Client alert: Construction under competition law spotlight

Introduction

A number of announcements from the Competition and Markets Authority (“CMA”) illustrate that the UK competition regulator has once again brought scrutiny on businesses in the construction and engineering sector as being culpable of anti-competitive conduct, notably around price fixing, collusive tendering and cover pricing.

Readers may recall that in the 2000s, the CMA’s predecessor, the Office of Fair Trading, led a series of long-running investigations into a wide range of businesses in the construction and engineering industry, who were ultimately charged and penalised for infringing the Competition Act 1998 (“CA 98”). 

This began with a series of dawn raids against roofing contractors in the West Midlands who were discovered to have been involved in collusive tendering, notably cover pricing.  That case revealed evidence of similar practices in other parts of the UK, culminating in penalties to 103 companies worth a total of £129.5 million after an investigation into bid-rigging in England. Only a handful of the fines issued were reduced on appeal to the Competition Appeal Tribunal.

In this brief alert we outline the three investigations which have either recently concluded or are ongoing together with a summary of what this means for businesses.

What is competition law and collusive tendering?

Chapter I of the CA 98 prohibits agreements and concerted practices between businesses the effect of which is to prevent, limit or distort competition. Chapter I precludes the possibility of arrangements such as price fixing, bid rigging / collusive tendering or customer or market allocation.

Collusive tendering or bid rigging is the practice of distorting the competitive tender process.  This can occur in the following ways:

• Businesses fix tender prices between themselves or facilitate price coordination by revealing sensitive bid information to each other;
• Bid suppression takes place when one or several competitors, who would otherwise be expected to tender for a contract, refrain from tendering or withdraw a previously submitted tender, so that a competitor’s tender will be accepted instead.
• Cover pricing (also known as ‘complementary’, ‘protective’ or ‘shadow’ bidding) occurs when competitors submit token tenders that are too high to be accepted. Such tenders are not intended to be accepted, but are merely designed to give the appearance of genuine tendering. This enables another competitor’s tender to be accepted when the contracting authority requires a minimum number of bidders. Sometimes this has occurred where one bidder has been too busy to return a genuine price and so requests a cover price from a rival tenderer.  Unfortunately, the intention behind seeking or providing a cover price is irrelevant and this practice will always contravene Chapter I of the CA 98.
• ‘bid rotation’ entails suppliers agreeing to take turns to win contracts, similarly market or customer allocation involve parties allocating customers or opportunities between themselves.

The CMA has wide ranging powers to investigate suspected breaches of the CA 98, including on-site inspections, the ability to require key witnesses to attend interviews and to remove documents and require individuals to provide explanations for those documents. 

The CMA may not only issue fines based on its findings of up to 10% of group turnover but also issue director disqualifications and even bring criminal prosecutions under the Enterprise Act 2002 (“EA 02”). It must be remembered that bid rigging is not only a serious violation of Chapter I of the CA 98 but also a criminal offence under Section 188 of the EA 02, carrying a penalty of unlimited fines for individuals and custodial sentences of up to five years. 

If this were not bad enough, businesses found guilty of anti-competitive conduct can be excluded from competitions for public contracts under Regulation 57 of the Public Contracts Regulations 2015. This may prevent a business bidding for such contracts in its own right and also damage its prospects of becoming a subcontractor or consortium partner.     

We now summarise the three most recent decisions of the CMA involving players in the sector.

Investigation 1:  Roofing materials [1]

Following an investigation into suspected cartel conduct in 2017, the CMA discovered anti-competitive agreements in place between Associated Lead Mills Ltd (ALM) and H.J. Enthoven Ltd (trading as BLM British Lead) (BLM), who had broken the law by entering into anticompetitive arrangements. ALM and BLM are two of the biggest suppliers of rolled lead, a key component in the production of roofing materials.

The four anticompetitive arrangements took place between October 2015 and April 2017 and included colluding on prices, sharing the rolled lead market by arranging not to target certain customers and avoiding supplies to a new business which risked disrupting the firms’ existing customer relationships. Each of the arrangements also included exchanges of commercially sensitive information.

The CMA imposed fines totalling over £9 million on the parties which included settlement discounts linked to admission of guilt and cooperation with the inquiry. In March 2021, the CMA also announced an additional sanction: it has exercised its powers of director disqualification against three executives of the parties involved in this decision. 

