum of
understanding (MOU), was entered into between Indian Railways and Steel Authority
of India (SAIL) to supply rails on a continuous basis. Jindal Steel and Power Limited
alleged that the said MOU resulted in foreclosure of the relevant market for it.
 It was held that the MOU was not hit by Sec. 3(4) and hence, not anti-competitive.
 Consumer Guidance Society v Hindustan Coca Cola Beverages Ltd is another case
dealing with exclusive supply agreements.
3. Exclusive distribution agreements

 Exclusive distribution agreements includes any agreement to limit, restrict or withhold

the output or supply of any goods or allocate any area or market for the disposal or
sale of the goods.
 The main feature of such agreements is that the manufacturer or supplier agrees to
supply certain goods for resale to only one party, the exclusive distributor within a
defined territory and no other party will be supplied with the goods within that area by
the supplier.
 Exclusive dealing is a way of restraining inter-brand competition.
4. Refusal to deal

 Refusal to deal includes any agreement which restricts, or is likely to restrict, by any
method the persons or classes of persons to whom goods are sold or from whom goods
are bought. It is a sort of boycott.
 It means refusal to buy or sell by a mutual agreement with an intention to restrict
competition is illegal. Refusal to buy or sell by a mutual agreement with an intention
to restrict competition is illegal. The Act, however, does not empower the authority to
decide on behalf of any of the parties whether they should enter into any particular
agreement or not. To deal or not to deal is the freedom of the enterprise and they can
choose not to deal with any specific firm or person.
 But where such refusal to deal falls within the definition of the Act, the behaviour of
the enterprises is said to be anti-competitive.
5. Resale price maintenance

 Resale price maintenance (RPM) includes any agreement to sell goods on condition
that the prices to be charged on the 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. RPM is a form of price fixing.
 Illustrations: A manufacturer Y and its distributor Z may agree that the distributor will
sell Y’s products at certain prices, at or above a price floor (Minimum RPM) or at or
below a price ceiling (Maximum RPM). If Z refuses to maintain prices due to
whatever reason, Y may stop doing business with it. Every case of RPM is to be
judged on the basis of its effects to establish its nature. Usually, branded goods are
subjected to RPM as opposed to non-branded goods.