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York Timbers Ltd and SA Forestry Company Ltd (15/IR/Feb01) [2001] ZACT 19 (9 May 2001)

.RTF of original document

COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA

                                                               Case Number: 15/IR/Feb01


In the matter between

YORK TIMBERS LIMITED                                         Applicant

and

SOUTH AFRICAN FORESTRY COMPANY LIMITED   Respondent



REASONS


THE PARTIES

1.      
The applicant is York Timber Timbers Limited, a public company incorporated in South Africa. The business of the applicant is sawmilling. It converts softwood into a range of sawn products, including wood chips for the pulp and paper industry. It also markets sawn wood to timber merchants, especially in the construction and furniture industries on the domestic and export markets.

2.      
The respondent is the South African Forestry Company Limited (“SAFCOL), a public company incorporated in terms of section 2 of the Management of State Forests Act 128 of 1992. SAFCOL is entrusted with the management and development of certain State forests. It sells softwood saw logs from these forests in South Africa and abroad. SAFCOL is vertically integrated and owns sawmills that it supplies saw logs to from the plantations under its management. The five sawmills under SAFCOL’s control are Wemmershoek, George, Weza, Blyde and Timbadola. Through these sawmills SAFCOL sells sawn products in competition with some of its customers in the sawmilling industry.


BACKGROUND

3.      
From around 1952 the State, through the Department of Water Affairs and Forestry (“DWAF”), entered into contracts for the sale of softwood saw logs from its plantations to private sawmills. The purpose of these contracts, which were for an initial period of ten (10) years extendable for another five (5) years, was to encourage investment into the sawmilling industry. Log prices for each year were determined through an agreed formula and negotiated between DWAF and the sawmills collectively, and as a result, prices were generally uniform. On the expiry of the first contracts DWAF decided to revise the terms of these contracts, and between 1968 and 1971 entered into 52 new agreements with existing and new sawmills.

4.      
The revised agreements were for an unspecified period of time but ran for an initial period of five years. They would then continue to run for further successive five year periods provided the parties agree on the terms of the contract for each five-year period. The contract provided that if the parties failed to agree on applicable terms then the matter must be referred to the Minister of Water Affairs and Forestry who would determine the terms of the contract. If the terms determined by the Minister were not acceptable to the sawmill the contract would run on existing terms for a further period of five years and then expire. An important feature of these agreements was that each sawmill was guaranteed a certain volume of logs per annum from a specified plantation. In other words, each log supply contract stipulated the source and the volume of the log supply based on the sawmill’s requirements and the sustainable yield of the specified plantation.

5.      
As mentioned above DWAF conducted price negotiations with the long-term customers collectively and they would all agree on the same price for all, with small regional variations. Later a clause was added to the contracts to provide a mechanism for the resolution of price disputes between the parties – if the parties were unable to reach agreement on price revisions they would refer this matter to the Minister of Water Affairs and Forestry (“the Minister”). If the Minister expressed the opinion that the parties were unable to reach agreement on the prices the matter would then go to arbitration. The effect of the wording of this clause was that if there is a price dispute the sawmill would continue to pay the prices last agreed between itself and DWAF until the dispute is resolved.

6.      
In 1993 SAFCOL succeeded DWAF as the seller of some of the State’s saw logs in South Africa, thus taking over a number of the long-term contracts between DWAF and various sawmills. It inherited 27 contracts allocated to 27 sawmills. SAFCOL had been incorporated in 1992 in terms of Management of State Forests Act 128 of 1992 and entrusted with the management of a large proportion of the State’s commercial forests. One of SAFCOL’s mandates in terms of the Act is to manage State forests under its control on a commercial basis.

7.      
The applicant was party to two long-term contracts that SAFCOL took over from DWAF. The contracts entitled the applicant’s sawmill, Nicholson and Mullin situated in Mpumalanga, to a supply of saw logs from the Witklip and Swartfontein plantations to the volume of 2, 000 000 (two million) cubic feet over five years.

8.      
SAFCOL decided to revise the inherited agreements in 1995. SAFCOL claimed that the changes were sought in order to enable it to meet its statutory requirement to manage the forests under its control on a commercially viable basis. Essentially the revisions limited the tenure period of the contracts to a period of 3 years with subsequent periods of three years provided the parties reached agreement on the terms to apply during each successive 3-year period. The revised agreements also did away with the requirement that the Minister’s opinion be sought on whether the parties are unable to reach agreement before price disputes can be referred to arbitration.

