UK: OFT Turns the Screw

Last Updated: 26 May 2005
Article by Guy Lougher

Originally published 23 December 2004

Companies within the construction and construction products sectors will soon find new interest being taken in their business. Unfortunately, this interest will be not from potential customers, but from the Office of Fair Trading (OFT), which has recently published its draft business plan for 2005/6. The OFT promises to focus upon five priority areas for competition enforcement – one of which is the construction and house building industry, and the supply of related services. The OFT has also identified procurement by public bodies as another priority area. The investigations will affect suppliers of construction products.

Why, then, has the OFT decided to take such an interest? The OFT has stated in its plan that "Construction and housing markets … form a significant part of the workload of the [OFT's] cartels branch. They are of prime importance in many large public procurement exercises. We continue to receive many complaints from consumers".

During 2004, the OFT has issued two recent fining decisions arising from anti-competitive behaviour in the construction and construction products sectors. In March, nine roofing contractors were fined about £300,000 for colluding to fix prices in local authority tenders. In November, five companies were fined £1.7 million for price fixing a double-glazing product - although the original fine of £2.4 million was reduced because the companies involved cooperated with the OFT's investigation.

There has also been recent action by the European Commission into suspected anti-competitive behaviour in this area. In September 2004, the European Commission imposed fines of over Euro 220 million on several companies "for operating a cartel in the European market for water, heating and gas tubes for a period of up to 12 years". Then, in November 2004, the European Commission and representatives from national competition authorities conducted dawn raids at the premises of various manufacturers and importers of bathroom fittings.

Against this background, the OFT clearly believes that there are many other anti-competitive arrangements in the construction, house building and related sectors that have not yet been discovered and it intends to devote significant resources to ensuring that these arrangements are uncovered and brought to an end.

The annual plan suggests that the OFT is going to be extremely active in this area. The OFT anticipates that during 2005/6 it will investigate between 45 and 65 cases for suspected breach of the competition rules.

The annual plan also indicates that the OFT will initiate up to 10 market studies or market investigation references to the Competition Commission. These are more wide-ranging investigations into whether a particular market is working to consumers' detriment, even if the OFT does not suspect the companies involved of acting in an anti-competitive manner. It may itself undertake market studies lasting up to about a year, or it may order the Competition Commission to undertake a very detailed investigation, potentially lasting up to two years, into a particular sector.

Either way, companies are likely to find themselves being questioned and scrutinised closely by the OFT. It has very wide powers to require companies to provide it with information and documents. These powers range from the ability to make written requests for information to unannounced dawn raids at a company's offices or at individuals' homes. If the OFT sends a written request for information, then the recipient may have time to review all relevant documentary evidence, speak to relevant employees and to decide how best to present its case. However, in a dawn raid, there is no such opportunity for self-appraisal or reflection.

For companies who have infringed the competition rules, and who find themselves at the centre of an OFT investigation, the option of applying for leniency should be considered. This is where it encourages companies to provide information about anti-competitive behaviour in return for a reduced or even zero fine. The testimony given would then be used as evidence in enforcement actions by the OFT against the other companies that had breached the competition rules. However, companies must weigh up the pros and cons of seeking leniency, but invariably they need to reach a decision quickly and without knowing what information the OFT really has about their activities.

Admitting liability may avoid a fine but could expose a company to actions for damages by parties, such as consumers, who were adversely affected by the anti-competitive behaviour. Before invoking the leniency process, companies and their advisers should also try to second-guess how strong the OFT's evidence might be; without the leniency application might the OFT be unable to find sufficient evidence that the competition rules had been breached? Reaching a decision against this background requires considerable judgment and experience.

Companies at risk should consider acting now to review their practices and procedures to ensure that they are not likely inadvertently to become involved in anti-competitive behaviour. This should not be a one-off check up but part of an ongoing system of regular reviews and staff education to ensure compliance with the competition rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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