In recent years, the construction industry has been the target of action by the Office of Fair Trading (OFT) enforcing UK competition law in respect of cartels and other anti-competitive collusion. Although in May 2011 the Competition Appeal Tribunal (CAT) reduced some fines imposed by the OFT, the OFT has made it clear that its determination to detect cartels in this sector and penalize those involved has not been affected and that the industry can expect tougher action in future.
Anti-competitive agreements, trade association decisions and collusive practices that restrict competition in the UK are prohibited by the Competition Act 1998. Cartels that involve collusion, typically over prices to be charged and market sharing, are regarded as a particularly serious infringement. In the construction industry, cartels have taken the form of arrangements to allocate contracts which have been put out to tender, for example, through:
- Suppressing bids – potential tenderers agree among themselves that one or more tenderers will not bid or will withdraw a bid.
- Bid rotation – tenderers agree to take it in turn to submit the lowest bid.
- Cover pricing – two tenderers agree that one of them will submit a high bid for a contract with no intention of winning in order to make it more likely that the other will do so, in some cases compensating the losing party. It is clear from the OFT’s decision in the cover pricing cases and the subsequent CAT appeals that although some construction companies may have engaged in this practice for some time believing it to be innocuous, it is anti-competitive and unlawful.
The penalties for engaging in anti-competitive agreements and practices can be very strict, particularly where the infringement is participation in a cartel. The possible consequences of infringing UK competition law include:
- Fines of up to 10 percent of the group’s worldwide turnover.
- Damages actions by affected third parties.
- Disqualification of directors (up to 15 years).
- Up to five years’ imprisonment for individuals found guilty of a criminal cartel offence under the Enterprise Act 2002.
Under the Spotlight – Recent Issues in the Construction Industry
- OFT investigation into bid rigging in the construction industry: In the UK, the OFT carried out its longest ever investigation under the Competition Act 1998 and uncovered widespread bid-rigging and cover pricing in the construction industry. It fined 103 parties £129.2 million for breach of competition law for participating in the practice of cover pricing during the period 2000-2006 (subsequently reduced on appeal to £60.7 million). Authorities across Europe have carried out similar proceedings against companies involved in cartel activity. Regulatory investigations of this nature draw unwanted attention to the industry and often necessitate cultural change. Construction companies must respond with visible, effective competition compliance. SNR Denton can assist companies in creating an effective compliance programme that meets the standards required by competition authorities. Third parties who have suffered loss as a result of competition law infringements can seek damages in the courts. Competition litigation is an emerging area of law and SNR Denton has been involved in its development, having appeared in ground-breaking cases before the CAT and the civil courts.
- Land agreements: In April 2011, the treatment of land agreements under competition law was overhauled. Previously, land agreements, such as leases, freehold sales and licenses, were largely exempt from the prohibition of anti-competitive agreements, but this is no longer so. All such agreements fall to be assessed by the parties to ensure compliance with the competition rules. Although the OFT has published guidance on the application of competition law to land agreements, there are still many grey areas that are open to interpretation. SNR Denton can help businesses review their land agreements and provide a risk assessment.
- OFT market study into aggregates: The OFT is currently carrying out a market study into the aggregates sector, which is due to complete in July 2011. The study results from representations the OFT received during its mergers work raising possible issues in the sector. The OFT will consider whether there are any distortions of competition, especially at local level, and barriers to entry for primary and secondary aggregates. The study may result in enforcement action by the OFT or a reference to the Competition Commission, which would carry out a lengthy investigation of all aspects of the market, and the potential for remedies to be imposed on the industry to mitigate competition concerns.