9.      
With the exception of the applicant, CJ Rance (Pty) Limited (“Rance”) and Lentz Properties (Pty) Limited (“Lentz”), SAFCOL succeeded in convincing all the sawmills to accept the new contracts. Under pressure from SAFCOL to agree to the revisions the applicant instituted a High Court action arguing that it was not obliged to negotiate about the tenure of its contract. This matter was settled. SAFCOL agreed with the applicant’s assertion regarding the unlimited tenure of the applicants’ 1968 contract. Rance and Lentz eventually entered into revised contracts with SAFCOL but it is common cause that their contracts are effectively the same as before and are not affected by the changes introduced by SAFCOL in 1995.

10.     
In 1998 SAFCOL again proposed revision to the log supply contracts. This time it persuaded the sawmills to accept contracts with even more limited tenure: the new contracts would run for an initial period of 3 years with an option to renew for a further 3 years subject to a right of cancellation by SAFCOL with 3 years notice at any time. Furthermore the price revision procedure of the 1995 contracts was amended to provide for an expert arbitration instead of the legal arbitration in the contracts then.

11.     
The applicant, Rance and Lentz again rejected these new contracts; all subsequent negotiations regarding the proposed new contracts failed. The relationship between the applicant and SAFCOL continued to be governed by the 1968 contract as the applicant had not accepted either of the revisions proposed by SAFCOL in 1995 or 1998. As a result, the price revision procedure requiring the intervention of the Minister in the case of the parties failing to reach agreement on price and the long-term tenure of the contracts remained part of the applicant’s contract with SAFCOL.

12.     
When SAFCOL took over the contracts in 1993 the applicant was involved in a price dispute with DWAF because it was resisting the price increases introduced by DWAF for the years 1991/1992, 1992/1993 and 1993/1994. Consequently, while all the other customers of DWAF were paying the 1993/1994 prices, the applicant was still paying the 1990/1991 prices. In 1994 the parties reached a settlement regarding the outstanding price increases and the applicant began paying the same price as the other long-term customers of SAFCOL.

13.     
The parties have since found it difficult to agree on price revision, and York has, as a rule, insisted that no arbitration can take place before the Minister expresses the opinion that the parties are unable to reach agreement. The Minister has refused to intervene in these disputes and SAFCOL has therefore been unable to enforce the arbitration clause. On 10 November 1998, after several attempts to get the applicant to agree to arbitration on the 1995, 1997 and 1998 price revisions, SAFCOL purported to cancel the long-term contracts between the parties and instituted an action for a declarator confirming the validity of the purported cancellation. Pending the outcome of this action the parties agreed to implement the contracts as if they were still in operation. The applicant contends that the purported cancellation is unlawful.

14.     
SAFCOL continued to negotiate the price revisions with the applicant. The applicant declined SAFCOL’s requests that they undertake arbitration on the three outstanding price revisions without the Minister’s involvement. It was not until 1999 that the applicant agreed to arbitration, and even then only on the 1995 price revisions.

15.     
When SAFCOL tried to implement new prices in 2000 that the other sawmills had agreed to, the applicant again resisted. By this time the applicant was still paying the 1995 prices as per the arbitration award as it had refused to subject itself to arbitration on the 1997 and 1998 price revisions. On 25 August 2000 SAFCOL sent an ultimatum to the applicant requiring it to declare whether it was willing to pay the 1997, 1998 and 2000 price increases or go to arbitration on the issue. The applicant committed to neither and SAFCOL purported to cancel the agreement governing the implementation of the long-term contracts. SAFCOL has applied to the High Court for a declarator on the validity of this purported cancellation as well. Both the application for a declarator regarding the purported cancellation of the long-term contracts and the agreement governing their implementation are still pending.

16.     
On 14 September 2000 the parties entered into an ad hoc supply agreement terminable on 30 days notice. In terms of this agreement the applicant would pay for the saw logs supplied the same price paid by other long-term customers of SAFCOL for the year 2000. The source and volume of saw logs, i.e. 6 675m3 per month from the Witklip plantation, remained unchanged from the disputed long-term contracts. On 14 February 2001 SAFCOL notified the applicant that it was no longer feasible to continue supplying the guaranteed volume (6 675m3 per month) from the Witklip plantation and this would be reduced to 2 222,2 m3 as from 01 May 2001. SAFCOL claimed that the reduction in volume supplies was necessary for the long-term sustainability of the plantation.

