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The bitter pill of blacklisting

Just how real is the threat to exclude firms named in the OFT price-fixing investigation from public contracts?

Since the OFT announced in April its decision to issue a Statement of Objections to 112 construction companies for alleged anti-competitive conduct, the concern has shifted from the inevitability of hefty fines to the possibility that certain firms could be excluded from bidding for public contracts.

That would be a bitter pill to swallow. A common reason for cover pricing was to stay in business by remaining on the supplier lists of clients who would blackball those who did not return invitations to price.

The fact is that the award of public contracts of any size is closely regulated by the public procurement rules. These rules, which require competitive tendering, also allow contracting authorities to block bids from a firm which is guilty of "professional misconduct", and that term is thought wide enough to cover collusive tendering.

The risk of being blacklisted

The OFT itself has moved to discourage blacklisting by authorities, albeit tentatively. Alongside the fanfare of its press release on the Statement of Objections, it issued an 'information note' directly addressed to public authorities.

That note stated that whilst it was "a matter for individual procurers to consider what action, if any, they should take in their own particular circumstances, having taken appropriate legal advice as necessary", contracting authorities must bear in mind that: "No assumption should be made by procuring entities at this stage that there has been an infringement of competition law by an SO addressee."

The OFT's final decision, which is likely to be published next year, will set out it's final conclusions as to whether there has been a breach of competition law in each instance. In other words, whilst authorities have the power to blacklist, they should think twice before doing so, particularly before the OFT's final decision.

There could be tenderers on the list of 112 against whom charges are ultimately dropped, yet others out there who are not on the list but whom the OFT knows to have engaged in cover pricing.

Moreover, a backlash against leniency applicants, whose information has been at least as important to the investigative breakthroughs in this sector as the OFT's own initiatives, would discourage further revelations and be extremely unhelpful in the ongoing war on cartels. As the watchdog has itself acknowledged, it is up to individual authorities, and not the OFT, to decide whether to exclude companies from competitions.

Legal challenges to exclusion

However, any exclusionary measures taken by public bodies can be judicially reviewed where they are disproportionate or apply unequal treatment.

The Information Note provides useful ammunition to judicial review applicants, who have been alienated from contests. The note per se is not hard law, though, and it seems possible that we will see one or more cases on the rights and wrongs of alienating contractors.

While we wait for case-law to answer some difficult questions, contractors face legal uncertainty on whether they can or cannot be kicked off public tender lists. Ultimately, the OFT must also be conscious of the possibility of creating the kind of phenomenon that has become known in the States as an Antitrust Paradox.

Allowing the chances of some of the biggest names in construction to become irreparably damaged in public tenders could be more harmful to competitiveness in this sector than cover pricing ever was.

John Sheils is a partner at law firm Shadbolt & Co

How the enterprise act 2002 changed business

Until 2002 "price-fixing agreements and cartels were not illegal under English law, unless there were other aggravating features such as dishonesty or deception".

Recent high-profile cases involving British Airways and big supermarkets - as well as construction firms - mean that investigative activity is increasingly in the headlines.

The Enterprise Act 2002 criminalised cartel activity in England and Wales and gave the Office of Fair Trading a wide range of investigative powers in cases where there are reasonable grounds for suspecting that a cartel offence has been committed.

The Enterprise Act gives powers to require persons under investigation or other persons which it has reason to believe have relevant information, to answer questions, provide information or produce documents.

The Act has introduced strong powers which allow for detailed and complex investigations. An individual is guilty of an offence under that Act if he or she dishonestly agrees with one or more other persons to make or implement, or to cause to be made or implemented arrangements of the following kind relating to at least two undertakings.

This includes price fixing, limiting or preventing supply, limiting or preventing production, dividing customers for supply and bid-rigging. The maximum penalty is five years' imprisonment or an unlimited fine, or both.

The criminal sanctions of the Enterprise Act 2002 run alongside the existing Competition Act 1998 regime, which provides for the imposition of civil sanctions on those entering into anti-competitive agreements.

The European Commission also has the powers to fine large companies involved in anti-competitive conduct.

The British Airways case made clear the benefit of being the first to whistle blow. In that case, BA was ordered to pay a record £121.5 million penalty for fixing prices with Virgin in respect of fuel surcharges.

However, Virgin Atlantic escaped a fine because the OFT accepted that it qualified for full immunity under its leniency policy, where a company which has been involved in cartel conduct and which is the first to give full details about it to the OFT will qualify for immunity from penalties for that conduct.

In addition, any employee involved in the price fixing disclosed will qualify from immunity from criminal prosecution in relation to that conduct.

Judith Seddon is a partner in the Business & Regulatory Investigations Department at law firm Russell Jones & Walker