Construction and competition: CMA takes a hard line

The Competition & Markets Authority ("CMA") has handed out fines of almost £60 million to 10 demolition contractors, and secured the disqualification of three former company directors, after finding that the firms had engaged in bid rigging across 19 contracts worth over £150 million.

This is just the latest in a long line of infringements in the construction sector, which have led to millions of pounds in fines, multiple director disqualifications and even individual criminal liability. It also comes against the backdrop of the first private damages claim to arise from a construction sector breach. These developments highlight the range of penalties businesses can be subjected to if they breach competition law, and the need for construction firms in particular to treat competition compliance as a priority.

The infringement

The CMA has identified bid-rigging practices covering 19 contracts for demolition work in London, the South East and the Midlands, for private and public works including Bow Street Magistrates Court, Selfridges (London) and Oxford University. This took the form of "cover bidding", where firms agree among themselves which of them will try to win a contract, with the others agreeing to submit deliberately uncompetitive bids to ensure they lose while giving the impression of a competitive process. The CMA also found that some of the firms had participated in arrangements whereby the successful tenderer would compensate the designated "losers" (with the highest compensation payment exceeding £500,000). The construction sector has a history of these sorts of practices: 103 firms were fined almost £130 million for cover bidding across England back in 2009.

The consequences

The significant fines imposed in this case show the seriousness with which the CMA approaches bid rigging and other cartel behaviour. The individual fines range from around £400,000 to over £17.5 million, with that largest fine (imposed on Erith) reportedly hitting the maximum 10% of the previous year's group turnover. All the parties other than Erith and Squibb (fined £2 million) admitted their involvement in the breach and so received a discount on their fines, though at least one – Keltbray – has said it will be appealing the penalty amount. Scudder and McGee received further discounts for reporting the conduct under the CMA's leniency policy, though since both were still fined they must have only applied for leniency after the CMA had started investigating. (If a party blows the whistle before the CMA is aware of the matter, it will secure full immunity from all civil and criminal liabilities.)

Each of the parties will also face being barred from any public tender where the authority has chosen to treat breaches of competition law as an exclusion criterion, unless the firm can show it has “self-cleansed” (i.e. adopted processes, and perhaps made personnel changes, to ensure the conduct is not repeated).

In addition to these corporate punishments, the CMA also secured the disqualification of three former company directors – two from Cantillon and one from Erith – who will be barred from acting as company directors for periods ranging from four and a half to seven and a half years. The CMA has been increasingly aggressive in seeking disqualification of directors whose businesses have breached competition law, and this power is not limited to disqualifying those who were personally involved – directors can also be on the hook if they should have spotted the warning signs of an infringement, or if they failed to ensure their firms had proper compliance measures in place. As bid rigging is one of the most serious (“hardcore”) types of cartel, the individuals who were involved may also be liable to criminal prosecution (though there is no indication of that in these cases so far).

Damages

The firms involved in this breach – and any other confirmed by the CMA – will also be vulnerable to follow-on damages actions by customers or other parties who can show they suffered loss as a result of illegal conduct that has been established by the CMA. Until recently this option had not been pursued (at least not publicly) in relation to any of the various construction infringements, but in January a damages action was commenced in the Competition Appeal Tribunal by Commercial Buyers Group Ltd ("CBG") against the participants in the “rolled lead” cartel – who the CMA found had (among other things) refused to supply CBG. If the claim is successful the cartel participants face the prospect of paying CBG damages, interest and costs, on top of the fines and individual penalties already imposed by the CMA.

The lessons

Between them these cases illustrate the various perils of breaching competition law. The construction industry should be particularly alert to these risks, given the regularity of infringement decisions in the sector and the vicious circle that creates – i.e. the more breaches are uncovered, the more regulatory attention the sector receives, which then uncovers even more breaches. Construction is regularly identified (in the UK and globally) as one of the highest-risk sectors for competition breaches, so the CMA will not be taking its eye off the industry any time soon.

Competition risk can nevertheless be managed and reduced like any other, particularly by adopting proactive compliance strategies. These help firms not only avoid future problems but also identify any past infringements, allowing the business to blow the whistle (and secure immunity) before a competitor does. A good compliance programme will include a competition policy as well as bespoke training to directors and employees, on both what the law requires and what it takes to comply in practice. This should ensure that risks do not arise either from ignorance of the law or from deliberate conduct, including by imposing controls and consequences on employee behaviour to discourage “rogue” activity. 

Clear and unambiguous policy statements should make clear that, whatever the perceived benefits of colluding might be, any such temptation must be resisted and any attempts by competitors to involve the business in illegal conduct must be reported. Compliance measures will also provide a defence to director disqualification, and sometimes result in a reduced fine, if a breach happens despite the firm's best efforts. Last but by no means least, proactive compliance will demonstrate to clients that a firm has its house in order.