17.     
An understanding of the history of sawlog volumes between the parties is necessary to contextualise SAFCOL’s notice. The original sawlog volumes to be supplied by SAFCOL to the applicant from the Witklip and Swartfontein plantations was 2, 000 000 (two million) cubic feet over five years. By 1988 the applicant’s guaranteed volumes was 55 000m3 per annum; 30 000m3 from the Witklip plantation and 25 000m3 from the Swartfontein plantation. During this year substantially more volumes became available and DWAF offered the applicant an extra 30 0003 per annum for the next five years. When SAFCOL took over the plantation in 1993 the applicant therefore had a guaranteed volume of 85 000m3 per annum from these plantations. In 1994 as part of a settlement in one of a number of price disputes between the parties it was agreed to keep the guaranteed sawlog volumes at 85 000m3 per annum until 31 March 1997; thereafter the volumes would revert back to 55 000m3 per annum. In yet another settlement between the parties in 1996 they agreed on volumes of 75 100m3 per annum from Witklip which by that time also included Swartfontein. The volumes of 75 100m3 were to be supplied to the applicant from 1 April 1997 until 31 March 2002.

18.     
The need to reduce the sawlog volumes, SAFCOL claimed in its notice to the applicant, was a consequence of the applicant’s insistence on the supply of volumes in excess of the sustainable yield of the plantation. This had resulted in severe overfelling. It is this reduction of the volumes of logs supplied to the applicant that is the subject of this application.

19.     
The applicant claims that its business is dependent on SAFCOL for well over 90% of its saw log supply volumes. It claims that transport costs make it infeasible to obtain saw logs from other suppliers who are situated long distances away. A reduction of almost two-thirds in its current log supply volume as per SAFCOL’s notice will, therefore, eventually lead to the demise of its business - its standing overheads and other fixed costs cannot be covered at a production rate of a third of its capacity. In addition, the applicant claims that its break-even point is volume sensitive with profit only made on the top of its current log supply volume of 6675m3; as a result scaling down the operations of the business will not save it.

20.     
The applicant also claims to have made an investment of R10 million in 1995 upgrading its processing facilities based on volumes then guaranteed to them by SAFCOL. It would not be possible to recover this investment as planned if the purported reduction in its log supply materializes and the loan re-payments will hasten the demise of the business.


THE NATURE OF THE RELIEF CLAIMED

21.     
We now consider the relief claimed. Ordinarily we would not consider this issue until the end of our decision once we had decided whether the requirements of section 49C had been met. In this case however a wide range of prayers were sought and the respondent has argued convincingly at the outset that only three are competent at the interim relief stage.

22.     
The three which it says are competent at this stage are prayers 8, 9 and 11.Prayer 8 provides for interim relief from the alleged refusal to deal and contains two different formulations of order to remedy the alleged problem. Prayer 9 provides that they serve as an interim order and prayer 11 is for costs.

23.     
At the hearing the applicant abandoned prayer 10 which related to the imposition of an administrative fine and no more need be said about that.

24.     
Prayer one relates to condonation of time periods which was not put in issue and prayer twelve was the usual further and alternative relief formulation customary in all such applications so no more need be said of either.

25.     
This then leaves us with prayers 2 – 7. What the applicant asks us to do is to make declaratory orders declaring conduct of the respondent to be a prohibited practice in terms of various provisions of section 8 and 9 of the Act. These are to be found in prayers 2 –6 . Prayer 7 requests us to issue a notice in terms of section 65(6)(b) certifying the above as prohibited practices.

26.     
The applicant wants these orders so that it can institute civil proceedings for damages and also, we understand, for the purpose of the civil proceedings in which the parties are currently engaged before the High Court. The respondent contends that an interim declaratory order is a contradiction in terms.

27.     
A party cannot institute a claim for civil damages without filing with the relevant civil court a certificate from the Chairperson of the Tribunal, or the Judge President of the Competition Appeal Court stating that the conduct which forms the basis for the civil action has been found to be a prohibited practice.

28.     
The question to be determined is whether this certificate can be issued pursuant to a finding in an interim relief case or only after the granting of final relief pursuant to a complaint referral.

29.     
Although the language of section 65(6) does not expressly limit it to complaint referral proceedings it seems clear to us that the certificate can only be issued at the end of final proceedings and not interim proceedings.

30.     
The reason for this is obvious. An applicant may be granted interim relief because the burden of proof in this proceeding is less exacting but may not be granted final relief. If the applicant could get a certificate after an award of interim relief and commenced action for damages in a civil court and was successful what would happen if it did not succeed in gaining final relief. The legislature could not have intended such an untenable result.

