Tribunal slashes fines payable by construction companies for colluding on bids

The Competition Appeal Tribunal has slashed the fines imposed by the Office of Fair Trading on six construction companies that were found to have colluded on bids for building public sector projects.

In its decision of 21 September 2009, the OFT found that between 2000 and 2006, some 103 undertakings had each committed between one and three infringements of the prohibition contained in section 2 of the Competition Act 1998.

Most of the infringements involved a practice known as “simple” cover pricing. This sees a company that is invited to tender for a construction contract (Company A), but does not wish to win it, seek a cover price from another company participating in the tender (Company B).

Company B will be seeking to win the contract and may already have submitted its own tender to the client. It does not reveal its own tender price to Company A. The cover price will be set at a sufficiently high level to ensure Company A does not win the tender, although it is submitted as a genuine tender.

The reason this is done is to ensure that Company A remains on the client’s tender list in circumstances where it was unable or unwilling to carry out the particular project for which the invitation to tender was issued. The client remains in the dark about the company’s lack of interest in the project.

The OFT imposed penalties totalling £129.2m, of which nearly £42m were imposed on the appellants.

But the Competition Appeal Tribunal has now concluded that:

• the final penalties imposed by the OFT on each of the appellants for “simple” cover pricing were “excessive given the nature of the infringement, together with the harm it was likely to cause, together with certain general mitigation”. This mitigation included the fact that the practice was long-standing in the industry and widely regarded as legitimate
• in a case of “simple” cover pricing, the figure of 5% of turnover in the relevant market, adopted by the OFT as its starting point at step 1 of its guidance as to the appropriate amount of a penalty was “too high where the current maximum for the most heinous infringements of the competition rules” was 10%
• the OFT’s interpretation of the guidance as meaning that “relevant turnover” was measured in the undertaking’s last business year prior to the Decision was incorrect
• the minimum deterrent threshold used by the OFT in its guidance was by its nature and application such as to give rise to penalties which were excessive and disproportionate. The threshold was “applied mechanistically and without giving proper consideration to the individual circumstances of each case”.

The Tribunal therefore varied the penalties imposed on the appellants. This saw, for example, the penalty payable by Kier Group fall from £17.9m to £1.7m and by Ballast Nedam from £8.3m to £534,375.

In a statement, the OFT said: “The judgment was limited to the level of penalty for these six companies, who did not challenge our finding that they engaged in illegal cover pricing, in breach of competition law.

“The right to appeal against the OFT's decisions in Competition Act cases is an integral part of the competition regime and an important safeguard for parties.”

The OFT said it would consider the judgment in detail, alongside those in the 19 other construction cases yet to be determined, and would consider whether to appeal to the Court of Appeal.

“Financial penalties play a key role in deterring the companies involved, and other businesses, from breaching competition law,” it added. “The OFT will consider whether the judgment has any implications for its practices and policies for ensuring a high level of compliance with competition law in the future.”

Philip Hoult