Cartels and the construction sector - Levelling up and screwing down

In recent years, the UK's construction sector has not had a happy track record with respect to competition law enforcement, where the Competition and Markets Authority (the CMA) has fined construction companies a total of £67 million across five cases. Of particular significance is the increased focus on individual responsibility, as these cases also led to the disqualification of 11 directors and two criminal convictions.

Any sense that the CMA will now be easing off after such a run of cases should be dispelled by the CMA's message earlier this year to construction business leaders to "take note to avoid making similar mistakes". As the economy tiptoes out of the lockdown and restrictions are eased, this message serves as a timely reminder to individual business leaders of their exposure in this area; both for their businesses and themselves personally.

If anything, CMA scrutiny of this sector is likely to increase, with enhanced investment in public infrastructure through schemes such as the 'Levelling Up Fund', as local and central government 'builds back better' in a post-COVID-19/Brexit world. As the CMA has pointed out, over a quarter of construction output is from the public sector and central government is the biggest single construction client. In this context, the CMA will be particularly concerned to ensure that competition is working effectively; ensures value for money and is not undermined by illegal collusive conduct. To that end, the CMA has also signalled that it is working with public services procurement officials to enable them to identify and report suspected illegal activity.

Spanning a wide variety of activities, from concrete drainage to roofing materials, this article reviews these recent cases as well as the extent of the exposure of companies and individuals operating in the construction sector.

The 'balanced portfolio' of enforcement

What is striking about the recent enforcement decisions is that they involved small as well as large companies.  The CMA has long promoted a policy of a so-called 'balanced portfolio' of cases, notably in the construction sector (i.e. companies of all shapes and sizes) - the basic message being that companies of a small scale or individuals involved with them cannot with impunity act in breach of the competition rules. In the case of serious breaches such as price fixing, bid rigging or market sharing, the defence of "no effect on competition" - namely, it was 'a victimless crime' - simply will not wash.

• Groundworks products: in 2020, the CMA fined two businesses a total of more than £15 million for illegal sharing confidential pricing information, and colluding on prices and strategic activity over a period of six years. Meetings between the parties were held from the individuals' business premises, and various emails were exchanged using personal email addresses.
• Roofing materials (rolled lead): in 2020, the CMA fined two rolled lead companies more than £9 million collectively for colluding on prices, market sharing through an arrangement not to target certain customers, and exchanging commercially sensitive information over a period of two years. Each company's fine was increased by 15%, as senior directors were actively involved in the anti-competitive conduct.
• Concrete drainage: in 2019, the CMA fined three concrete companies £36 million for price fixing and coordination, market sharing through the allocation of customers and exchanging competitively sensitive information. Additionally, senior employees within the organisations had signed compliance declarations and/or documents confirming that they would not breach competition law. In signing such documents, the employees:
  • confirmed that they would not discuss prices or market shares, or engage in anti-competitive practices; or
  • acknowledged that they had read and understood the company's competition compliance guidelines.

This was taken into account by the CMA when determining whether the infringement was committed intentionally, and whether to impose a penalty on the companies. When interviewed by the CMA, some employees indicated that they knew what they were signing up to, with others noting that they had not read the declarations.

When calculating the fines imposed on the companies, the CMA applied an uplift of 10% on the basis that there was a large amount of evidence indicating that the companies must have been aware, or could not have been unaware, that their conduct would have the object or effect of restricting competition. The decision serves as a serious lesson for companies - it is not enough to simply sign compliance declarations and/or documents, they must be understood and followed.

• Office fit out services: in 2019, the CMA fined five office design, construction and fit-out firms in the construction sector as a result of bid rigging over a period of 11 years. On at least one occasion, each company used 'cover bidding' (i.e. submitting an artificially low, deliberately high or poor quality bid) to avoid competing with one or more of the other companies in a bidding process. Where a company had been the 'instigator' in respect of the cover bidding process, the CMA applied a penalty uplift in relation to the fine.
• Galvanised steel tanks: in 2016, the CMA fined several water tank suppliers more than £2.6 million as a result of agreeing to fix prices of tanks, allocate customers and bid rigging in respect of customer contracts. At the outset, the companies agreed to meet for legitimate reasons in connection with a trade association working group to discuss safety standards. However, this subsequently developed into secret meetings over a period of seven years.

Consequences for the directors of the businesses

In almost all of the above cases, the CMA - besides issuing hefty fines - also held directors personally to account for their involvement in the cartels. In the concrete drainage case, the CMA conducted a parallel criminal cartel investigation to establish whether the individuals involved had committed a criminal offence.

As a result of this investigation, the CEO of one of the companies involved was sentenced to two years' imprisonment, issued a curfew from 6pm-6am for a period of six months and disqualified as a director for seven years. In addition, four former directors were disqualified for periods of between six and a half and 12 years; the latter being the longest disqualification issued by the CMA

A parallel criminal investigation was also carried out in relation to the galvanised steel tanks case. In this case, brought forward under the previous cartel rules with a higher burden of proof - looking for a 'guilty mind' of dishonesty - three individuals were charged, one of whom pleaded guilty and the two others were acquitted at trial. The individual who pleaded guilty was sentenced to six months' imprisonment, suspended for twelve months and ordered to complete 120 hours of community service.

Directors were also disqualified in the office fit-out services and the rolled lead cartels. The periods of disqualification varied between one and a half and six and a half years in total.

What action should directors/businesses take?

