Ensuring fair is fair

As the recent construction industry case shows, local authorities can find themselves on the receiving end of anti-competitive activity. Simon Chamberlain looks at what actions they can take in response and how they can prevent themselves from being affected in the future

The Office of Fair Trading (OFT) published findings in September this year that 103 companies in the construction industry had engaged in illegal anti-competitive activities between 2000 and 2006.

The companies had been under investigation since April 2008 when the OFT made formal allegations of bid rigging, and in particular cover pricing, in breach of the Competition Act 1998. Cover pricing occurs where one or more bidders in a tender process obtains an artificially high price from a competitor, distorting the tender process.

The full decision was published on the OFT website on 20 November. Bar a relatively small reduction in the fines imposed, it confirmed the original announcement that had set out details of the fines and identified those projects where the investigation revealed anti-competitive behaviour.  

You should consider its potential impact on your organisation both in the context of concluded and future procurements, You should seek legal advice if you are concerned that you have been affected by anti-competitive behaviour or if you would like more information regarding the steps you can take to prevent it happening on your procurement, including your options under the Public Contracts Regulations 2006.

What should you do if you are concerned that one of your projects has been affected by anti-competitive activity in an already concluded procurement?

You may have seen recent briefings, press releases and articles quoting legal advisers and industry bodies encouraging parties affected by bid-rigging to bring claims against contractors to recover losses they may have suffered as a result.

Our view is that if you are concerned that one of your projects has been affected by bid rigging, cover pricing or other illegal anti-competitive activity, it may be sensible to carry out your own evaluation of the procurement. This is particularly the case if your project was one of those expressly identified by the OFT in its findings. If a particular procurement is not identified, this should not stop you carrying out your own evaluation if you have serious concerns that you may have suffered a loss as a consequence of illegal anti-competitive behaviour.

However, although it is correct to say that ultimately a party affected by a breach of the Competition Act could sue through the courts for damages in respect of loss it has suffered as a result of that breach, in either case it is likely to give grounds to enable you to take further action in only very limited circumstances.  

The difficulties are as follows:

If the breach is one in respect of which the OFT has made a formal finding of breach, those affected may bring a “follow on” action. Under this type of claim the affected party does not need to prove the infringement (on the basis that the OFT have already done this). The affected party would need to prove it has actually suffered loss. This is because in assessing whether there has been a breach of the Competition Act, the OFT does not take into account whether an affected party has suffered loss as a consequence of the breach.  Gathering sufficient evidence to show that it actually suffered loss as a consequence of anti-competitive behaviour places a heavy burden on potential claimants. In many cases, the “affected party” may not have suffered any loss at all. It is also not possible to bring a “follow on” action until the OFT appeals process has been exhausted (which could take several years). A number of the contractors have already announced that they intend to appeal against the OFT’s decision.

In the absence of an OFT infringement decision for a particular project, gathering sufficient evidence to prove an illegal arrangement before even starting to look at the question of loss places an even heavier burden on potential claimants. It took four years for the OFT to carry out its investigations and reach the decision announced in September. This is likely to be an option only in the most exceptional of cases.

The difficulties in proving breach and loss would apply whether a claim was brought based on a breach of the Competition Act or through breach of a contractual provision such as a “non-collusion” clause or similar.

In the vast majority of cases the focus for procurers of work is likely therefore to be seeking to prevent anti-competitive behaviour affecting your procurement in the first place.

How should contracting authorities deal with those companies named on the OFT’s list in the context of the Public Procurement Regulations 2006?

Contracting authorities may now be considering whether or not those named/ fined by the OFT in its decision should be disqualified from current and/ or future procurements. But are collusive activities such as cover pricing grounds for disqualification during the procurement process?

When undertaking a procurement exercise in accordance with the Public Contracts Regulations 2006, contracting authorities may only review a bidder’s suitability and eligibility to meet a contracting authority’s requirement at the “selection” stage, commonly referred to as the “PQQ” stage.  

