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Competition Law

12 Jun 2012

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Overseas Application of the Commerce Act

A recent decision in the Court of Appeal, regarding alleged price fixing in the freight forwarding industry, has provided clarification on the application of the Commerce Act (Act) to overseas companies. In this FYI, we examine the key points of the decision, as well as proposed jurisdictional amendments to the Act currently working their way through Parliament.

Kuehne + Nagel Court of Appeal Decision

The Facts

The Court of Appeal's decision in Kuehne + Nagel International AG v Commerce Commission [2012] NZCA 221 arises out of alleged price fixing in the international freight forwarding market. The Commerce Commission issued proceedings against Kuehne + Nagel AG (K+N), along with a number of other defendants, alleging breaches of the Commerce Act in New Zealand. It was alleged that K+N, through its New Zealand subsidiary (K+N NZ), had implemented a number of price fixing arrangements in New Zealand. K+N, a Swiss company, challenged the New Zealand Court's jurisdiction.

The Arguments

The Commerce Commission did not seek to argue that there was jurisdiction over K+N under section 4 of the Act. This was because K+N itself did not carry on business in New Zealand which is the requirement for section 4.

However, under section 90(2) of the Act, conduct engaged in on behalf of a body corporate by any person at the direction, or with the consent or agreement of the body corporate, can be attributed to the body corporate.

The Commerce Commission therefore argued that by giving effect to the price fixing arrangements in New Zealand, K+N NZ was acting on behalf of K+N. Accordingly, the actions of K+N NZ that took place in New Zealand could be attributed to K+N. K+N argued it did not carry on business in New Zealand through K+N NZ and K+N was, in reality, merely a holding company - it was another overseas company, and not K+N, that managed the group's operations.

The Decision

In the High Court, Venning J placed reliance on the fact that, in United States proceedings, K+N had accepted it was in business and provided freight forwarding services. This was inconsistent with it being a holding company. The Judge went on to find an arguable case that the actions of K+N NZ could be attributed to K+N on the basis that K+N NZ's actions were done with the consent of K+N's agents. Therefore, they could be sheeted back to K+N at the top of the "chain of agency".

The Court of Appeal agreed with the conclusions of Venning J. Although the Court's decision was not based on the wording of section 90(2), but rather on the facts of the case, the Court made a number of useful comments about the scope of section 90. In particular:

section 90 is intended to extend liability under the Act beyond common law principles of agency;
it is not necessary to demonstrate the existence of a benefit flowing to the alleged principal in order to attract liability under section 90;
the question of whether liability arises under section 90 requires an assessment of all the relevant facts which does not necessarily require analysis based on common law agency rules.

The Court of Appeal went on to conclude, on the facts, that there was a good arguable case that the implementation of the alleged price fixing arrangement by K+N NZ in New Zealand could be attributed to K+N. The Court was careful to note a parent and subsidiary relationship does not of itself result in an agency relationship - the facts in this case went further and established such a relationship existed.

Legislative Amendments

While the Court of Appeal found that section 90 was wide enough to give jurisdiction over K+N, there are legislative moves afoot to make section 90 wider still.

This is because, in Poynter v Commerce Commission [2010] 3 NZLR 300, the Commerce Commission argued the actions of employees of an alleged cartel member in New Zealand could be sheeted back to their superior in Australia, Mr Poynter. The Supreme Court held they could not as Mr Poynter was not resident, or conducting business in New Zealand. Also section 90 only provided for the conduct of the employees to be sheeted back to the company (as occurred in the K+N case), not Mr Poynter personally.

As a result of the Supreme Court's decision, amendments to the extraterritorial reach of the Act were introduced into Parliament last October as part of the Commerce (Cartels and Other Matters) Amendment Bill (Bill) (see our October 2011 FYI). These amendments are two-fold:

a new subsection is added to section 4 of the Act saying that a breach of the Act is deemed to occur in New Zealand if either an act or omission, or event necessary for the completion, of the breach occurs in New Zealand. This is wider than the current wording which requires residence or carrying on business; and
section 90 of the Act is extended, with the intention of making it clear that the actions of employees can be attributed not only to their companies, but also to their superiors.

As can be seen by the K+N decision, the Courts are already willing to find jurisdiction against overseas companies under the attribution provision of section 90. The proposed amendments to section 90 will extend this to allow conduct to be attributed to superiors and not just employers.

The extended section 90 gains extra importance with the proposed criminalisation of cartel conduct also included in the Bill. Overseas managers and directors could face potential jail time if they direct their New Zealand subordinates to undertake activity breaching the cartel prohibitions included in the Bill.

Given the widening of section 90, we query whether the proposed amendments to section 4 are necessary as well - it is difficult to conceive of any situations which are of concern that would not be caught by the amended section 90 and the current wording of section 4.

Conclusion

K+N has 20 working days to decide whether to seek leave to appeal to the Supreme Court. If not, then the case will proceed to a substantive hearing. Meanwhile, the legislative amendments to jurisdiction will work their way through Parliament. We will keep you updated with any major developments in this regard. In the meantime, do not hesitate to contact any of the authors listed on this FYI with any queries.