In brief

  • At a time when the debate continues on whether Australia’s cartel laws are effective to operate against anticompetitive price fixing and bid rigging, the ACCC had a sweet victory against three companies and two individuals engaged in ‘cover pricing’ in bids for government construction contracts in Queensland. 
  • ‘Cover pricing’ is a practice used where one party wants to be seen as tendering for work without actually winning it. In these circumstances they seek a ‘cover price’ from a genuine bidder, who provides a price greater than their tender price, with the result that the party seeking the cover price can bid using the cover price in the knowledge their tender will not be successful.
  • In his decision in Australian Competition and Consumer Commission v TF Woollam & Son Pty Ltd [2011] FCA 973, Justice Logan agreed with the ACCC that the ‘cover pricing’ was illegal price fixing.
  • The court held that the parties willingness to seek and provide ‘cover prices’ exposed a relevant ‘understanding’ between them to control tender prices and therefore came within the scope of prohibited price fixing. 
  • The case again highlights the risk attaching to price related communications between competitors. Add elements of secrecy and the fact that all understood what is expected of a cover price and the risks are very high indeed. Bear in mind also that this case was based on the old law; in the future it could well be assessed under the criminal provisions of the cartel law.

Facts

The contractors in the case were involved in tendering for various Queensland and local government public works projects. In relation to each of the projects, one contractor sought from another a cover price. In doing so:

  • all parties understood what was meant by a ‘cover price’—as Justice Logan put it:

the term ’cover price’ as used in these conversations one to the other was one pregnant with meaning for each.

  • the parties’ purpose was to put a ceiling on the price at which the party seeking to win would tender (because its price would be below the cover price) and to put a floor on the price at which the other party would tender (because its price would be above the cover price).

In tendering for the projects, each of the parties also had represented they would comply with certain documents outlining how the tender process would be run.

Decision on price fixing

Justice Logan held that the facts established the three key elements required for illegal price fixing:

  1. An ‘arrangement or understanding’: Both the previous price fixing prohibition as well as the current cartel prohibitions (which include price fixing and bid rigging), require that the parties make or give effect to a ‘contract, arrangement or understanding’. Justice Logan held that an ‘arrangement or understanding’ was proven by one party seeking and receiving a cover price, coupled with the contractors’ knowledge of what was meant by the practice of cover pricing. The facts established a ‘mutual obligation’ between the parties to act consistently with the arrangement or understanding’. However, Justice Logan expressed the view that a mutual commitment was not a necessary element to an arrangement or understanding. 
  2. The parties were in competition with each other: Against the ACCC, it was submitted that the respondents were not in competition with each other in relation to the projects as only one wanted to win the projects and the other did not. Consistent with earlier authority, Justice Logan rejected this proposition and held that the fact that one party did not wish to win the tender was irrelevant. It was sufficient that the contractors had entered into the same tender process. 
  3. ‘Controlling’ the tender price: Justice Logan held that the purpose of the understanding to put a ceiling on one contractor’s tender price and a floor on the other contractor’s price amounted to ‘controlling’ the price at which the services were to be supplied. This was the case, Justice Logan found, even though the party seeking to win the tender had fully costed its tender and determined its price prior to providing the cover price. The ‘controlling’ arose from the fact that the arrangement restrained a freedom that would otherwise exist as to the price to be charged.

In the result the arrangements fell within the previous provisions of the Trade Practices Act 1974 (Cth) as illegal price fixing. Under the cartel prohibitions that currently operate in the Competition and Consumer Act 2010 (Cth), such conduct would also be held to be illegal as either price fixing or bid rigging, and accordingly the key principles emerging from the case remain relevant.

Justice Logan’s view that mutual commitment is not required to establish an arrangement or understanding further reinforces earlier decisions and is important in the ongoing cartel law and price signalling debate.

Decision on misleading and deceptive conduct

With respect to the allegations of misleading and deceptive conduct, each of the contractors were found to have made various representations to the effect that they had not discussed tenders with other tenderers, had not been party to any collaboration or collusion between tenderers, had not given or received assistance to submit a cover tender and had no knowledge of the price of any other tender. These representations were found to have been made due to provisions in tender or contract documents the parties had purported to comply with, and the effect of government pre-qualification on tenderers.

As, contrary to these representations, the parties had entered into the cover pricing arrangement, the representations were misleading or deceptive within the meaning of section 52 of the TPA.

Individual liability

The ACCC pressed cases against only two individuals involved in the cover pricing. Again, its case succeeded as Justice Logan found that both had knowledge of the practice of cover pricing and its features and had authorised a subordinate to communicate a cover price to another contractor. They therefore had knowledge of the essential matters which go to make up the contravention, and thus were both liable as having been knowingly concerned in the contraventions.

Consequences

The court has not made final orders or determined penalties. Contravention of the previous price fixing laws can result in fines greater than $10 million – under the new cartel laws the conduct could also lead to imprisonment for up to 10 years.