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Competition law update
09 June 2011

Two recent high profile sets of decisions from the Competition Appeal Tribunal (“CAT”) have highlighted the significant penalties that companies face for breaching competition legislation.

Whilst much media attention has been focused on the CAT’s decision to reduce significantly the penalties imposed by the Office of Fair Trading (“OFT”) in the “Bid rigging in the Construction Industry” and “Construction Recruitment Forum” cases, it should not be forgotten that the OFT has the power to impose fines of up to 10% of worldwide group turnover for each relevant infringement.

Faced with these levels of fines are companies sufficiently aware of the law in this area?

Both of these cases involved infringements of the Chapter I prohibition imposed by section 2 of the Competition Act 1998 (“the Act”) which provides as follows:-

“(1) …agreements between undertakings, decisions by associations of undertakings or concerted practices which –

(a) may affect trade within the United Kingdom, and

(b) have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom, are prohibited…”

The Bid Rigging in the Construction Industry decision followed the largest ever investigation carried out by the OFT. It resulted in fines totalling £129.2 million being imposed on 103 undertakings. In most of the cases the infringing conduct was cover pricing, a practice which until the OFT’s decision had been largely considered by those in the industry as widespread and acceptable.

In its most basic form, cover pricing arises when one (or more) of the companies invited to tender for a particular contract (Company 1) does not wish to win the tender, for example due to lack of resources at that time. However, because it does not want to upset the client (for whom it might wish to do work in the future) it contacts another company (Company 2) which it knows is also tendering and asks it to provide a cover price. Company 2 will provide an inflated price (having already decided the value of its own tender) which Company 1 can use to produce a tender figure it knows will not be successful but can submit a tender as though it is genuine.

Twenty five of the companies fined by the OFT appealed the decision to the CAT. The appeal cases involved fines of over £80 million which were reduced on appeal to just over £13.5 million. However, the largest of these fines were still 7 figure sums in an industry with notoriously low profit margins.

The Construction Recruitment Forum case concerned much more serious conduct involving a cartel which had been formed by 8 recruitment companies in response to the entry of a new company, Parc, to the construction recruitment market. Parc acted as a managed service provider which is an intermediary responsible for the commercial relationship that a construction company would otherwise have direct with recruitment agencies. Parc sourced candidates from a number of recruitment agencies to fulfil the roles required by its clients. The recruitment agencies involved in the case were concerned that intermediaries such as Parc affected their profit margins. In order to try and squeeze Parc out of the market they formed a cartel and reached an agreement that they would withdraw and/or refrain from entering into contracts where Parc was acting as the intermediary. They also agreed to fix the rates for the supply of candidates to certain parties.

The OFT decided that these actions amounted to a very serious infringement which involved both price-fixing and a collective boycott and imposed fines totalling just under £40 million after leniency (of which just over £30 million was imposed against Hays plc (and its subsidiaries)).

On appeal by three of the companies the CAT reduced the fines from just over £39 million to just under £8 million. However, Hays still received a fine of £5,880,000 - a not insignificant sum in the current financial climate.

In a press release issued in light of its decision not to appeal the CAT decisions the OFT has said: “Looking ahead, the OFT will continue to focus its resources on high impact enforcement action, with substantial financial penalties and the use of individual sanctions where appropriate, to deter businesses from breaching competition law.”

Competition law is a complex area of the law but with the OFT’s powers to fine at such high levels and with it remaining committed to enforcement action, companies cannot afford to be ignorant.

For more information about the issues raised in this article or to find out more about how the Construction Disputes team can help you please contact Mike Robinson on 0118 952 7206 or email[email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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