Investigation 2: Construction services [2]

Little has been publicly announced regarding this inquiry, which began in March 2019 and remains ongoing. Publicly, the CMA has said only that it is investigating suspected anti-competitive arrangements in the supply of construction services in Great Britain which may infringe Chapter I of the Competition Act 1998. The CMA’s press release discloses only that the investigation is ongoing with a further announcement expected in October 2021.

Investigation 3: Groundworks [3]

In 2017, the CMA opened an investigation into a number of suppliers of groundworks products to the UK construction industry. 

Subsequently, the CMA issued a statement of objections setting out its provisional findings that three suppliers to the construction industry had breached competition law by coordinating their commercial behaviour (in particular pricing practices) with the aim of reducing competition on price and strategic uncertainty, through the sharing of competitively sensitive, confidential pricing and strategic information in relation to the supply of certain groundworks products in the United Kingdom.

The CMA in December 2020 issued a decision finding that Vp plc, M.G.F (Trench Construction Systems) Ltd and Mabey Hire Ltd had infringed competition law by colluding illegally. Fines totalling more than £15 million were imposed on Vp and M.G.F. The non-confidential version of the decision was released in March 2021. 

So what?  Why is this important for construction businesses?

There are a number of essential take-aways here for businesses active in construction and engineering:

• the construction sector remains in the CMA’s sights. After a period in which it seemed other industries were the focus, it is now clear that construction is a key target.  Whereas previously competition compliance had been at the forefront of many firms’ practices, a significant number have now sloppily lapsed back into unlawful conduct;
• Brexit and the pandemic have created acute challenges for construction and engineering businesses. These pressures make it more appealing to cut corners in competitive tender processes and lead to a false instinct that there must be a defence based on the prevailing difficulties. The CMA has sent a clear message that tough market conditions are no excuse for breaking the law;
• the exchange of competitively sensitive information between competitors is not permitted. Neither are agreements between rivals not to compete for customers or business or to decide between themselves who will win any given contract or customer; and
• the CMA has sophisticated means of capturing evidence and despite the businesses meeting in various different locations, it was able to obtain the necessary evidence. Individuals involved in cartel behaviour frequently use private email addresses to conceal illicit conduct but this strategy is not always effective.

The penalties for anti-competitive conduct are severe. Businesses may face fines of up to 10% of group, worldwide turnover as well as lawsuits from parties who have been affected by cartel activity. Fines can be reduced or even wiped clean for firms who self-report through the CMA’s leniency policy. That can lead to the reporting firm bringing to the CMA’s attention other cartel activity of which it may not already be aware, thus putting other businesses at risk. 

Increasingly, the CMA is using its powers to press for disqualification of directors who have been involved in illicit conduct. They may also be subject to mandatory debarment for up to 15 years from directorships and management positions in companies, a process that will also involve them being publicly and personally “named and shamed”.   

The key step for businesses to take is to put in place a competition compliance program, that will involve training staff to avoid and to be on the look-out for unlawful practices. The aim is to both prevent the occurrence of behaviour that could land the company in trouble as well as to be able to spot it early where it arises and to take timely action to remedy or mitigate the risk (such as considering an application for leniency to the CMA).   

Rights to compensation for victims of cartel behaviour

Finally, remember that competition law gives your business important compensation rights, particularly if you have been buying over the odds as a customer of a cartel. Losses may have arisen because your business procured goods and services at inflated and artificial anti-competitive prices. Legally, the overpayment will only be compensated if the victims initiate a claim. The CMA has no jurisdiction to distribute the proceeds of fines to injured parties.

Businesses should therefore consider whether they have been bearing the cost of unlawful prices. Given the tight margins in construction and the challenging trading environment, simply “taking it on the chin” may be considered contrary to the interests of shareholders. Businesses should move quickly to secure their right to be refunded for unfair, exploitative pricing.

For more information, please contact your usual Charles Russell Speechlys contact.

[1] https://www.gov.uk/cma-cases/roofing-materials

[2] https://www.gov.uk/cma-cases/supply-of-construction-services 

[3] https://www.gov.uk/cma-cases/provision-of-products-and-or-services-to-the-construction-industry-civil-investigation