Home Features Commercial & Legal The construction industry under competition authority’s scrutiny

The construction sector has caught the attention of the Competition and Markets Authority in the last year or so. Sarah Kosminsky, a registered European lawyer, and Francesco Lamanna, head of Competition and Regulation, both with Bond Dickinson, outline the importance of compliance with competition law and how breaches may result in serious financial penalties.

Earlier this year, the Competition and Markets Authority (CMA) announced an investigation into suspected anti-competitive behaviour in the provision of products and/or services to the construction industry. In June, the CMA provided an update into its criminal prosecution of an individual suspected of cartel activity in the supply of precast concrete drainage products.

In previous years, the UK competition authorities have investigated anti-competitive activities in the construction sector which included bid rigging and the supply or acquisition of aggregates, cement and  ready-mix concrete. These events reinforce the message that  complacency about compliance with competition law creates serious commercial risks for companies.

Levels of industry competition law awareness

A 2015 CMA commissioned report entitled ‘UK businesses’ understanding of Competition Law’ found that construction sector companies had low levels of competition law compliance awareness and were possibly at the greatest risk of breaching competition law. (See www.gov.uk/government/publications/uk-businesses-understanding-of-competition-law). This provided the CMA with insight about where to target its resources both in boosting competition law awareness and investigating breaches.

The 2017/18 CMA Annual Plan restates its commitment to proactive competition law enforcement of anti-competitive behaviour and cartels. Competition law compliance remains important. It consists of understanding the distinction between illegal commercial behaviour and what is legal but sometimes incorrectly considered unfair. A compliance programme will mitigate the risk of companies breaking the law but also allow them to identify breaches by other sector players and make them best placed to defend their commercial interests. Cartel offence changes which entered into force on 1 April 2014 (through reforms implemented by the Enterprise and Regulatory Reform Act 2013) were intended to improve enforceability.

Risks of criminal prosecution for competition law breaches

Prohibited cartel activities are: direct or indirect price fixing; limitation of production or supply; sharing customers or markets; and bid rigging. These apply to reciprocal horizontal agreements regarding the supply or  production of a product or service in the UK.

Prior to 1 April 2014, a criminal cartel offence required an individual to have acted ‘dishonestly’ in entering such an agreement, which made prosecution difficult and the scope of the offence uncertain. The cartel offence no longer requires dishonesty, which should increase the prospect of more successful prosecutions. Cartel offence exclusions and defences were also introduced in 2014.

In June 2017, the CMA announced that in its criminal cartel  investigation in the supply of construction products, it did not have  sufficient evidence to criminally prosecute any further individuals. Since the relevant cartel activity occurred before 1 April 2014, the CMA was unable to conduct the criminal investigation under the reformed cartel offence. While the details of the CMA’s investigation are not known, it is worth noting that an investigation under the reformed cartel offence could have resulted in more individuals facing criminal prosecution.

Anti-competitive behaviour to watch out for

Anti-competitive agreements, trade association decisions and collusive practices restricting competition in the UK are prohibited by the  Competition Act 1998. Collusion over pricing and market sharing are  serious competition law infringements. Previous construction industry cartels included arrangements to allocate tendered contracts by  suppressing bids, bid rotation and cover pricing.

Competition law requires all companies to make their own commercial decisions independently and free of any restraints between competitors. This includes refraining from sharing commercially sensitive information with each other on matters such as pricing intentions, costs and any other factors which may influence prices or pricing practices, including through trade association forums.

Co-operation between competitors may be acceptable if it provides counter-vailing benefits for consumers or the marketplace. For example,  a consortium bidding for a project may be able to justify competitor co-operation if individually they would have been unable to do so.  However, competitors intending to co-operate should seek legal advice before proceeding.

Why compliance matters

Breaches of competition law may result in serious financial penalties. Companies may be fined up to 10 per cent of their worldwide turnover and may be subject to third party damages claims. Individuals can also be disqualified from acting as company directors for up to 15 years.

Anti-competitive provisions in agreements may be void and  unenforceable, and competition investigations are costly. They may lead to reputational damage and will require the involvement of significant senior management time.

In the UK, individuals involved in a criminal cartel may be sentenced up to five years in prison and/or be fined.

 

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