This Section 26(6) order by the Competition Commission of India [hereinafter, “CCI”] exemplifies a sound reasoning but an ultimate error by equating two parties with unequal bargaining power.. While agreeing to the dominant nature of Oil and Natural Gas Corporation Limited [hereinafter, “ONGC”], CCI declared it to not be abusive of this dominant position operating the relevant market of chartering Offshore Support Vehicles [hereinafter, “OSFs”] in the Indian Exclusive Economic Zone [hereinafter, “EEZ”]. This decision highlights a very restricted perspective undertaken by the CCI: treating inclusion of onerous contractual clauses as a result of dominance’s abuse rather than as a medium to an end.
While application of mind by CCI did wonders in ascertainment of dominant position, it felt short when it was declared that while ONGC had sufficient market power, the mere inclusion of onerous clauses in contracts would not amount to abuse of dominant position. These precedents risk creating a slippery slope, making it easier for market players to evade CCI scrutiny and potentially distort the market through abusive contracts. This perspective may lead to challenges for firms with weaker bargaining power who, despite facing restrictive terms, might struggle to prove abuse, thus, potentially overlooking the real impacts of unequal bargaining power. .
The Author, through this blog , attempts to highlight the anti-competitive nature of unilateral contractual clauses (as were entered into in this case), and analyse how this judgement of CCI can enable such a practice to go unchecked.
Background and first-level ignorance:
In 2018, the Indian National Ship-owners Association [hereinafter, “INSA”] alleged violation of Section 4 of the Competition Act, 2002 as there was “abuse of dominance” by ONGC with reference to three clauses in the Charter Hire Agreement [hereinafter, “CHA”] which hired OSFs:
- ONGC’s right to “unilaterally terminate” the contract, without specific reasons’ notification;
- ONGC’s right to “unilaterally terminate” the contract during “force majeure” events;
- No right to the INSA to choose and appoint arbitrators.
In its initial order, the CCI did not find clauses (b) and (c) prime facie anti-competitive, but only clause (a), thereby defeating its own orders in Magnolia Flat Owners case and Rajat Verma case where it held similar arbitration clauses as abusive and unfair. The reasoning behind such decisions was not provided by the CCI, but if one were to ascertain it from the arguments advanced, it could be that such clauses reduce willingness to be invoked as they undermine the expectations of a fair and impartial trial. In dealing with such cases, the CCI has emphasized that the mere inclusion of such conditions is abuse and has mistakenly or intentionally chosen to ignore their impending effects on the market at large. In INSA v. ONGC, the CCI significantly chose to ignore the fact that this termination came as a response to the CAG report which had found out that oil prices had fallen drastically, affecting oil companies negatively and “thereby the demand for OSVs and resultantly the charter hire day rates also witnessed a significant drop”. The CAG’s remarks on the financial implications of delayed action provide a basis for the CCI’s interpretation that ONGC’s actions were not conducted in “bad faith.” Instead, the CCI noted that ONGC reasonably waited for market stability before terminating the contracts, indicating a measured approach rather than a hurried or exploitative termination. CCI found no evidence of ONGC using its dominant position abusively; instead, the termination was viewed as a necessary business response to exceptional circumstances..
This disparity in viewpoint results in CCI applying conceptual concepts of “good faith” and “change in circumstances” when deciding along the similar lines. These tests, as in INSA v. ONGC are employed to ascertain unilateral termination clauses’ legality under contract law. The CCI applied this, along with the case of Central Inland Water Transport case, and reasoned that both the requirements were fulfilled since INSA and ONGC had “equal bargaining power”, thus, dismissing any penalty for ONGC for causing market distortion by abuse of dominant position. Support was given to this decision through the argument that even though ONGC comprises 80% of the market share, the rest 20% gives an “alternative market” to the OSFs. This category analysis culminating in such a decision is erroneous because it prevents undertaking an investigation into the potential deteriorating impacts that such clauses have on the relevant market as a whole, and hence, extinguishing any liability that might arise due to insertion of such clauses. This is because during such an analysis, the CCI finds itself in either of two inevitable situations:
First, if contended clause is declared invalid under the contract law, it will stand void and the mere inclusion would be construed as an abuse, without assessing its competitive nature; second, in case the clause is valid, there would arise no further scrutiny on market distortion. More or less, the issue would end with application of contract law, and discussion under Competition law would not make an appearance. This would defeat the purpose of constituting CCI which is to eliminate conduct which adversely affects a healthy competition in the market.
