The construction industry and the Competition Act 1998

United Kingdom
Susan Hankey explains the impact of the new rules

The Competition Act 1998 comes into force on 1 March 2000. It changes the face of competition law in the UK. No longer can cartels and abusive dominant companies hide for years, relatively safe from excessively formalistic but generally toothless domestic law. This new law has teeth and the Office of Fair Trading has promised to bite hard with them.

The new law

The Act creates prohibitions of anti-competitive agreements (the Chapter I prohibition) and of abuse of a dominant position (the Chapter II prohibition) modelled on EC competition law. In contrast to much of the old law, which it sweeps away, the new Act is principally concerned with the practical effects of business arrangements on competition in the market place. The Director General of Fair Trading ("DGFT") has strong new powers to uncover anti-competitive activities and to act against them. Firms engaged in anti-competitive activities in the UK could face fines of up to 10% of UK turnover and open themselves up to challenge in court by customers and competitors.

Chapter I: prohibition

The Chapter I prohibition is based on Article 81 EC Treaty.

The Chapter I prohibition outlaws agreements, decisions or concerted practices which are, or are intended to be, anti-competitive and which affect trade in the UK.

Companies must not, for example, indulge in price fixing, market sharing, discriminatory treatment of customers or tying arrangements.

Any provision which breaches the Chapter I prohibition will be void, unless the agreement benefits from an exemption. There are a number of different types of exemption, including:

  • block exemptions (the agreement falls into a category of exempted agreements);

  • individual exemptions (an exemption is granted on the merits of an individual agreement); and

  • parallel exemptions (the agreement benefits from an exemption available at the EC level).

  • agreements which before 1 March 2000 received clearance under the Restrictive Trade Practices Act 1976 ("RTPA") as not being sufficiently significant to call for further investigation.

Professional rules, regulations and codes of conduct of architects, surveyors and various categories of civil engineering consultants may be designated by the DTI to be excluded from the Act. Without specific exclusion such codes of conduct could be covered by the Act in the same way as the rules of trade associations.

Vertical and land agreements
Special treatment takes many vertical agreements outside the ambit of the Act. These are agreements where for the purpose of a particular arrangement, companies operate at different levels of the production or distribution chain. A similar exclusion applies to agreements dealing in an interest in land.

Notifications
The Act provides for individual exemption or clearance for an agreement to be obtained by notifying the agreement to the DGFT. Agreements notified under the Chapter I prohibition will have immunity from fines from the date of notification to the date of determination of the application. Notification need not be for a definitive decision - it can be limited to guidance as to the likely applicability of the prohibition.

Transitional provisions
The impact of the Act on most agreements made before 1 March 2000 will be postponed by a transitional period of one year.

Chapter II: prohibition

This provision is based on the Article 82 EC prohibition on abuse of a dominant position.

Chapter II prohibits conduct constituting an abuse of a dominant position held in the UK or part of the UK and which may affect trade in the UK.

Examples of abusive conduct include imposing unfair prices or trading conditions, limiting production or technical development to the prejudice of consumers, discriminatory behaviour and tying agreements.

As with Article 86, there is no exemption available for abusive behaviour, but the Act does provide for applications to be made to the DGFT for guidance or for a negative clearance decision as to whether or not the Chapter II prohibition has been infringed by particular conduct.

There is no transitional period for the Chapter II prohibition, which applies on 1 March 2000.

Investigations

The DGFT gains extensive powers of enforcement. If there are "reasonable grounds for suspecting" an infringement, the DGFT can send in the investigators. They must always be investigating a particular matter and must explain this to the company visited. The DGFT can call for the production of documents or information relating to an investigation and demand an explanation as to the contents or whereabouts of a particular document. Investigating officers can on two days' notice visit companies to seek out documents and talk to staff, even when the company itself is not under investigation.

Dawn raids can be carried out where there is a fear that the company would not produce documents or might try to destroy or conceal evidence. The company gets no warning - the investigators appear as the offices open and walk straight in. If the investigating officers have a warrant from a High Court judge they can use reasonable force to enter and they do not have to wait for the company to open up files - they can search the premises and seize original documents. It is an offence punishable by fines and/or imprisonment intentionally to obstruct an investigation.

The DGFT also has power to make rules relating to procedural and other aspects of the new Act. He must publish general advice and information about the application and enforcement of the prohibitions, and on how penalties will be assessed.

Penalties
Where breach of the Chapter I and Chapter II prohibitions is found, the DGFT can:

  • impose a penalty of up to 10% of UK turnover if the breach was committed intentionally or negligently; and

  • direct that the infringement be brought to an end.