In light of this continued and indeed, possibly enhanced scrutiny by the CMA, businesses operating in the construction and building sector are well advised to review their internal competition compliance processes to ensure that:

1. the level and extent of any risk is identified;
2. it is being appropriately managed and monitored internally; and
3. all employees and contractors, whether that be on-site employees or at the board level, are aware of the requirements of competition law, the consequences for themselves and the business, as well as the process for reporting any suspicious practices.

In particular, directors have a responsibility to be well informed about the workings of their business. As noted by the CMA's Executive Director of Enforcement, "the message to directors is clear - you are personally responsible for ensuring that your company complies with competition law, and if it doesn't you risk disqualification".^[1]

Breach of UK competition law - consequences for businesses

In the last few years, the CMA has sought to focus on cartels in the context of its competition law enforcement. Between 2020 and 2021, the CMA issued eight infringement decisions, resulting in a total of £52 million of fines being imposed on businesses. In the event that a business breaches competition law in the UK, the CMA could investigate the company, leading to any number of the following consequences:

• fines of up to 10% of total group annual worldwide turnover;
• where an infringement of competition law has caused loss to a third party (e.g. the third party has purchased goods or services at a higher price due to the unlawful agreement), the business could be sued by that third party for damages. In addition, if a third party sues another member of the cartel, that member will be jointly and severally liable for all damages due to that third party. This means that where, for example, a fellow cartel member goes into liquidation and has no funds (as often occurs once a cartel is broken up), claimants are able to pursue the other cartel members for damages caused, even where they were not customers of those businesses;
• serious reputational damage caused to the businesses in question and their brand;
• businesses may be excluded from participating in public tenders; and
• the least of a business' worries in this context, the illegal agreements will be automatically void and unenforceable.

Breach of UK competition law - consequences for individuals

There is a specific criminal offence - the cartel offence - where an individual participates in cartel conduct. Cartel conduct concerns collusion with competitors and involves price fixing, bid rigging, market sharing or output restriction or supply. An individual found guilty of such an offence may be imprisoned for up to five years and receive an unlimited fine. As we note above, prison sentences of six months and two years have been imposed following criminal investigations in relation to the construction sector. The first an individual may learn of an investigation using the CMA powers would be their arrest at home in the morning, or a request to attend a police station.

An investigation of many months, if not years, may then ensue. In the galvanised steel tanks case, the managing director of one of the parties involved was arrested in 2012 at the beginning of the investigation, charged in 2014 and ultimately sentenced in 2015. The investigation in the concrete drainage case was equally lengthy, spanning the period from March 2016 to September 2017.

Some seven years ago, frustrated at the lack of successful prosecutions, the UK removed the requirement that dishonesty needed to be established for the cartel offence. It is now sufficient that the arrangement was carried out in secret. That the accused may have considered that the collusion was justified by reference to some higher end is no longer any defence. Following this fundamental change, there have been a very limited number of prosecutions (albeit not in the construction sector); however, the UK is now 'uncoupled' from the EU competition rules, which applied in parallel to the UK ones. The EU civil enforcement rules sat awkwardly with a UK criminal regime, and so we expect that the CMA may become more active in pursuing criminal prosecutions of individuals.

Breach of UK competition law - consequences for directors

A director can be disqualified from being involved in the management of any business for a period of up to 15 years. The longest disqualification to date was for 12 years in the concrete drainage case, although shorter disqualifications of two to five years are more common.

Since 2016, the CMA has disqualified 24 directors. The graph below compares the number of infringement decisions issued by the CMA, alongside the number of director disqualifications from the year ended 31 March 2017 to the year ended 31 March 2021.

Total CMA infringement decisions and director disqualifications

(2016 - 2021)

As highlighted above, it is clear that there has been a significant jump in the number of director disqualifications. Based on the current trend, we anticipate that this number is likely to continue to increase over the coming years given that, as we have considered previously, the CMA has indicated that it would now be minded to consider pursuing director disqualification in the context of resale price maintenance cases, increasing the personal risks of non-compliance for individuals. Following on from our previous articles dealing with director disqualifications in the context of cartels (including a piece on competition law and director disqualification and one on a precast concrete cartel and the CMA), the table below summarises the recent director disqualifications in connection with the five construction cartel investigations referred to above.

Five recent construction cartel cases - director disqualifications

Date of decision	Duration of disqualification	Case
April 2019	7.5 years	Supply of precast concrete drainage products
April 2019	6.5 years	Supply of precast concrete drainage products
April 2019	2 years	Design, construction and fit-out services
April 2019	2.5 years	Design, construction and fit-out services
May 2019	5 years	Design, construction and fit-out services
July 2019	4.75 years	Design, construction and fit-out services
July 2019	2.75 years	Design, construction and fit-out services
July 2019	1.5 years	Design, construction and fit-out services
March 2021	12 years	Supply of precast concrete drainage products
March 2021	11 years	Supply of precast concrete drainage products
March 2021	4 years	Roofing materials
March 2021	3 years	Roofing materials
March 2021	6.5 years	Roofing materials

How can Gowling WLG advise you and your business?

Our award winning EU, Trade and Competition team places particular emphasis on cartel-related advice, regularly acting on high-profile competition law investigations and frequently advising clients upon making immunity and leniency applications. Gowling WLG has a dedicated Dawn Raid Response Unit of specialists based in Birmingham and London, with expertise in multi-jurisdictional civil and criminal investigations and inquiries. Organisations ranging from publicly listed companies to family-owned businesses rely upon us to safeguard their interests when faced with the threats posed by competition law investigations. For more information about how we can advise you and your business in this area, please contact Bernardine Adkins, head of our EU, trade and competition team.

Footnotes:

[1] See, CMA 'Annual Report and Accounts 2020/21 (for the year ended 31 March 2021)' 15 July 2021