Cover pricing and bid rigging: illegal and on the ACCC’s radar

February 2012 Authors: Nick McHugh, Claire Forster

Contacts

Introduction

A recent case in the construction industry has highlighted that the orchestration by competitors of the outcome of tender processes that would (and should) be otherwise determined by market forces, can attract significant penalties.

Cover pricing

The term “cover pricing” refers to a practice that occurs where a company wishes, or believes it is necessary, to be seen to tender for a particular project but either does not wish to win the tender; or does not have the time or resources to prepare a carefully priced tender for that project. The company accordingly submits a high bid that it does not expect will be successful.

In itself, independently submitting a bid which is higher than other bids is not illegal. In this case, it was the preceding communication of cover prices between competitors which, in the circumstances was construed as engineering the field of prices submitted during the bidding process. This was found to orchestrate the ultimate tender outcome.

^Back to top

Case circumstances

Three construction companies were found to have engaged in “cover pricing” in relation to tenders for four separate government construction works projects in Queensland between 2004 and 2007.1

In concluding that the conduct of the companies had amounted to a breach of the law that applied at the time of the conduct (under the then Trade Practices Act 1974 (Cth) (TPA)), Logan J found that seeking and communicating a “cover price” between the companies concerned made it more likely than not that the companies came to an arrangement or understanding to control price, a form of collusive tendering.

The Court commented that whilst tender prices were not fixed, “they were controlled by an agreed ceiling in respect of the person giving the cover price; and an agreed floor in the case of the person requesting and receiving the cover price” with the requester and receiver of the cover price bidding above the floor and the giver of the cover price, bidding below the ceiling.

This, the Court held, was sufficient to meet the requirements of the then TPA given that an “arrangement” or “understanding” had been made out and the behaviour could be categorised as price-controlling behaviour for the purposes of the then section 45A. Section 45A was repealed on 24 July 2009 and replaced by prohibitions against cartel conduct in Division 1 of Part IV of the Competition and Consumer Act 2010 (Cth) (CCA). These prohibitions continue the pre-existing ban on price-fixing, price-controlling and price-maintaining behaviour. There is now also a specific prohibition on forms of bid rigging. It may be that had the conduct occurred after 24 July 2009, the case would have been run as a specific bid rigging case.

The Court also found that the conduct was misleading and deceptive2 because each of the companies expressly or impliedly represented during the tendering process that it had: no connection, knowledge or arrangements with any other tenderer in respect of the tender; and no knowledge of the price of any other tenderer at the time of the submission of the tender.

^Back to top

Penalties

The Federal Court imposed penalties on the construction companies and two individuals knowingly concerned in the conduct in excess of $1.3 million (plus the ACCC’s costs).

At the time of the contraventions, the maximum penalty payable for each price-controlling arrangement was $10 million (no pecuniary penalty was available for misleading or deceptive conduct). In this case, the Court did not impose the maximum penalty for a number of reasons including that the respondents in this case were small operators, lacked capacity to pay a much more substantial fine and that the projects concerned were small. Certainly more sophisticated and larger respondents would have faced far higher penalties.

Since the introduction of the cartel provisions, a corporation convicted of engaging in civil cartel conduct may face a fine of up to the greatest of:

  • $10 million;
  • if the court can determine the total value of the benefits, three times that total value; or
  • if the court cannot determine the total value of those benefits — 10 per cent of the corporation’s annual turnover during the 12 month period ending at the end of the month in which the corporation committed, or began committing, the offence.

Individuals subject to civil prosecution face a significant maximum pecuniary penalty of $500,000 per breach.

These are potentially very significant sums as the penalties are applicable per offence.

Serious cartel conduct is now also capable of constituting a criminal offence. An individual who commits, or who is otherwise knowingly involved in criminal cartel conduct, will face imprisonment for up to 10 years or a fine of up to $220,000 or both.
 

^Back to top

Conclusion

After the contravention finding, ACCC Chairman Rod Sims stated that,

“the decision of the court is an extremely important one and follows the ACCC’s decision to pursue cover pricing as a form of cartel behaviour. Cartels damage the Australian economy, raise prices for consumers in this case taxpayers and hurt businesses that play by the rules”.3

Mr Sims subsequently commented that “the penalties imposed here should be a wake-up call for the construction industry that cover pricing is not a legitimate business strategy.”4

The clear message is that serious consequences can flow from rigging bids and highlights the need for construction companies to act independently when participating in tender processes.

1ACCC v TF Woollam & Son Pty Ltd [2011] FCA 973 and [2011] FCA 1216
2in contravention of the then section 52 of then TPA. The TPA was renamed and reorganised on 1 January 2011 but the equivalent of section 52 still exists as section 18 of the Australian Consumer Law (which forms Schedule 2 to the CCA)
3ACCC news release, 25 August 2011
4ACCC news release, 2 November 2011

^Back to top