The Competition Authority of Kenya, in a recent decision, has fined a major player in the retail sector approx. USD 6.8M for abuse of buyer power. The freedom of parties to freely negotiate the terms under which they are willing to enter into a contract with each other remains a fundamental tenet in the negotiation and entry into commercial agreements in Kenya. However, the freedom of contracts can be limited by law where a party has significantly more bargaining power than the other party.
The Authority is tasked with enforcing the abuse of buyer power provisions under the Competition Act, No. 12 of 2010 Laws of Kenya in a bid to promote fair business practices and competition in Kenya.
Buyer Power
The Competition Act defines buyer power as the influence of a purchaser of goods and/or services to obtain from a supplier or service provider goods and/or services on terms that are more favorable to the purchaser than the supplier/service provider.
For a purchaser to impose its terms on a supplier or service provider, the purchaser must command such a large portion of the consumer market such that it can cause the price of the products or services to fall by purchasing less or cause the price to rise by purchasing more.
Abuse of Buyer Power
The exercise of such power to the detriment of suppliers for the gain of purchasers is considered as an abuse of buyer power. In determining whether a buyer with buyer power has abused it, the Authority will largely consider the following:
i) the commercial terms of the contracts with suppliers
- The following contractual terms are likely to be construed as abuse of buyer power:
- unreasonable discounts;
- irregular rebates;
- imposition of promotional fees; or
- payment of fees in order to gain access to the buyer’s platform/infrastructure.
ii) the dependency of the supplier on the buyer
- A buyer whose suppliers depend on for the bulk of their sales due to the buyer commanding a large market share can abuse their buyer power. The Authority, in determining whether buyer power has been abused, considers the buyer’s market share and inability of the supplier to find alternative buyers for their products/services.
- Acts of a buyer such as threats of delisting a supplier, refusing to accept goods ordered, unilateral variation or termination of contracts and delays in making payments all amount to abuse of buyer power.
Conclusion
The Authority is empowered to impose a financial penalty of up to ten percent (10%) of the preceding financial year’s gross turnover in Kenya for persons in contravention. It is imperative that agreements are properly negotiated to avoid impeding the provisions of the Act.
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