Use of Weaponized Clauses: Markets in danger
It has to be realized that these clauses, despite being declared valid under contract law, do not cease to be a deterrent for the market. Therefore, CCI’s focus has to be on an analysis against the touchstone of competition law and policies which allows them to understand market operations in the present of such weaponized clauses. This is because, two substantial market distortions come to picture through restrictive clauses which gives one party the upper hand:
- Lock-in instances
“Lock-in” or a “Contractual lock-in” is a situation involving absolute dependency of a buyer/consumer on a single seller/supplier for a specific type of product or service, in a manner that switching to an alternative entails heavy costs or inconvenience. This cost is termed as “switching cost” including social, psychological and pecuniary costs and it works to deter a buyer from moving on from one supplier to another. In INSA v. ONGC, ONGC’s dominant position forced the Association into a dependency, with limited alternatives and significant switching costs as the number of other players in the market constituted only 20%. Moreover, a fact that should have formed the basis of CCI’s decision is that ONGC operates 45 offshore drilling rigs, out of active 48, thus, making it almost impossible for OSFs to effectively switch and with a potential threat of being blacklisted from subsequent contracts. It can be deciphered that inclusion of clause (a) in CHA resultantly created a lock-in for the Association by virtue of “various costs”. Moreover, clause (c) too reflects that arbitral mechanism is operating in the favour of the entity the consumer is incumbent upon. Such clauses, due to threat of paying costs, hold buyers/consumers and don’t allow them to break it off until expiration.
B. Entry barriers
This translates into restricting the entry of new competitors in the relevant market, and herein, this is being done through onerous unilateral clauses. A detailed analysis of this implication came in United Shoe case where the dominant entity controlled 85% of the shoe manufacture market and had developed a convoluted system of leasing. These cleverly crafted leasing clauses had exterminated any other alternative market by offering free services for repair. Hence, United was held to be in abuse of its dominant position by creation of entry barriers, despite prima facie being anti-discriminatory and anti-competitive. Thus, the extra costs, like incentivizing customers to agree to new clauses and give up the existing ones, that would have to be undertaken by the customer in making a switch to a new entrant would act as an entry barrier for the latter. The entrant would then have to lower the prices compared to existing dominant player. This is what had happened in INSA v. ONGC and still the CCI refused to consider it as an abuse.
What is the effect of INSA v. ONGC in today’s world?
Since this case, the CCI has moved from an “object-based approach” to an “effects-based approach”. The most recent example of this is the Uber India case of 2019 and Meet Shah case of 2021. In the former, the CCI denied any dominant position held by Uber and instead declared that incurring losses by Uber, even though prima facie abusive, were actually to lay down a practical network. In the very controversial latter judgement, the CCI came to the rescue of IRCTC’s overcharging activity by rounding up to the next higher multiple of Rs.5, and held that since it was an extensive policy, coming in after being tabled in the Parliament, it was an efficient service, logistically, and did not have an “adverse effect” on the consumers. This “effects analysis” was also employed in the Google Android case.
Conclusion:
While some may view this as a ‘move away from a narrow interpretation’, it actually highlights a ‘jurisprudential vacuum’ in addressing the market impact of such contractual clauses. The decision underscores need for a nuanced approach in examining contractual clauses imposed by dominant market players. The central issue lies in the CCI’s approach, which permitted ONGC’s unilateral clauses without fully recognizing the anti-competitive effects on a market characterized by power imbalances. The decision failed to acknowledge the restrictive impact of ONGC’s actions, including lock-in effects and entry barriers that stifle competition and hinder the effective participation of smaller players. While the contract law might come to the rescue to dictate if such inclusion is valid or invalid, the duty and responsibility of the CCI does not stop there. What is required is an appreciation, acknowledgement and analysis of the market, consumers, new entrants being affected as a whole due to such a practice. This would then culminate into investigating extent, gravity of violations under Section 4 and 19 of the Act, and hence would prevent “erroneous absolutions of guilt”, as was the case in INSA v. ONGC. The decisions which have employed this course, remain relatively less, like the case of Surinder Barmi, and hence, what is required is an overturning of a decision like INSA v. ONGC so as not to allow it to undo the growth that competition jurisdiction has achieved in India.
A broader necessity is brought to light through this order: a need for reform in how the CCI scrutinizes unilateral clauses within contracts, especially when wielded by dominant entities. First, the CCI should apply stricter scrutiny to unilateral clauses, focusing on their potential to create dependency and deter market entry. Additionally, aligning CCI’s methodology with the competition policy goals of promoting fair market access would prevent dominant firms from using contractual terms to entrench their market position unjustly. Hence, a holistic approach that not only considers contractual legality but also the real market effects of dominant players’ conduct is the need of the hour.
This blog is written by Anushka Rohilla, BA-LLB (Business Law Hons.) IVth Year