UK: OFT Continues to Investigate Construction Cartels

Last Updated: 30 March 2006
Article by Guy Lougher

The Office of Fair Trading (OFT) has imposed total fines of £2.3 million on 13 roofing contractors for colluding to fix prices for car park and flat roofing surfacing contracts in England and Scotland. This is the fifth set of fines to be levied by the OFT in the roofing sector in the past two years. The OFT has previously warned that it intends to pursue those involved in anti-competitive practices in the construction and housing markets as a matter of priority during 2006-2007.

Anti-competitive agreements, decisions and concerted practices are prohibited in the UK by the Competition Act 1998. Cartels, involving collusion between competitors, are considered to be a particularly damaging form of anticompetitive agreement. Cartels may operate to pre-determine which of its members will win a particular contract put out to tender or may arise more generally from collusive tendering arrangements. These could include one of the following three ways:

  • Bid Suppression - companies agree among themselves who will not bid or who will withdraw a bid;
  • Bid Rotation - companies agree to take turns in submitting the lowest, winning, bid;
  • Cover Bidding/Cover Pricing - one person (who wants to win a tender) provides another person with a tender price calculated to be sufficiently high to ensure that the person receiving the cover price does not win the tender.

Even though some companies in the construction sector may have engaged in this practice for some time, the OFT considers it to be anti-competitive.

The penalties for anti-competitive practices can be severe and the penalties for participating in a cartel even more so. Potential consequences of infringing UK competition law include:

  • A fine of up to 10% of the company's turnover;
  • Director disqualification orders;
  • Third party damages actions;
  • Imprisonment for up to 5 years for individuals found guilty of the criminal cartel offence under the Enterprise Act 2002.

Practical Implications

This latest set of fines and recent news of OFT ‘dawn raids’ in the construction sector should remind construction companies of the importance of competition law compliance within their organisations.

OFT issues interim directions for the first time

The OFT has issued a direction to the London Metal Exchange (LME) to prevent it from extending its trading hours as planned.

The OFT indicated that it is currently investigating a suspected breach of Article 82 of the EC Treaty by the LME, following a complaint by Spectron Group Plc (Spectron) that the LME may be abusing its dominant position by below-cost pricing and price discrimination on its electronic trading platform.

The LME had intended to extend the hours of its electronic trading platform in order to cover the Asian markets, but Spectron requested an interim direction, as they argued that any extended hours would force Spectron's own electronic trading platform to exit the market.

Where the OFT is investigating a suspected infringement of Article 82 and where urgent action is needed, it can issue a direction to prevent serious and irreparable damage to a particular person or category of persons or to protect the public interest. The OFT concluded that these conditions were satisfied, as the extension of hours would be likely to exacerbate the existing alleged abusive conduct.

As a result of this direction, the LME cannot extend its trading hours as planned and must wait until the OFT has completed its investigation. However, in a subsequent turn of events, the OFT issued a statement saying that it has learned that Spectron has withdrawn its request for an interim measures decision. The OFT is seeking clarification of the issue and has also defended itself from criticism that the direction had not been issued at the earliest possible opportunity.

Comments

This is the first time that the OFT has used its powers to issue an interim direction. Indeed, the OFT has shown great reluctance in the past to consider issuing an interim direction and has sought to rely on voluntary assurances instead.

Typical situations suitable for consideration of an interim measures direction are those where competitors (often the complainant) can show that they will suffer medium to long term harm in the absence of interim protection. Harm can include financial loss or damage to goodwill or reputation.

Competition Commission publishes final report on store cards

The Competition Commission (CC) has recently published its final report in its store cards inquiry. The CC confirmed its provisional finding of 2005 that the supply of consumer credit through store cards and associated insurance had an adverse effect on competition in the UK, with the effect that store cardholders who take up credit and associated insurance in this way are paying too much.

The European Commission is concerned that the efficacy of its Leniency Programme for cartel cases could be undermined by court orders for the disclosure of written statements submitted by whistleblowers to the Commission as part of a leniency application. Cartel members can gain up to 100% leniency from fines under the programme if they provide information to the Commission on a cartel. However, the Commission believes that potential whistleblowers will be dissuaded from coming forward, for fear that this could expose them to third party claims for damages in national courts.

The CC is imposing remedies to counter the problems identified, including requiring store card credit providers to give more and better information on store card holders' monthly statements, and to give store card holders the option of paying by direct debit. The CC intends to make an order requiring the remedies to be implemented in approximately 12 months' time.

European Commission aims to encourage whistleblowers

The Commission proposes a number of solutions to the problem. These include offering whistleblowers an opportunity to make oral statements, greater restrictions on general access to the Commission's file and the threat of reporting errant lawyers who fail to observe these restrictions to their national Bar. The proposed amendments are designed to ensure as far as possible that companies do seek leniency as soon as possible and that cartel members who do not seek leniency are not placed in a more advantageous position than whistleblowers.

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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