UK: OFT Fines 103 Construction Companies For Breach Of Competition Law

Last Updated: 2 November 2009
Article by Ian Mason and Sheila Tormey

On 22 September 2009, the Office of Fair Trading (OFT) brought its five year investigation into bid-rigging in the construction industry to a conclusion, imposing fines of £129.5 million on 103 contractors. The highest individual fine of close to £18 million was imposed on Kier Regional Limited and its parent company, Kier plc.

The OFT's findings primarily relate to the practice of "cover pricing", where a bidder arranges for a competitor or competitors to submit artificially high bids. The OFT found that this practice gives a misleading impression to customers as to the real extent of competition and considers it to be a form of bid-rigging. Contractors have argued that the intention of cover pricing was to stay on the list for future tenders, rather than to overcharge for contracts.

The OFT also found that, in six cases, successful bidders made compensation payments (or losers' fees) to unsuccessful bidders. These payments ranged from £2,500 to £60,000 and were made by raising false invoices. The OFT considers this practice to be a more blatant breach of competition law than cover pricing.

The investigation, prompted by a complaint in the East Midlands in 2004, related to local authority contracts for schools and hospitals and private sector contracts for apartment blocks. The OFT stated that it actually uncovered evidence of cover pricing in over 4,000 tenders involving over 1,000 companies but that, for practical reasons, it narrowed its investigation to 199 contracts entered into between 2000 and 2006. In April 2008, it issued a statement of objections to 112 firms. It subsequently dropped its allegations against nine of these due to insufficient evidence. Eighty six of the 103 firms fined received reductions in their penalties because they admitted their involvement and co-operated with the OFT. This investigation is one of the most complex in the OFT's history and the OFT gathered much of the evidence by carrying out "dawn raids" on the contractors.

Fines are normally payable within two months, but the OFT announced that, given the current economic climate affecting this industry, exceptionally it is offering all parties the option of payments by instalments over three years.

Under competition law, parties have two months from the date of decision to lodge appeals before the Competition Appeals Tribunal and numerous parties are reported to be considering this option. In addition, local authorities or other procuring entities which have incurred losses as a result of the infringements identified by the OFT can seek damages from the contractors involved.

In consultation with the Office of Government Commerce, the OFT has issued a notice to local authorities and other procuring entities recommending that these contractors should not be automatically blacklisted from future tenders on the grounds of this decision. Given the original much wider scope of its investigation, the OFT has stressed that it should not be assumed that those contractors which are named in its decision are the only companies that have engaged in cover pricing. Further, the parties in question have been penalised for their conduct and, if anything, should now be more likely to comply with competition rules in the future.

Is your business compliant?

The scale of this investigation and the magnitude of fines imposed serve as a reminder that it is essential for businesses to be aware of, and comply with, competition law. Whilst it is impossible to eliminate all competition law risk, this can be minimised through a well designed competition law compliance programme. Further, the OFT has stated that a compliance programme may be taken into account as a mitigating factor in the case of an infringement when the OFT is calculating penalties.

Compliance programmes need to be tailored to individual companies but should comprise the following elements:

  1. Assess your level of competition law risk. Do you operate in a concentrated market with few competitors? Do your staff have regular contact with competitors, perhaps through a trade association? Are your staff aware of their obligations under competition law?
  2. Establish a competition law compliance policy, backed by senior management. This can be a brief statement that the company takes its obligations under competition law seriously and complies with competition law in all aspects of its business. However, it is essential that senior managers support this and that staff know that compliance is a priority.
  3. Establish document management policies (what to retain, what to destroy and when).
  4. Train relevant staff and ensure that they have access to legal support.
  5. Evaluate the programme on a regular basis.

If the worst happens, and you face an investigation, how you respond is very important in terms of the likely sanction. Full co-operation will earn credit and a reduced sanction. An ineffective response to the investigation could aggravate the situation and result in a higher penalty.

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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