Redefining the Scope of Section 3(1): Towards a Purposive Interpretation

[By Shubham Gandhi & Aditya Puri]

The authors are students at the Dharmashastra National Law University, Jabalpur. 

The Competition Act, 2002 (“the Act”), as legislated by the Parliament, is a special statute that governs the practices conducted in a market and ensures that healthy competition is maintained. The legislature in the Competition (Amendment) Bill, 2020 has stressed the need to identify a legislative way to cover agreements that otherwise do not fall in the ambit section 3(3) and 3(4). Considering the scheme of the Act, the question which arises is whether the Act contains enough space to accommodate the independent application of section 3(1) read with (“r/w”) 19(3) or the two agreements, i.e., horizontal and vertical agreements, are exhaustive of the scope of anti-competitive agreements as restricted by the Act under section 3(3) and 3(4) of the Act, respectively. This issue is yet to be settled with finality by the Apex court of the land.

The author(s) in this article will throw open the discourse with regards to scope and extent of umbrella provisions viz. section 3(1), undertake a purposive interpretation of the Act to disseminate the scheme of section 3(1), highlight the precedents recognizing the extent of section 3(1) and will exemplify the growing need to curb advance anti-competitive agreements which do not fall under section 3(3) or 3(4) of the Act.

Underlying Purposive Interpretation

The words used in the literal sense are the most reliable source of interpretation. It is to be emphasized that statutes invariably have some purpose of accomplishing. The sympathetic discovery of the purpose is the best guide to the intended meaning of the statute. In clear terms, the apex court in Excel Corp v. CCI laid down that, “In ordinary circumstances, once the ‘plain meaning’ of the words in a statute has been identified there is no need for further interpretation. Different considerations can apply, however, in cases where a statute would be unconstitutional if interpreted literally.

The preamble of the Act provides for sustenance and protection of competition, ensuring the freedom of trade for the other participants of the market in light of economic development of the country, and preventing practices that have the potential of causing an adverse effect on competition, as laid down in the judgment of CCI v. SAIL. The factor of “economic development” is a dynamic phenomenon requiring flexibility on the part of the commission to accommodate the changing nature of anti-competitive agreements. To achieve the said purpose, the Act bestowed upon the commission the power to take action under section 18 of the Act.

The literal semantics of section 3(1) nowhere suggests that the scope of agreements mentioned therein are limited to the ones categorically mentioned under sections 3(3) and 3(4), i.e., horizontal and vertical agreements, respectively. The section explicitly uses the phrase “any agreements” while prescribing the anti-competitive agreements. To disseminate our argument, reproduction of section 3(1) is necessary:

“No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.”

It is just a matter that the horizontal and vertical agreements are certain in structure and scope that they deserve a categorical mention. Further, the other agreements not mentioned under section 3 are, in author(s) view, not certain in scope and structure to be bestowed with a categorical mention. Also, the definition of ‘agreements’ under section 2(2) has been left wide and open to facilitate the inclusion of even a blink of an eye. In such a scenario, defining the contours of all the agreements covered under section 3 is nearly impossible.

It is the contention of the author(s) that agreements stipulated under sections 3(3) and 3(4) are only illustrative of “any agreements” under section 3(1). They do not exhaust the scope of section 3(1). Hence, the legislators used the phrase “any agreement” to leave the scope of the section open-ended to accommodate the ever-changing dynamics of anti-competitive agreements entered by market players to “eliminate practices having an adverse effect on the competition, to protect the interest of the consumers.” Therefore, any interpretation inclining towards restricting the reading of section 3(1) to horizontal and vertical agreements would be a creative exercise unnecessarily narrowing the scope of section 3(1).

The approach adopted by CCI

The CCI first decided the issue regarding the standalone application of section 3(1) in the case of Ramakant Kini v. Dr. Lh Hiranandani Hospital, wherein the commission categorically stated that if the agreement does not fall within the ambit of section 3(3) or 3(4) due to its nature, then resort shall be made to section 3(1) r/w 19(3) to serve the purpose of the Act. Although the Ramakant case was overruled by order of COMPAT, as the agreement in the specific case does not vitiate the principles of AAEC, it does not discuss the interpretation done by CCI regarding 3(1). After that, the CCI in P.K Krishnan v. Paul Madavana, while referring to the Ramakant Kini Judgment, held that “in Dr. L. H. Hiranandani Case (Ramakant Kini case) the position is quite clear that an agreement, even if it is not falling under section 3(3) or 3(4) of the Act, is amenable to the jurisdiction of the Commission under section 3(1) if the same has an appreciable adverse effect on competition.” CCI again accepted this line of reasoning in the case of Rohit Medical Store v. Macleods Pharmaceutical Ltd.

The author(s) find the interpretation adopted by CCI in the aforementioned cases in line with the preamble. Also, section 18 puts the commission under a duty to prevent practices from having adverse effects on competition. Moreover, it is observed in various cases, like      Builders Association of India v. Cement Manufacturers’ Association and CCI v. Co-ordination Committee of Artists, that the associations always contend that they were merely an association of people and did not undertake any economic activity in respect of any production, supply, distribution, storage, acquisition or control of goods or provision of services by themself, as required by section 3(3) and 3(4), and hence were not covered by section 3(1) of the Act. Similarly, in Rajasthan Cylinders Containers Limited v. Union of India, the Apex court recognized a buyer cartel but could not penalize the enterprises, as there was no law prohibiting buyer cartelization agreement in the Act. This relieves them from any liability for indulging or facilitating anti-competitive agreements. These are some illustrations wherein the Act fell short of achieving its intended purpose of negating the anti-competitive agreements.

Concluding Remarks

Interpretation of the Act’s provisions in line with underlying objects becomes paramount, as players will enter into dynamic agreements to avoid the peril of section 3. Further, the agreements of such nature may not always be as certain in structure as the horizontal and vertical agreements specified under sections 3(3) and 3(4). However, the purpose of the Act is to prevent such anti-competitive practices. In the same vein, the legislature is figuring out the possibilities of widening the ambit of the Act to cover such agreements with uncertain structures. The author(s) believe that the ambit of section 3(1) in its standalone capacity comprehensively covers all the anti-competitive agreements, contrary to the perception that the scope of section 3 is limited to horizontal and vertical agreements.

Thus, the adjudicating forums must not shy away from utilizing the potential of section 3(1) of the Act. This recourse would be in line with the judgments of Ramakant Kini and P.K Krishnan as highlighted. However, a legislative amendment in section 3 of the Act that replaces the phrase “any agreements” with “any agreements not limited to the agreements as specified under sub-section (3) and (4) of this section” would resolve the dilemma once and for all, and which could be applied retroactively.

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