31.     
In any event the language of section 49C says that the Tribunal may grant an interim order. An order finding conduct to be a prohibited practice for the purpose of section 65 is certainly not of an interim nature.

32.     
Our interpretation is also strengthened by section 65(8) which states:

“An appeal or application for review against an order made by the Competition Tribunal in terms of section 58 suspends any right to commence an action in a civil court with respect to the same matter.”

33.     
The clear implication of this provision is that the civil action should not commence until the matter has been exhaustively heard by the Competition authorities. It follows that if an appeal suspends the right to institute a civil action the right contemplated must be pursuant to a final not an interim order.

34.     
In section 65(9) the right to claim commences on the date the Tribunal has made a “determination...” This language too suggests a final not an interim order is contemplated.

35.     
We find accordingly that prayers 2 – 7 are not competent for us to consider at interim relief stage. Accordingly we confine ourselves in this decision to considering prayers 8, 9 11 and 12.


Standard of proof required for an interim relief application.

36.     
Prior to the amendment, on the 1st February 2001, of the Competition Act by the Competition Second Amendment Act, the standard of proof for an interim interdict was no different to the standard for complaint referral proceedings and was the balance of probabilities.

37.     
Various amendments were made to the section providing for interim relief (section 59) so that the present section 49C differs from it in important respects. One of the changes relates to the standard of proof required in interim relief applications which now receives specific mention in the section.

Section 49C(3) of the Act states:

‘In any proceedings in terms of this section, the standard of proof is the same as the standard of proof in a High Court on a common law application for an interim interdict.”

38.     
It is important to note that the section mandates the application of the common law “standard of proof”, for an interim interdict ,but not the common law requirements for an interim interdict.

39.     
The common law requirements for an interim interdict are well known and are usually stated as follows:

a.      
A prima facie right on the part of the applicant;
b.      
A well-grounded apprehension of irreparable harm if the interim relief is not granted and the ultimate relief is eventually granted;
c.      
A balance of convenience in favour of granting the interim interdict; and
d.      
The absence of any other satisfactory remedy.

40.     
The requirements for interim interdict in terms of section 49C are set out in section 49C(2)(b)

         “The Competition Tribunal -
         may grant an interim order if it is reasonable and just to do so, having regard to the following factors:
(i)     
The evidence relating to the alleged prohibited practice;
(ii)    
the need to prevent serious or irreparable damage to the applicant; and
(iii)   
the balance of convenience.”

41.     
It will be observed that these requirements, although similar to, are not identical to, the requirements for an interim interdict at common law.

42.     
However as the applicant points out we are required to follow the Act in so far as the requirements are concerned, although we are expressly required to look to the common law on interim interdicts to determine the standard of proof.

43.     
It is common cause that this means a standard of proof less exacting than the civil burden of a balance of probabilities but how exacting is that burden.

44.     
Erasmus has observed that:

“In the majority of cases an applicant for an interlocutory interdict cannot establish his right clearly upon affidavits, his allegations more often than not met by counter allegations or denials. Therefore since the application is merely interlocutory and the effect of the granting thereof is only temporary and not finally decisive of either party’s rights, the court will grant an interdict upon a degree of proof less exacting than that required for the grant of a final interdict. It is in attempting to define this degree of proof – an almost impossible task, it has been held – that the court have used such varied expressions as ‘a clear right’, ‘a prima facie right’, ‘prima facie proof of a clear right’, ‘a prima facie case for an interdict’ and prima facie grounds for an interdict.” (Erasmus E8 – 9 – 10)

45.     
These questions were resolved in the well-known case of Webster v Mitchell. Here Claydon J in a frequently cited paragraph observed:

“The use of the phrase “prima facie established though open to some doubt” indicates I think that more is required than merely to look at the allegations of the applicant, but something short of a weighing up of the probabilities of conflicting versions is required. The proper manner of approach I consider is to take the facts as set out by the applicant, together with any facts set out by the respondent which the applicant cannot dispute, and to consider whether, having regard to the inherent probabilities, the applicant could on those facts obtain final relief. If serious doubt is thrown upon the case of the applicant he could not succeed in obtaining interim relief, for his right, prima facie established, may only be open to “some doubt”. But if there is mere contradiction, or unconvincing explanation, the matter should be left to trial and the right be protected in the meanwhile, subject of course to the respective prejudice in the grant or refusal of interim relief.”


