The Competition and Consumer Act 2010 (Cth) (CCA) prohibits a corporation from making or giving effect to a provision of any contract, arrangement or understanding which has the purpose, effect, or likely effect of substantially lessening competition in a market. By reason of the adoption of the Competition Code by the states and territories, the prohibition applies to other entities including partnerships, associations, sole traders and individuals.

Contracts, arrangements or understandings which substantially lessen competition can take many forms and there is no definitive list of what will and won't breach the prohibition. Such contracts, arrangements or understandings are to be distinguished from some specific types which are absolutely prohibited eg agreements to fix prices. For details of what will constitute a contract, arrangement or understanding, see Contracts, arrangements and understandings.

Contracts, arrangements or understandings which substantially lessen competition:

• may, but need not, be between competitors;

• do not have to be formal or written or legally enforceable or binding. A mutual expectation that things will happen in a certain way can be enough;

• may involve client/customer, product or territory sharing;

• may involve the appointment of exclusive agents or distributors;

• may involve exchanging information, such as terms of trade;

• may involve restrictions on supply or acquisition;

• may involve agreeing to support a particular supplier over and above other suppliers; or

• may involve agreeing with a party (usually a competitor) not to compete for bids or tenders.

The following elements must be satisfied for there to be a breach of the prohibition:

• There must be a contract, arrangement or understanding between two or more parties.

• The contract, arrangement or understanding must contain a provision which has:

The market affected must be one in Australia but it need not be a market in which both parties compete. For example, making an agreement with a client/customer which has the effect of substantially lessening competition in the client/customer’s market, but not the supplier’s market will breach the prohibition.

The relevant purpose is the subjective purpose for the inclusion of the provision in the contract, arrangement or understanding, although purpose can sometimes be inferred from the surrounding circumstances. Purpose does not mean motive but means “the end they had in view … The purpose of conduct is the end sought to be accomplished by the conduct” (per Gleeson CJ in News Ltd v South Sydney District Rugby League Football Club Ltd ).

It is the purpose of the provision at the time it was made which is relevant.

Any provision which has as a purpose to lessen competition, to unfairly prejudice or remove competitors, to control or share the market or clients/customers, or to provide a party with a competitive advantage may be unlawful.

See Purpose of substantially lessening competition.

Determining the effect or likely effect of a provision of a contract, arrangement or understanding requires an assessment of the impact which the making or giving effect to (ie implementation of) the provision will have on competition in a market. For example, an agreement between a supplier and a customer that the supplier will not supply another party with the same product may not substantially lessen competition if there are alternate sources of supply available to that party. However, if the product to be supplied is an essential component of that party's production that is not available elsewhere it may mean that the party's production will suffer, and with it, competition for the product.

In other cases, it will be more difficult to be certain whether a provision will have the effect or likely effect of substantially lessening competition. For example, agreeing to an exclusive distribution agreement with a distributor in suburban Sydney may have little impact if the market is state based, but a very large impact if the market is more regionalised and the distributor is the only, or a major, distributor to the relevant area.

In order to assess the effect or likely effect of a provision, factors such as the following are relevant:

• How many competitors are there?

• Which/how many of those competitors will be affected by the provision and how?

• How easy is it for new competitors to enter the market?

• To what extent would there be competition but for the provisions concerned?

• What is the duration of the provision?

See Effect or likely effect of substantially lessening competition.