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Kenya: High Court issues its decision in the abuse of buyer power case against Carrefour

5 June 2024
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Overview

  • In its May 2024 decision, the High Court fortified the principles of fair administrative action as provided in the Constitution of Kenya (Constitution) and the Fair Administrative Action Act (FAA Act) by overturning the decision of the Competition Tribunal (Tribunal) requiring Majid Al Futtaim Hypermarkets Limited (trading as Carrefour) (Carrefour) to amend all its supplier agreements. However, the High Court agreed with the Tribunal’s decision that Carrefour was guilty of an abuse of buyer power in relation to its dealings with its then supplier of probiotic yoghurt, Orchards Limited (Orchards).

In its May 2024 decision, the High Court fortified the principles of fair administrative action as provided in the Constitution of Kenya (Constitution) and the Fair Administrative Action Act (FAA Act) by overturning the decision of the Competition Tribunal (Tribunal) requiring Majid Al Futtaim Hypermarkets Limited (trading as Carrefour) (Carrefour) to amend all its supplier agreements.  However, the High Court agreed with the Tribunal’s decision that Carrefour was guilty of an abuse of buyer power in relation to its dealings with its then supplier of probiotic yoghurt, Orchards Limited (Orchards).

This matter is distinct from the December 2023 findings by the Competition Authority of Kenya (CAK) that Carrefour allegedly abused its buyer power in relation to two other suppliers, namely Pwani Oil Products Limited and Woodlands Company Limited, and in which the CAK levied a total fine of KES 1.1 billion (approximately USD 8 million). These decisions are both currently being appealed before the Competition Tribunal.

The Orchards complaint dates back to April 2019, when Orchards filed a complaint with the CAK alleging that Carrefour had engaged in practices constituting an abuse of buyer power, including the unfair application and collection of rebates; the unilateral removal of Orchards as a supplier; refusal to accept deliveries; shifting commercial risks onto Orchards by returning goods nearing expiry; and transferring labour costs by mandating Orchards to position its personnel as merchandisers at Carrefour stores. Following an investigation, the CAK determined that Carrefour contravened the abuse of buyer power provisions in the Competition Act, Cap. 504, Laws of Kenya (Competition Act). Carrefour appealed against the CAK’s findings, which included the imposition of various financial penalties and remedial actions, before the Tribunal and following an unfavourable ruling from the Tribunal, Carrefour lodged a further appeal with the High Court.

The High Court’s decision on the Orchards matter clarifies some important aspects of the procedure for prosecuting a competition law complaint, as well as the CAK’s legal mandate concerning abuse of buyer power.

Fair administrative action

Carrefour contended before the High Court that the procedure adopted by the CAK in arriving at its decision was in breach of its rights under the FAA Act, as it had been deprived of a fair hearing and fair administrative action. However, the High Court disagreed with Carrefour and upheld the Tribunal’s view that the CAK had adhered to the procedure outlined in the Competition Act.

Of particular interest is the High Court’s confirmation that despite breaches of the Competition Act carrying potential penal consequences, the CAK is not required to prepare formal rules but rather, is empowered by the Competition Act to conduct hearing conferences in an informal a manner and to exercise discretion as to whether witnesses may be summoned or otherwise. The High Court, however, noted that as a baseline, the CAK was required to adhere to the requirements for fair administrative action under the FAA Act.

The power to investigate abuse of buyer power prior to 31 December 2019

Orchards had been contracted to supply probiotic yoghurt to Carrefour stores from 2015 to 2018, and its complaint was related to this period.

Although the provisions on abuse of buyer power were introduced into the Competition Act in 2016, there was no express provision empowering the CAK to investigate abuse of buyer power until the Competition Act was amended in December 2019.  As such, Carrefour submitted that the CAK did not have the power to investigate abuse of buyer power prior to the 2019 amendment.  However, the High Court dismissed this argument on the basis that the ‘catch-all provision’ authorising the CAK to investigate contraventions relating to restrictive trade practices would apply to an abuse of buyer power investigation.

It is important to note that, at the time of writing this, the CAK is receiving public comments regarding a draft Competition (Amendment) Bill that proposes to replace the abuse of buyer power provisions with “abuse of superior bargaining position” provisions, which are aimed at capturing contractual relationships beyond those of a retailer-supplier.

Additionally, the High Court clarified the status of the CAK’s Buyer Power Guidelines, noting that they are non-binding policy documents aimed at guiding the CAK in implementing competition law. As such, they are not statutory instruments that can be invalidated for failure to comply with the process set out in the Statutory Instruments Act, which includes obtaining approval from the National Assembly.  

Volume-based rebates and the right to reject defective goods on delivery are common commercial practice

In holding that Carrefour had abused its buyer power against Orchards by applying volume-based rebates, rejecting unacceptable goods, and returning goods nearing expiry, the High Court disappointingly missed an opportunity to provide guidance on:

  • whether all rebates are now considered an abuse of buyer power or whether the legal breach was in how Carrefour applied its rebates. Does this finding only apply to volume rebates or other types of rebates as well?
  • what is the legal place of the Retail Trade Code of Practice, 2021 that is the self-regulatory code established by retailers (including Carrefour) with the championing of the CAK, and which acknowledges the validity of rebates as well as the other conduct, which was nevertheless still found to be amount to an abuse of buyer power?

Given the diverse application of rebates and other forms of discounting (and not only in the retail sector), the lack of clarity from the High Court’s decision, as well as the omission in providing guidance on the place of a supplier’s “countervailing” power, risks distorting the application of the abuse of buyer power provisions in Kenya.

Requiring Carrefour to amend all supplier agreements would go too far

Following a determination that Carrefour had abused its buyer power, the Tribunal upheld the CAK’s decision to require Carrefour to amend the terms of its agreements with all its suppliers, despite the fact that no other complaints were the subject of the investigation, and it was possible that some of Carrefour’s suppliers may have equal or even greater bargaining power to Carrefour.

The High Court held that the CAK had erred in requiring Carrefour to amend all its supplier agreements that were not the subject of this dispute, holding that it was unconstitutional to amend contracts of parties that were not privy to the proceedings, as they could not be provided with a fair hearing as required by the FAA Act. The High Court also took issue with the CAK’s failure to give Carrefour any notice that it intended to decide on the other supplier contracts that were not the subject of Carrefour’s dispute with Orchards.

This, in our view, is a significant finding because it means that the CAK cannot dictate its hitherto wide-ranging remedial measures that affect contractual counterparties unless those counterparties have been allowed to make representations in the matter.  

Conclusion

This decision provides important clarity that the CAK cannot utilise its enforcement powers against parties who are not the subject of its investigation and/or who have not been given an opportunity to make representations. Unfortunately, however, this decision missed the opportunity to clearly stipulate what factors must be taken into account in assessing an abuse of buyer power, for example, whether the parties have equal bargaining power. 

As such, until clarity emerges, it would be advisable for all undertakings in the retail industry, in particular, to diligently document their contracting processes and commercial engagements with suppliers, especially small to medium-sized enterprises (SMEs) or parties in an inferior bargaining position, to ensure that fairness and open contractual negotiations can be proven should the same be disputed.