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Businesses warned not to destroy documents

Commission warns businesses not to destroy company information and documents

Search warrants are a valuable tool that the Commerce Commission will not hesitate to use when investigating allegations into anti-competitive behaviour. General Manager Geoff Thorn said the Commission is committed to the use of search warrants particularly following the admission by Tranz Rail that one of its employees destroyed emails and possibly documents relating to the subject of a Commission investigation.

The Commission has recently closed a long standing investigation into Tranz Rail, now owned by Toll NZ Limited, regarding allegations of anti-competitive behaviour relating to the provisions of ferry services between the North and South Islands in the period 1999-2000.

The investigation was prolonged when Tranz Rail challenged the validity of the Commission’s use of a search warrant during the investigation. The High Court dismissed Tranz Rail’s application for judicial review, and Tranz Rail subsequently appealed to the Court of Appeal. The Court of Appeal reversed the High Court decision in October 2002, ruling that the Commission’s search warrant was invalid, and therefore the Commission was not entitled to retain the documents seized as a result of the warrant.

“Since receiving the Court of Appeal judgment, the Commission uncovered, and Tranz Rail confirmed, that one of its employees in October or November 2000 directed the destruction of emails and possibly documents relating to ferry service negotiations that were being investigated by the Commission at the time,” said Mr Thorn.

“The Court of Appeal criticised the Commission for its ‘generality and lack of disclosure’ in its application for a search warrant. The Court questioned whether the warrant was necessary in this case and further questioned whether the Commission should have used its requisition powers before applying for a search warrant.”

Under its requisition powers, the Commission may require a person to furnish or produce any documents or information and may require a person to appear before the Commission.

“The Commission’s accepts the Court of Appeal decision that the Commission must prove a warrant is necessary. One factor is the likelihood of destruction of documents by business or their employees,” Mr Thorn said.

“The subsequent discovery that a Tranz Rail employee directed the destruction of some documents is significant. The fact of the matter is that we will now never know the extent of that evidence, and how it might or might not have been relevant to our investigation.

“This example of destruction will be used by the Commission in the future when applying for warrants. We now have a New Zealand example of an Enron-like destruction of corporate information.”

The investigation centred on two claims: that Tranz Rail may have exploited a dominant position by using targeted low prices, possibly below cost, to eliminate the “Top Cat” Cook Strait ferry operation or to substantially lessen competition in the relevant market; and that Tranz Rail had entered into an arrangement with Incat, the owner of the “Top Cat”, whereby it would lease a new fast ferry from Incat on condition that Incat would withdraw the “Top Cat” from the Cook Strait.

Mr Thorn said given the factual background, the lack of evidence of below-cost pricing, the various factors that had contributed to the failure of the “Top Cat” operation, the lack of direct evidence of an agreement between Tranz Rail and Incat for the removal of “Top Cat” from the market and Tranz Rail’s denial that such an agreement was entered into, the Commission had not been able to establish whether a contravention of the Act had occurred.

The Commission also has information gathering powers under the Fair Trading Act. By serving a notice, the Commission can require businesses to provide information and documents relating to an investigation, and also use search warrants when necessary.

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