Competition Law

08 Oct 2009

Tenders Under Scrutiny

Anti-competitive behaviour in tender processes - in particular, bid-rigging arrangements - has been a focus of competition regulators across the globe in recent times. Regulators in both Australia and the United Kingdom have made announcements in respect of such conduct in the last couple of weeks. The New Zealand Commerce Commission has also placed a particular emphasis on the prosecution of individuals and entities involved in such behaviour.

The recent international enforcement and prosecution activity serves as a timely reminder that "cartel conduct" captures a wide variety of behaviours and arrangements, and bid-rigging and other anti-competitive behaviour in tender processes is a particular example of this type of conduct. With cartel conduct and price-fixing arrangements squarely at the forefront of enforcement activity by regulators worldwide, the business community is learning (some the hard way) that conversations with competitors about pricing and process matters (including prices submitted in a competitive tender process) are not legal and are not worth the risk.

In this FYI, we describe bid-rigging behaviour and comment on some recent investigations and enforcement actions both internationally and in New Zealand in relation to such behaviour.

What is 'bid-rigging'?

Bid-rigging is where competitors collude to determine the outcome of a competitive tender process through fixing the price of goods and/or services offered in bids to potential customers (the parties to the arrangement having previously decided which of them should be successful in a particular process). 'Bid-rigging' is a form of cartel conduct and price-fixing behaviour which breaches the Commerce Act 1986. Cartel conduct is a breach of sectionof the Commerce Act which prohibits competitors from entering into arrangements which have the purpose or effect of fixing, maintaining or controlling prices. Price-fixing is also deemed to substantially lessen competition under section 27 of the Commerce Act.

Construction industry in the international spotlight

On 22 September 2009, the Office of Fair Trading (OFT) in the UK (the equivalent of the Commerce Commission) released its findings in respect of the behaviour of a large number of participants in the United Kingdom’s construction industry. 103 construction companies were fined a total of £129.5 million for participating in bid-rigging in relation to construction contracts.

Perhaps an indication of how prevalent bid-rigging behaviour had become in the UK, the OFT uncovered evidence of cover-pricing (where one party would agree on an artificially high price for its tender so another's bid would be accepted) in over 4,000 tenders involving over 1,000 companies.

Forced to limit its investigation to the instances in which the strongest evidence was available, the OFT found that the 103 companies had colluded on 199 tenders between 2000 and 2006. As a result, the OFT says that "[b]idding processes designed to ensure clients and in many cases tax payers received the best possible choice and price were distorted, creating a real risk of increased prices". In a number of situations, the OFT found that all bids, other than the successful bid, were cover-bids meaning that there was no real competition in the process. In some circumstances, compensation arrangements (through falsified invoices) were also found to have been put in place between successful and unsuccessful bidders to facilitate the bid-rigging arrangement.

Also in September 2009, the Australian Competition and Consumer Commission (ACCC) accused three construction companies of price-fixing and deceptive conduct in tendering for government construction projects in Queensland. It is alleged that the companies agreed to cover-pricing arrangements, similar to those uncovered by the OFT investigation. The ACCC also claims that the companies' conduct was deceptive (under the Australian equivalent of New Zealand's Fair Trading Act 1986) because the companies made representations in each tender process that they had not collaborated with any other parties in the preparation of their respective tenders/bids. The matter will be heard in Federal Court this month.

New Zealand

In New Zealand, the Commerce Commission places a heavy emphasis on, and devotes considerable resources to, uncovering and investigating cartel arrangements, and prosecuting those involved in the illegal activity. In line with international trends, bid-rigging has received particular attention as part of a wider focus on cartel conduct and price-fixing arrangements. The high cost and uncertainty associated with participating in tender processes, combined with the scarcity of work opportunities in some sectors, make it likely that bidding behaviour in tender processes will continue to be an area of interest for the Commission.

Tender participants need to be aware that it is not just giving effect to an anti-competitive arrangement that will be illegal. Engaging in discussions, or attempting to persuade a competitor to enter into a bid-rigging arrangement, can fall foul of the legislation even in circumstances where an arrangement does not eventuate.

In 2008, the Commission investigated allegations of anti-competitive conduct in the elevator industry, eventually concluding a settlement with ThyssenKrupp Elevator New Zealand Limited. ThyssenKrupp admitted an attempted breach of the Commerce Act by contacting a competitor and attempting to ensure that prices submitted for a maintenance tender were "similar". The Commission agreed to a settlement with ThyssenKrupp on the basis that the attempt appeared to be an isolated incident and was not part of a long-standing anti-competitive arrangement.

In a prime example of enforcement activity where there was an attempt rather than an arrangement put into effect, the Commission brought High Court proceedings against Christchurch Transport Limited and its Chief Executive in 1998. The company admitted that it had breached the Commerce Act by discussing with another bus company, Leopard Coachlines Limited, how much they should bid for, and who should win, bus route contracts tendered by the Canterbury Regional Council. The High Court imposed penalties of $380,000 on Christchurch Transport Limited and $10,000 on the company's Chief Executive. In his decision, Justice Panckhurst noted that "the endeavours to persuade executives of Leopard to be involved in anti-competitive conduct were sustained and determined" and that "the potential for damage... was very significant", therefore justifying the substantial penalties imposed on the defendants. Justice Panckhurst also accepted an argument advanced by the Commission that where a person of seniority within a company, for example a Chief Executive, was centrally involved in the relevant conduct, it was appropriate that the penalties imposed reflect that circumstance.

Continued focus on cartel enforcement

Cartels, which capture a variety of behaviours and arrangements (of which bid-rigging is only one example), are considered a seriously damaging form of anti-competitive behaviour as they typically raise prices above competitive levels without a corresponding increase in benefits. Enforcement action in respect of bid-rigging and other anti-competitive tender behaviour is a timely reminder of the focus on cartel conduct by international regulatory bodies, and the Commerce Commission continues to dedicate significant resources to cracking cartels and other anti-competitive alliances.

In New Zealand, significant monetary penalties may be imposed for cartel conduct in breach of the Commerce Act and individuals involved may be excluded from future management of a company. Cartel behaviour has long been criminalised in the United States and Canada, and Australia has recently enacted legislation which also criminalises such behaviour. The criminalisation in Australia may be expected to increase the likelihood of criminalisation being considered in a New Zealand context, with both the Prime Minister and Commerce Minister acknowledging that criminalising cartel behaviour is a legitimate issue for New Zealand to consider.

Authors

Anne Callinan

Partner - Dispute Resolution

DDI: +64 9 977 5031

Mobile: +64 21 403 592

Email:

View Profile

Shelley Cave

Partner - Corporate & Commercial

DDI: +64 9 977 5260

Mobile: +64 21 660 090

Email:

View Profile

James Craig

Partner - Dispute Resolution

DDI: +64 9 977 5125

Mobile: +64 21 497 713

Email:

View Profile

Peter Hinton

Partner - Corporate & Commercial

DDI: +64 9 977 5056

Mobile: +64 21 446 866

Email:

View Profile

Elisabeth Welson

Partner - Corporate & Commercial

DDI: +64 4 924 3400

Mobile: +64 29 924 3400

Email:

View Profile