What are Restrictive Agreements?

Competition laws prohibit the use of restrictive agreements and penalise organisations which do carry them out, whether they are written or oral agreements.

Restrictive Agreements are anti-competitive agreements decided upon between two bodies with the intent to distort the competition within the market, through either a written agreement or an oral agreement. The UK Competition Act 1998 and the Enterprise Act 2002 refer to restrictive agreements within Chapter I and establish the anti-competitive nature within these agreements, which ensure that penalties will be inflicted because of such agreements. To ensure that your organisation is aware of what restrictive agreements are and how they are penalised, knowledge of competition laws is essential.

The Competition Act 1998 and Enterprise Act 2002 prohibit any type of restrictive agreement which is anti-competitive in nature. This prohibition is stated in Chapter I, as it refers to agreements which might affect trade within the UK and distort competition. The most severe restrictive agreements will include agreements upon price fixing and market sharing; deals such as these will be referred to as ‘hard-core’ restrictive agreements. The agreements which can be considered as restrictive include:

– Agreements which fix purchases and selling prices.

– Agreements which control production, the markets, developments and investments.

– Agreements which allow the sharing of markets or sources of supply.

– Agreements which apply dissimilar conditions to equivalent transactions with other trading parties, which results in these parties being at a competitive disadvantage.

– Agreements which conclude certain contracts through the acceptance of unrelated obligations.

These restrictive agreements do not have to be officially written down agreements – they can even be in the form of oral agreements. For example, if two employees from competing businesses share information about the market and about different competitors, this can be through an oral transaction of information, not written. They are still regulated by competition law.

Restrictive agreements can be in the form of vertical agreements and horizontal agreements. Restrictive vertical agreements are agreements between two bodies that are at different levels of the supply chain, so this could be a distributor and a retailer. Restrictive horizontal agreements are the agreements made between two competing bodies.

It has been discovered that restrictive vertical agreements can have a significant effect on the market competition if the combined market shares of the two bodies involved exceed 15%. Regarding restrictive horizontal agreements, if the two bodies involved have a combined market share of 10% then it will affect the market competition.

What are the consequences for making restrictive agreements?

The Competition and Markets Authority (CMA) is the non-ministerial government department in the UK which has the responsibility of ensuring competition is maintained within the market and for subsequently penalising the actions of organisations which conduct anti-competitive practices.

With regard to Chapter I of the Competition Act 1998, which refers to restrictive agreements, if an organisation is found guilty of a restrictive agreement, the CMA can inflict a fine upon this organisation which is the equivalent to 10% of the organisation’s global turnover. This fine can be huge, and for SMEs especially it can be crippling.

As an organisation, if you implement a competition compliance programme, it will protect your business from engaging in anti-competitive conduct which could result in it being penalised. Therefore, it is important to consider the steps which could be implemented in order to comply with competition laws.

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