Recent changes to the Enterprise Act mean that anyone involved in forming a cartel will face crippling fines, and individual managers could get five years in prison
You can probably imagine the discomfort of those at the centre of the recent Hasbro, Argos and Littlewoods price-fixing case. The Office of Fair Trading imposed fines totalling more than £22m on the latter two companies. Well, on 20 June laws were introduced that could have rather more unpleasant consequences for anyone tempted to try to distort competition in the way apparently contemplated in the Hasbro case. The legislation concerned is part of the Enterprise Act 2002. It relates to competition law, but it also involves the criminal law. How, then, do the provisions affect the construction industry?

Competition law, of course, cuts across all trade activities, so it will have an impact on, for instance, tendering for construction work and entering into supply agreements for building materials, plant and equipment. The introduction of criminal penalties, including custodial sentences, means that everyone involved in tendering and contract negotiation ought to think twice before entering into an exclusive supply agreement or discussing a proposed tender with a rival bidder. Turning a blind eye to, or even showing ignorance of, an offending agreement will provide no defence against prosecution.

Under existing legislation, the OFT can impose sanctions on any business that breaches competition law. An agreement between any two or more businesses that may affect trade in the UK and that seeks to prevent, restrict or distort competition is prohibited and unenforceable. Such offences are known as cartel activities. They would include bid fixing (collusive tendering). The same also applies to any conduct on the part of a business that seeks to abuse a dominant position in a market if it may affect trade in the UK.

The penalties for a breach of one of these provisions can be fines of up to 10% of a business' UK turnover for each year of infringement for up to three years. Given contractors' tight profit margins, fines based on turnover could be ruinous. But worse is to come. The act provides that a company in breach of competition law could also be open to claims by third parties. A business that establishes a loss as a result of the breach can claim. The combined effect of a fine and damages to third parties could be massive. It could bring down even the largest of businesses.

It is, however, the individual criminal offences for involvement in cartel activities that will attract most immediate interest. Anyone involved in cartel activities, including price fixing, market sharing, limiting supply or production to artificially inflate prices or bid rigging, runs the risk of committing an offence. A director or other individual can be prosecuted for agreeing to carry out cartel activities with another person.

The making of the agreement itself is sufficient to commit the offence, even if it is never implemented. Conviction can carry a sentence of up to five years' imprisonment and an unlimited fine. Stiff jail sentences can also be given for actions taken to obstruct the investigation or to conceal or destroy evidence. Furthermore, the judge can impose an order prohibiting a director from being involved in managing a company for a maximum of 15 years. There is also the possibility of extradition for cartel activities involving overseas companies.

To help enforce the legislation, the OFT will receive £21m, together with powers modelled on those of the Serious Fraud Office. It may use extensive powers of seizure to remove documents, potentially including privileged communications from a lawyer.

Covert intelligence can include the use of surveillance techniques, wiretaps and whistleblowers. Whistleblowers can be offered immunity from prosecution, provided they have not deceived the OFT over their involvement in the offence. In the case of Hasbro, Argos and Littlewoods, Hasbro got off scot-free because it blew the whistle on the other two companies.

So what is the message? If you don't have a compliance programme in place, you should consider whether your business needs one. If you do have a compliance programme, be sure that it is up to date and takes account of the new provisions.

Also, make sure it is adhered to. Strictly.