Gov’t Warns Retailers of Ksh10 Million Fine, Jail Over Unfair Deals With Suppliers

The Competition Authority of Kenya (CAK) has warned retailers and other buyers against imposing unfair commercial terms on suppliers.

In a notice on Wednesday, November 11, the Authority said it had observed continued cases of retailers imposing commercial conditions on suppliers, including transferring operational costs and risks to suppliers, demanding rebates and promotional contributions, and extending payment periods.

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CAK explained that the law prohibits various forms of Abuse of Buyer Power (ABP), particularly where businesses use their stronger bargaining position to impose unfavourable conditions on suppliers.

"The Competition Act sets out a non-exhaustive list of conduct that may constitute ABP, including delayed payments, unilateral termination or threat of termination of a contract, and refusal to receive goods without justifiable reasons and in breach of contractual terms. 

'Other forms of ABP include transfer of costs or risks to suppliers, demand for preferential terms that are unfavorable to suppliers, and limiting suppliers from selling to competing buyers," the notice read.

CAK noted that its market surveillance had identified commercial arrangements in the retail sector that raised concerns over compliance with the law.

"As part of its continued surveillance of the market, the Authority has noted continued instances of commercial terms being imposed on suppliers in the retail sector, in circumstances that may contravene the Competition Act. 

"The conduct entails transfer of costs and risks to suppliers, rebate demands, promotional contributions, extended payment periods and unfavourable terms in joint business plans between retailers and their suppliers," the notice added.

CAK cautioned businesses against taking advantage of their bargaining positions when entering into supply agreements, insisting that commercial terms should emerge from genuine negotiations rather than being dictated by buyers.

"Therefore, the Authority cautions entities entering into commercial agreements with their suppliers that these contracts must be the outcome of genuine, good-faith negotiations and meaningful engagement. Terms should not be dictated by a buyer merely because it enjoys buyer power," the notice further read.

CAK also clarified that although it encouraged businesses to have written supply agreements, it had not directed suppliers in the retail sector to enter into joint business plans (JBPs) with buyers.

It maintained that such arrangements should be voluntary and that signing an agreement did not automatically mean that the conditions had been fairly negotiated or complied with the law.

"Whereas the Authority encourages the use of written supply agreements, it has never issued a directive requiring suppliers in the retail sector to enter into joint business plans with buyers. Such arrangements must be voluntary. The existence of a signed agreement does not, on its own, establish that the terms were fairly negotiated or that the conduct is lawful," the notice noted.

CAK announced that it was undertaking further scrutiny of commercial practices in the retail industry and would pursue enforcement measures against businesses found to have breached competition laws.

"The Authority is taking appropriate steps to address the concerns in the retail sector, including continued market surveillance and monitoring of commercial practices in the retail sector. Our interrogation of the sector will establish whether the conduct contravenes the Competition Act. Full investigations and enforcement action against specific retailers will follow where breach is established," the notice added.

As such, CAK warned that businesses found guilty of abusing buyer power risk a criminal penalty of a fine not exceeding Ksh10 million, imprisonment for a term not exceeding five years, or both.

The Authority may also impose administrative penalties under Section 36 of the Act, including financial penalties of up to 10 per cent of an undertaking's gross annual turnover in the immediately preceding financial year, alongside other remedies.

CAK urged suppliers to preserve evidence that could support complaints against buyers, including draft and signed supply agreements, joint business plans, correspondence, payment records and other documents showing how commercial terms were negotiated.

CAK further called on retailers and other buyers to review their agreements and ensure their commercial dealings with suppliers comply with competition laws.

"Retailers and other buyers are urged to review their commercial practices and ensure that commercial supply agreements are based on negotiation, mutual engagement and compliance with the law," the notice concluded.

This comes months after CAK carried out coordinated search and entry operations targeting six foam mattress manufacturers and distributors in Nairobi, Machakos, Kiambu, and Kisumu counties. 

In a statement on Tuesday, March 31, the authority said the raids, conducted simultaneously, form part of an ongoing investigation into suspected anti-competitive practices within the sector.

During the unannounced inspections, commonly known as dawn raids, CAK collected a wide range of critical materials for forensic examination. 

These included electronic storage devices such as hard drives and flash disks, as well as laptops, mobile phones, internal management reports, and sales documentation, among other records deemed relevant to the inquiry.

According to CAK, the intervention in the foam mattress market was informed by credible intelligence gathered through routine market surveillance by its case officers.