Immunity from Chapter I fines is available to 'small agreements' (yet to be defined by the DTI at the time of writing).

Immunity from Chapter II fines for 'conduct of minor significance' will also be available (but again the DTI had not at the time of writing settled the applicable threshold).

The changes in practice

The old regime of the Restrictive Trade Practices Act is swept away by the new law. The RTPA was formalistic and cumbersome, and it was extremely difficult for the DGFT to use it effectively to punish even the most obvious offences.

Take the ready mixed concrete cartel, a well known construction industry saga. Employees of four companies fixed prices and markets, contrary to instructions from senior management and without the knowledge of their companies. The practices continued for almost 10 years. In 1990 the Restrictive Practices Court found the companies to be in contempt of court because the actions were in breach of restraining orders previously imposed under the RTPA in 1978-79. The companies appealed on the grounds that the relevant employees had been acting without their authority. The Court of Appeal agreed. But the case went to the House of Lords in 1994.

The House of Lords ruled that the deliberate acts of the employees in the course of their employment in fact constituted the carrying on of business by the company itself. So the Restrictive Practices Court was in the end enabled to impose fines totalling some £8.37m against the companies and to require individual directors to pay fines ranging from £10,000 to £20,000

In October 1997, the RPC took action again against the ready mixed concrete industry. It made orders against two companies and accepted undertakings from another 11 not to implement any registrable agreements without first submitting details to the OFT. The companies were involved in the same cartels as those companies fined in 1995.

So the whole story took years to unfold, years during which the companies continued to fix prices and share markets without penalty.

Under the new regime, the ready mixed concrete saga would be dealt with far more quickly. Rather than having to rely on procedures spanning a period of over 10 years to bring the companies to account, the DGFT can take immediate action to investigate alleged breaches and impose fines if the allegations are justified. There will be no need to refer the matter to the court.

The Ready Mixed Concrete Saga - what exactly was anti-competitive?

Representatives of the ready-mixed concrete companies met frequently in public houses to make price fixing and allocation agreements in respect of the supply of ready mixed concrete in the Oxfordshire area. The available market was agreed to be shared between them, jobs were allocated in accordance with agreed percentages and, if another company was asked to quote on a job not allocated to itself, that company agreed to tender on less favourable terms than those offered by the chosen party. A price list for different mixes of the product was agreed and there was also a no poaching provision.

Institutions

A new Competition Commission took over the role of the Monopolies and Mergers Commission ("the MMC") on 1 April 1999. It continues to perform the MMC's functions in relation to monopolies and mergers under the Fair Trading Act as well as having a new function to hear appeals against the DGFT's decisions on the prohibitions. As a result of the repeal of both the RTPA 1976 and the Restrictive Practices Court Act 1976, the Restrictive Practices Court will cease to exist except in relation to proceedings which are continuing before the Court at 1 March 2000.

Monopolies and mergers - status quo retained

The existing provisions in the Fair Trading Act 1973 (the "FTA") for the investigation and control of scale and complex monopolies are retained. Mergers will continue to be governed by the FTA or the EC Merger Regulation as appropriate, although any restrictions contained in the merger arrangement which are not directly related to and necessary to the implementation of the merger may be caught by the new prohibitions.

The DGFT has Fair Trading Act powers to investigate monopolies and mergers and these powers remain in place. There are two kinds of monopoly situation:

  • where at least 25% of particular goods or services in the UK are provided by or to the same person/company (scale monopoly), and

  • where two or more persons control, either by agreement or by the conduct of their business, at least 25% of particular goods or services in the UK (complex monopoly).

Following an investigation into a monopoly situation by the DGFT, a reference may be made to the Competition Commission for a determination as to whether the monopoly situation operates against the public interest.

The Act also allows the DGFT to investigate any merger involving at least one UK company which results in the acquisition in the UK market share of at least 25%, or where the value of the assets taken over is above £70 million. Following the investigation, the Secretary of State may refer the matter to the Competition Commission for a report as to whether the merger may be expected to operate against the public interest.

What should businesses do?

All businesses, small and large, should be reviewing their trading agreements and market practices to determine the extent to which they are affected by the new Act. Their liabilities for falling foul of the Act's requirements could be substantial. In view of the fact that the OFT has previously intervened to stop anti-competitive behaviour in the construction industry - RPC proceedings have also taken place against protective polyester film and roofing material suppliers in addition to ready mixed concrete suppliers - business should not ignore the new powers.

For further information please contact Susan at sph@cms-cmck.com or on +44 20 7367 2960.