OFT special: What now?

The fines

The Office of Fair Trading’s investigation focused on anti-competitive activities between 2000 and 2006, principally in the form of cover pricing, which involves contractors submitting artificially high bids, after consulting their rivals, to ensure they don’t win a contract. The OFT has decided this practice falls under the label of bid-rigging, which is prohibited under the UK Competition Act 1998 and article 81 of the EC Treaty. Businesses found to have been involved in such conduct can be fined up to 10% of their annual worldwide turnover. In this case, the fines imposed by the OFT were at the lower end of expectations.

On average, the firms involved were fined a total of £130m. This works out at £1.26m, or 1.14% of their turnover. The total fine would have been about £65m higher, but many firms had fines reduced because they either applied for leniency, took advantage of the OFT’s fast track offer of a reduced fine in exchange for admitting “guilt” and co-operating with the inquiry, or admitted their involvement in the illegal activities after receiving the statement of objections.

Exceptionally, in recognition of the recession, the OFT is allowing the firms to pay the fines over three years; normally they are payable within two months.

Appeal prospects

There is some speculation that the fines were set low to avoid triggering a mass appeal by the contractors. Appeals against the substantive decision or the level of the fine can be made to the competition appeal tribunal within two months of the decision.

For the smaller firms and those with the lowest fines, an appeal is unlikely to be attractive. In addition, contractors that benefited under the leniency option or settled may be reluctant to appeal because the tribunal could impose a higher fine.

However, the top 10 contractors may take a different view. Between them they were fined a total of £83m, about 64% of the total fine. Of these, only two benefited under the leniency programme. Given the scale of the fines, these contractors do have an incentive to appeal.

The contractors will have seen the OFT’s reasoning (which has not yet been made public) and may be able to attack both the level of the fine and the finding itself. There are interesting times ahead.

Recompensing clients

There have been calls from the Local Government Association for the fines to be returned to the councils and other public bodies – the victims of the illegal practices – rather than simply swelling central government finances. The OFT would be reluctant to create such a precedent.

If this fails, public bodies could seek compensation by launching an action for damages. The Competition Act allows damages to be sought in a “follow-on action” after an infringement decision (in addition to civil action in the courts).

The problem councils face is that establishing the loss caused by bid-rigging will not be straightforward. Essentially the loss amounts to the difference between the tender price accepted and what would have been a competitive price at the time – framed on the basis of the lost opportunity for the client to obtain this competitive price. Of course, it is virtually impossible to calculate what price the client would have got if cover pricing had never taken place.

The cases in which recovery is most likely are those in which compensation payments have been made – that is, an agreed sum of money was paid by a successful bidder to the other bidders (to ensure the unsuccessful ones did not win the tender). The OFT found six instances of compensation payments, ranging from £2,500 to £60,000. If the public sector client could establish that these amounts had been added to the successful tender price, then these amounts should be recoverable.

A more difficult task is to establish damages in those 11 cases where the OFT found the lowest bidder faced no genuine competition because all other bids were cover bids. Expert evidence would be needed to establish what a competitive market price for that particular tender would have been.

The bulk of offences related to cover pricing where some but not all of the bidders submitted a cover price leaving at least two bidders in a competitive situation. In those instances it is difficult to see how it could be shown that the genuine bids were anything but competitive. It seems unlikely that contractors in these cases would face civil actions.

Discrimination

Clients probably do not have grounds to terminate contracts awarded as a result of bidding processes subsequently found to have been rigged. To do so would place the client in breach of contract. The most likely response is that clients will omit contractors involved in competition law breaches from their tender lists. Although there is no barrier to prevent clients from doing this, it may not be as attractive as at first envisaged. First, the OFT found cover pricing was “a widespread and endemic practice”, so it follows that other contractors are likely to have been involved in cover pricing (even if such activities have not been detected). Second, by preventing the named contractors from participating in future tenders, competition is further eroded.

Third, the OFT has pointed out that those companies caught up in this investigation can now be expected to be particularly aware of the competition rules and have effective compliance programmes in place to ensure that they do not offend in future. For this reason, the OFT has suggested that the named contractors are not automatically excluded from future tender lists.