Civil damages adding to the woes of SAA
THE high court on August 8 ordered South African Airways (SAA) to pay R104.6m (plus interest) to liquidated airline Nationwide for damages arising out of anticompetitive practices.
After an extended legal battle, this decision represents the first time that civil damages have been ordered in SA for a breach of competition law.
The genesis of this decision was a complaint made by Nationwide to the Competition Commission in response to incentive agreements between SAA and various travel agents whereby travel agents were financially incentivised to book air tickets with SAA. Subsequent to the commission’s investigation, the Competition Tribunal found that SAA was a “dominant firm” for the purpose of the Competition Act. While the Competition Act does not prohibit dominance, it does prevent an abuse of dominance, including “inducing a supplier or customer to not deal with a competitor”.
The tribunal found the contracts that SAA entered into with travel agents induced them to deal exclusively with SAA at the expense of its rivals and were thus an abuse of SAA’s dominance. This judgment was subsequently confirmed by the Competition Appeal Court.
In terms of section 65 of the Competition Act, anyone who suffers loss or damage as a result of a prohibited practice (such as an abuse of dominance) may claim civil damages from the offending party on obtaining a certificate issued by the tribunal or Competition Appeal Court. This certificate serves as conclusive proof that the basis of such action is a prohibited practice and is binding on a civil court. It was this provision on which Nationwide relied in pursuing an order from the court for civil damages against SAA in compensation of its loss in profits.
Bound by the decisions of the tribunal and the Competition Appeal Court, the court was left to determine the quantum of damages. It was common cause between the parties that any damages suffered by Nationwide would amount to its lost profit over the relevant period — in other words, the difference between what Nationwide would have earned but for SAA’s abusive conduct, and what Nationwide did in fact earn. Importantly, the court from the outset made it clear that the numerous variables to be taken into consideration made it an “impossible exercise” to quantify damages with any precision. The court noted that such a calculation could be likened to the “preserve of fortune tellers and soothsayers” due to the speculation required.
The court therefore concluded that even if the quantum of damages amounted to merely an estimation, it was enjoined to do the best it could on the available material — which is consistent with the approach taken by foreign courts. It therefore fell to the parties to lead evidence to assist the court in making as accurate a decision as possible.
In the case before the competition authorities, SAA argued that Nationwide’s losses were incurred as a result a number of factors, including market and passenger perceptions of Nationwide, rather than SAA’s abusive conduct. It is evident SAA was relying on the safety record issues and financial difficulties experienced by Nationwide during the latter years of its operation, including serious maintenance issues and the grounding of the entire Nationwide fleet in 2007.
This argument was specifically rejected by the Competition Appeal Court, which held that while Nationwide’s safety record and financial difficulties may have been to blame for the drop of its market share during the period of SAA’s abuse, such factors were irrelevant in the case as it was SAA’s incentive agreements that had the anticompetitive effect.
Not ready to give up the argument, SAA led evidence before the court in an attempt to show that Nationwide suffered no damages as a result of SAA’s abusive conduct, as Nationwide’s market share actually decreased once SAA’s abusive conduct ceased, which was not to be expected if the abusive conduct was having the alleged impact. This expert evidence was rejected by the court, which reiterated that it was bound by the tribunal’s finding that Nationwide did in fact suffer damages.
The court was therefore clear that it would entertain arguments as to the quantum of damages and not arguments on the existence thereof.
During the hearing, one of the significant areas of difference between the economic models proposed by SAA and Nationwide experts for calculating the losses was whether to use data from only those routes on which Nationwide competed with SAA, or the entire domestic market. Again, the court repeated that it was bound by the findings of the competition authorities and that the use of the total data for the entire domestic market best adhered to the decision of the competition authorities. This is because it had been found that the effect of SAA’s conduct was not confined to those routes where Nationwide and SAA competed, but also on routes where Nationwide did not fly.
The court for the most part agreed with Nationwide’s expert witness and calculated the quantum of damages on the basis of the following formula: the number of passengers that it estimated Nationwide lost as a result of SAA’s behaviour (based on market share information), multiplied by Nationwide’s average revenue per passenger, the result of which was then multiplied by Nationwide’s profit margin. The court then used its discretion in applying a 25% contingency discount to provide for the fact that only 70% of airline bookings actually occur through travel agents (the market held to be the most affected by SAA’s abusive conduct).
The figure reached was R104.6m (plus interest payable from the date of judgment), a hefty fine for SAA, which is already facing a number of challenges. The precedent set by this case, as well as the hefty fine attached to it, serves to show that firms engaging in prohibited practices will face increasing financial consequences in the future.
It marks the first time civil damages have been ordered in SA for a breach of competition law
HB Senekal is a director and Samantha Hobson-Jones a candidate attorney in the antitrust/competition practice at ENSafrica.