46.     
In Gool v Minister of Justice and Another Ogilvie Thompson J commented that the criteria on the first branch of the enquiry leaned too heavily in favour of the applicant and he proposed the following addition to the test:.

“With the greatest respect, I am of opinion that the criterion prescribed in this statement for the first branch of the inquiry thus outlined is somewhat too favourably expressed towards the applicant for an interdict. In my view the criterion on an applicant’s own averred or admitted facts is: should (not could) the applicant on those facts obtain final relief at the trial. Subject to that qualification, I respectfully agree that the approach outlined in Webster v Mitchell... is the correct approach for ordinary interdict applications.”

47.     
The Webster test with the Gool rider has now become the accepted common law test for the standard of proof in an interim interdict and many courts have followed it.Most recently it has been confirmed by the Supreme Court of Appeal in Simon NO v Air Operations of Europe AB and Others . For the purpose of this decision we will refer to this approach as the ‘orthodox approach’.

48.     
The applicant argues that the Gool qualification is not part of our test because of the requirement in section 49C(2)(b) for an interim order to be granted if it is “reasonable and just to do so ”. The applicant thus appears to accept Webster but not Gool. No basis for following the common law in the first instance and abandoning it in the second is given. As we point out below there is nothing inherent in the meaning of the words reasonable and just that suggests that the balance should be tilted in favour of either the applicant or respondent.

49.     
What the applicant appears to be advancing is that we distinguish between a prima facie “case” and a prima facie “right”. The distinction in classification appears to be based on the use of these terms in the Webster judgment where Claydon J identifies the prima facie case approach as one where one looks at the applicant’s case and sees if he has furnished proof which if uncontradicted and believed at the trial would establish his right. Claydon J goes on to say that the use of the phrase

“'… prima facie established though open to some doubt” indicates I think that more is required than merely to look at the allegations of the applicant, but something short of weighing up the probabilities of conflicting versions is required.”

50.     
Hence he arrives at the test we have discussed above.

51.     
It must be conceded that the case has been made for departing from the orthodox approach in two recent decisions although this is not an argument that has been made by the applicant. Let us first consider these decisions and then examine the consequences of them.

52.     
The first case involved an application for interim relief in relation to an alleged constitutional right. Here Heher J decided the Court was not bound by the same standard that applies in an ordinary application for an interim interdict. The justification for this departure was because:

“We are at large to arrive at our own decision as no rule has been laid down for such interdicts involving constitutional issues.”

53.     
Heher J considered what is held to be a rival approach to these issues, that favoured by the House of Lords in American Cyanamid Co v Ethicon Ltd. In that case, Lord Diplock stated that an applicant need no longer demonstrate a strong prima facie case. Rather he held it would suffice if he or she could satisfy the court that the claim is not:

“ frivolous or vexatious ; in other words that there is a serious matter to be tried.”

54.     
Heher J went on to state that he could see no reason why the ‘serious question to be tried approach’ (i.e. that favoured in American Cyanamid)

“ should not be accorded equal status with the traditional approach”

55.     
The Land Claims Court in Chief Nchabeleng v Chief Pasha followed this approach, preferring American Cyanamid.Here the court after considering Heher J’s decision held:

“For similar reasons I am of the view that this Court should adopt the approaches in the two decisions of Holmes JA and the American Cyanamid case, which for all practical purposes, are the same.”

56.     
The Court held that it was not bound by the common law approach (i.e. the orthodox approach) for several reasons. Firstly, because the Land Claims Court was not bound by precedents of provincial divisions of the Supreme Court and High Court and could find no Appellate Division or Supreme Court of Appeal decision on the issue. Secondly, because its powers to confer an interim interdict were based on a statute that had not previously been interpreted by any court. Thirdly because its statute requires that Court to have regard to the requirements of equity and justice. Finally, because the right sought to be enforced in the case before them was a right to restitution which had its origins in the interim Constitution.

57.     
Yet these decisions, carefully argued as they are, relate to instances where the courts felt able to depart from the orthodox approach. Here we are mandated to follow it. Given that in Simon, which was decided after these two decisions, the Supreme Court of Appeal reiterates the orthodox approach we can see no basis to depart from it. It is not for us to determine whether the common law approach is correct – it is for us to ascertain what it is and having done so to apply it.

58.     
At best for the applicant it can be said that the language of “reasonable and just to do so” in section 49C(2)(b) suggests that we are at large to follow the