The regulations allow contracting authorities to disqualify bidders on both mandatory and discretionary grounds as set out in the regulations. Although the collusive activities highlighted by the OFT do not warrant a mandatory exclusion, some contracting authorities may wish to disqualify a bidder using the discretionary criteria. The OFT's guidance/information note sets out that "the Parties should not be excluded automatically from future tenders on the grounds that they are Parties to the Decision, or be the subject of similar adverse measures making it more difficult for them to qualify for such tenders". 

The reasons referred to for this are:

(i)    The OFT openly state that many other firms were implicated but resources meant that the OFT focussed on a limited number of companies. Given this clear statement, disqualifying only those named will be likely to be discriminatory. In practice this means that you will not necessarily have a list of 'clean' bidders if you exclude only those who were fined;

(ii)   Some of the companies fined participated in the OFT's leniency programme by co-operating with the OFT and as such have many more infringements listed than those who did not and were therefore fined for a maximum of three offences. This can distort the view of the impact of their activity;

(iii)  The OFT's view is that the investigation process has raised awareness with the companies involved and many have already put in remedial steps in their organisations to prevent future occurrences;

(iv)  Practically, if you do exclude the companies on the list this will remove a lot of the market normally available to compete and may have an effect on the quality of response;

(v)   The companies may well seek to take action against being excluded for this reason on the grounds of discrimination, particularly as to do so would go against the OFT guidance/ information statement.

Contracting authorities may be aware that the UK Contractors Group and National Federation of Builders recently launched a new code of conduct which contains commitments to fair and free competition and which was produced in response to the OFT investigation. It would be quite appropriate for a contracting authority to seek information from bidders as to whether they comply with this code of conduct as part of their assessment as to whether they should exercise their discretion.

It follows therefore that any contracting authority wishing to disqualify a bidder on the grounds that they have been named on the OFT’s list should think carefully before doing so. Contracting authorities should however continue to ensure that they seek all relevant declarations from bidders in respect of individual tenders including statements of non-collusion.

What steps can contracting authorities take to protect themselves from being affected by illegal anti-competitive behaviour?

Although the OFT has indicated that it is for procurers to decide what action, if any, they should take in their own particular circumstances it has cautioned against excluding the 103 firms on the list from future tenders.

We agree that on balance it is a sensible approach not to exclude the contractors identified in the OFT’s decision from tender lists solely on the basis that they have been identified as having been engaged in anti-competitive behaviour in its findings. Its findings of anti-competitive behaviour are not “exhaustive” and it has expressly stated its view that cover pricing was widespread in the construction industry in the period covered by the investigation.

The OFT has reasoned that those which have faced investigation can now be expected to be particularly aware of the competition rules. The UK Contractors Group and National Federation of Builders have also recently launched a new code of conduct which contains sensible and common sense guidelines and illustrates the industry’s desire to reassure the its clients and regulators that they take abiding by competition rules seriously.

However, you should remain vigilant in any procurement. Where you are in the process of undertaking a procurement exercise now or are intending to do so in the future, you need to look out for signs of potential bid rigging, cover pricing or other anti-competitive activity.  

The OFT has published guidance on competition issues for public sector procurers of construction following on from its findings of anti-competitive behaviour. (http://www.ogc.gov.uk/documents/CP0144MakingCompetitionWorkForYou.pdf)

This includes a useful checklist of suspicious bidding patterns to look out for:

1.   Bids received at the same time or containing similar or unusual wording.
2.   Identical prices.
3.   Bids containing less detail than expected.
4.   The likely bidder failing to submit a bid.
5.   The lowest bidder not taking the contract.
6.   Bids that drop on the entry of a new or infrequent bidder.
7.   The successful bidder later subcontracting work to a supplier that submitted a higher bid.
8.   Expected discounts suddenly vanishing or other last minute changes.
9.   Suspiciously high bids without logical cost differences (e.g. delivery distances).
10. A bidder betraying discussions with others or with knowledge of previous bids.

There are also other practical steps which you can take to help reduce the risks of anti-competitive behaviour, such as the use of non-collusion clauses and/or certificates of independent bids, and careful design of your procurement process to ensure sufficient credible bidders.

Simon Chamberlain is a partner at Eversheds

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