So, what's the damage?
Construction companies accused by the Office of Fair Trading (OFT) will be wondering how bad things are going to be for them. Here's the answer.
The statement of objection issued by the Office of Fair Trading points the finger directly at the British construction industry. Many may claim that cover pricing was a rational (albeit illegal) response to an inefficient procurement process, and one that is increasingly outmoded. For the individual companies, however, the most pressing question is how the statement of objections will affect them. Companies will have several key concerns: the calculation of fines, de-listing and claims for damages.
A picture of the possible financial penalties levied against construction companies can be obtained by analysing the OFT's previous practice and guidelines. The OFT may impose a financial penalty on a company that has intentionally or negligently committed an infringement of the relevant competition rules. The OFT determines, on a case by case basis, the level of financial penalty to be imposed.
The OFT uses a five-step approach to calculate fines:
- It calculates a starting point, having into account the seriousness of the infringement and the company's turnover in the last business year, to a maximum of 10% of the turnover. The OFT has regard to the market for the product and where that market is located. Clearly, it is beneficial that these markets are construed as narrowly as possible to limit the basic turnover used for calculation.
- The starting point is then multiplied by the number of years over which the infringement lasted. If the infringement lasted less than a year, a minimum of one year would apply.
- An increase or decrease is applied for "deterrence" taking into account the financial benefit of the infringement and the company's market position.
- The amount may be further increased or reduced if there are aggravating or mitigating factors (for example if the company acted as a leader or instigator, or if it co-operated with the OFT).
- The fine cannot exceed 10% of the firm's worldwide turnover in the past business year and must be offset against any fines levied in other Member States.
Finally, the OFT applies any reduction for leniency which has been granted to the infringing company.
A key concern is the threat of de-listing by public authorities. According to the Procurement Regulations, public procurers are not obliged to exclude companies implicated in cover pricing. Even so, there is a risk of a "knee jerk" response by public authorities to suspend companies from their tender lists.
The OFT published a note to Local Authorities on the morning of 17 April 2008 that has gone some way to alleviating these concerns. . The note reminds authorities, inter alia, that currently no assumptions should be made as to any infringement of competition law by companies listed in the statement of objections.
The OFT highlights the exposure of public authorities if they were to de-list individual companies given that, "cover pricing was a widespread and endemic practice in the construction industry as a whole." The OFT further emphasises that even if a company is named in the statement of objections, "companies that have applied to the OFT for leniency are under an obligation to put their house in order as part of their leniency agreement with the OFT and are therefore unlikely to be now engaging in cover pricing or other forms of bid rigging."
It is well established that claimants are able to recover damages for breach of competition law. Private enforcement of competition rules is increasing and the wider use of "no win, no fee" arrangements have further swelled the number of actions.
The court's approach to the calculation of damages is to restore the claimant to the position that it would have been in had the breach of competition law not been committed. Any claimant would need to establish a causal link between the loss suffered and the alleged breach of the competition rules. However, with cover pricing, the bids were tightly contested under lowest price tendering and causation will be difficult to establish. The prospect of large damages claims may well be wishful thinking on the part of claimants. Nevertheless, construction companies are clearly concerned about the time and money required to defend themselves against third party actions, no matter how ill-founded.
Loss of reputation
The 112 construction companies may, quite rightly, feel sore that the OFT has opted to make an example of them with respect to "widespread and endemic" practices. In so doing, the OFT may also have discredited and divided the British construction industry both nationally and internationally.
For further information about this published article, contact Kathryn Hobbs on +44 (0)121 685 2785, Rebecca Davies on +44 (0)121 685 3819, Gayle Biddle on +44 (0)121 685 2708 or Amy Richards on +44 (0)121 260 9973
This published article may contain information of general interest about current legal issues, but does not give legal advice.