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01 August 2019
On 8 November 2018 the Competition Commission of India (CCI) dismissed allegations that GAIL (India) Ltd had imposed unfair and one-sided conditions in its gas supply agreements (GSA) with seven other companies and thereby abused its dominant position as the sole supplier of regasified liquefied natural gas (RLNG). The main allegations concerned the take-or-pay (ToP) liability and letter of credit clauses in the GSAs, which were allegedly one-sided and biased.
The relevant product market, as defined by the director general, was the market for the supply and distribution of natural gas to industrial consumers. As the case was 'clubbed' (ie, separate allegations pertaining to the same issue had been made to the CCI), the director general delineated four different geographic markets (ie, Gurgaon, Rewari, Ghaziabad and Alwar).
When considering GAIL's position, the director general found that:
The director general concluded that GAIL had abused its dominant position, as it had enforced ToP liability and letter of credit clauses in its GSAs in order to meet the minimum guarantee offtake by using the GSAs as a one-sided tool.
When analysing the nature of the long-term RLNG contracts, the CCI stated that long-term ToP liability is common in the energy sector, including the natural gas markets. As such, long-term RLNG contracts are not inherently anti-competitive, nor do they lead to the foreclosure of competition. Further, the buyers in the present case had been able to choose to enter a short-term contract of three years, five years or another period of less than 20 years, but had willingly chosen to enter long-term contracts due to the commercial advantages, such as a guaranteed and steady supply and stable prices.
As regards the ToP liability, the CCI observed that for a period, the buyers had failed to purchase the required volumes of RLNG and, as a result, GAIL had been required to sell the remaining volumes in spot markets. However, when GAIL had subsequently suffered losses, in order to recoup them, it had invoked the ToP liability clause against the contracted buyers, which did not amount to an abuse of dominance. The CCI observed that GAIL's conduct:
appears to be rational and not arbitrary since the amount demanded by [Gail] was substantially lower than the actual liability. Safeguarding commercial interest or invoking contractual cases which are not unfair per se cannot be termed as unfair just because they are invoked by one of the parties to the contract.
As regards the letter of credit clause, the CCI noted that GAIL had never invoked this in order to meet the minimum guarantee offtake and that the buyers had thus suffered no loss as a result. As such, the clause was surplusage, had never been acted on and therefore did not constitute an abuse which had caused serious prejudice to the informants. The CCI observed that GAIL's multiple and partial drawdown of letters of credit had contravened the GSA; however, the buyers had been unable to show how such conduct had caused them any prejudice or loss.
For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4249 2525) or email (firstname.lastname@example.org). The Vaish Associates website can be accessed at www.vaishlaw.com.
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Man Mohan Sharma