K&LNG
MAY 2006
Alert
Competition Law
UK construction industry under the spotlight
The UK construction industry is currently under
close scrutiny by the Office of Fair Trading ("OFT").
The construction industry has been one of the OFT's
stated priority areas since early 2005 and the OFT
Annual Plan for 2006/7, published on 29 March
2006, indicates that the focus on the construction
(and housing) markets is set to continue. In the
coming year, the OFT's work in these markets will be
co-ordinated under three themes: inputs to
construction, where its work "on rooting out cartels
is of most relevance"; supply of new buildings; and
services relating to housing, such as estate agency
and repairs.
Recent Cases
The UK Competition Act 1998 prohibits anticompetitive agreements, practices or conduct that
have the object or effect of damaging competition in
the UK. Price-fixing and the creation of cartels are
seen as serious infringements by the OFT as they
distort competition and inflate the prices paid by endusers. OFT research in July 2005 indicated that
nearly a quarter of small and medium sized
enterprises across Britain believe they are harmed by
unfair practices such as price fixing and collusion to
set tender prices.
"Evidence on cartel activity in the construction sector
- from leniency applicants and site visits - is
mounting. [This] roofing case is likely to be the first
in a series of construction cartel cases".
As far as the construction industry is concerned, the
OFT recognises that 'old habits die hard' and that
certain anti-competitive practices, such as cover
pricing, 'bid rigging', sharing markets and other forms
of collusion in the tendering process which may have
historically existed in certain sectors of the industry,
may still linger on.
The OFT considers that independent submission of
bids is an essential feature of the tendering process in
order to ensure competition. This is not to say that a
tenderer could not unilaterally decide to submit a
high bid for commercial reasons without expecting to
be awarded the job, but any tenders submitted as a
result of collusion (or attempted collusion) between
prospective suppliers are likely to infringe the
Competition Act.
Within the UK construction industry, the OFT is
most recently known for the series of successful
investigations it has brought against a considerable
number of roofing contractors in England and
Scotland since 2004. The first case was against
members of a West Midlands roofing cartel in 2004.
Members of the cartel were fined over £300,000 for
price-fixing arrangements that effectively shared out
the market between them through a system of
collusive tendering. Commenting at the time, John
Vickers, the then OFT Chairman, said:
Indeed, since then four other cases have been
successfully brought against roofing and car park
surfacing contractors in other geographical markets
with total fines in the sector currently in excess of £4
million. Through collusive tendering, those
contractors had inflated the prices paid by the endusers - including hospitals, schools, local authorities,
private developers and banks.
The OFT's well-publicised "dawn raid" powers were
exercised on a large scale in mid-2005 when the OFT
searched the premises of 22 companies in the East
Midlands under warrant as part of an investigation
into allegations of collusive tendering for public and
private contracts in the construction industry over a
number of years. Whilst this was an exercise of the
OFT's civil powers under the Competition Act, 2005
also saw the first raids carried out by the OFT - in
conjunction with the Serious Fraud Office - using
criminal enforcement powers where proceedings
were pending. Other high profile 'dawn raids' of
major construction companies have also been
recently reported in the press.
Kirkpatrick & Lockhart Nicholson Graham LLP |
MAY 2006
Price fixing and other anti-competitive activities can
result in fines of up to 10 per cent of a business'
global turnover. Attempts to set up a cartel do not
have to be successful to be unlawful as the
prohibition is on anti-competitive agreements that
have the object or effect of distorting competition.
The OFT operates a leniency programme whereby
fines may be reduced for 'whistleblowers', but this
comes with serious strings attached regarding
assistance with any investigation. The best policy is
obviously to ensure you are never in a position to be
fined in the first place.
Criminal Activities
If that is not encouragement enough, the UK
Enterprise Act 2002 introduced a specific 'cartel
offence' with criminal sanctions: any person
dishonestly engaged in cartel activity after 20 June
2003 (the date the Act came into force) may face
criminal prosecution for their actions, with unlimited
fines and up to 5 years imprisonment. The criminal
concepts of 'conspiracy' and 'attempt' apply, meaning
that unsuccessful attempts to form cartels can also
lead to prosecution. In undertaking its criminal
investigations, the OFT has the power to bug a wide
range of premises, and non-compliance with
investigations can also result in prison sentences and
fines.
How Best to Respond
All companies involved in the construction industry
should have a working knowledge of the UK and
European competition laws and take active steps
within their organisations to ensure compliance with
those laws. Even if the anti-competitive practices
currently being targeted by the OFT are a complete
anathema to your own company's business policies,
there is always a risk that an employee may not fully
understand that historically 'acceptable' practices are
now unacceptable, or a risk that a company with
whom you do business or share a market may not be
equally principled.
The importance of good internal procedures to filter
out unacceptable practices cannot be overstated. This
should start with a detailed compliance programme
and be supplemented by regular training sessions and
updates for relevant individuals across your
organisation, including directors, in-house lawyers,
contract/project managers and sales staff.
Compliance programmes should also set out detailed
procedures to be followed in the event of a dawnraid, not only to protect the company's position to the
extent it is legally entitled to do so, but also to ensure
that no further offences arise through a failure to cooperate with the OFT in its investigations.
The OFT can also apply for Competition
Disqualification Orders ("CDOs") which disqualify
directors who have been involved in any
infringement of competition law (not just the cartel
offence) from holding office for up to 15 years. A
CDO could effectively put a director out of action for
the remainder of their career.
2
Kirkpatrick & Lockhart Nicholson Graham
LLP
|
MAY 2006
For more information on our Construction & Engineering and Antitrust & Competition practices, in both the
United Kingdom and USA, please visit our website at www.klng.com. For more information about
competition law as it affects the construction and engineering industries in the United Kingdom, and how we
may assist with any competition related matters (including training and compliance), please contact one of the
following London-based lawyers:
LONDON
Construction & Engineering
Linda Kent
Inga Hall
+44 (0)20 7360 8151
+44 (0)20 7360 8137
lkent@klng.com
ihall@klng.com
UK and European Competition
Neil Baylis
+44 (0)20 7360 8140
nbaylis@klng.com
+44 (0)20 7360 8186
lharcombe@klng.com
Litigation
Laura Harcombe
www.klng.com
BOSTON • DALLAS • HARRISBURG • LONDON • LOS ANGELES • MIAMI • NEWARK • NEW YORK • PALO ALTO • PITTSBURGH • SAN FRANCISCO • WASHINGTON
Kirkpatrick & Lockhart Nicholson Graham (K&LNG) has approximately 1,000 lawyers and represents entrepreneurs, growth and middle market companies, capital
markets participants, and leading FORTUNE 100 and FTSE 100 global corporations nationally and internationally.
K&LNG is a combination of two limited liability partnerships, each named Kirkpatrick & Lockhart Nicholson Graham LLP, one qualified in Delaware, U.S.A. and
practicing from offices in Boston, Dallas, Harrisburg, Los Angeles, Miami, Newark, New York, Palo Alto, Pittsburgh, San Francisco and Washington and one
incorporated in England practicing from the London office.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in
regard to any particular facts or circumstances without first consulting a lawyer.
Data Protection Act 1988 - We may contact you from time to time with information on Kirkpatrick & Lockhart Nicholson Graham LLP seminars and with our regular
newsletters, which may be of interest to you. We will not provide your details to any third parties. Please e-mail cgregory@klng.com if you would prefer not to
receive this information.
© 2006 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP. ALL RIGHTS RESERVED.