The Office of Fair Trading suffered a humiliating blow yesterday when a court cut by 90 per cent the fines it imposed on six construction companies after the biggest investigation the regulator has carried out.
The Competition Appeal Tribunal agreed with the companies’ argument that fines imposed against them by the OFT for illegally colluding on bids for building projects including schools, hospitals and other public buildings had been excessive and discriminatory.
The decision was another setback for the watchdog, which last year was forced to abandon its prosecution of four British Airways executives accused of price-fixing after new evidence emerged during the trial. Lawyers said that the ruling would cast further doubt on the OFT’s ability to handle large, complex cases.
It also called into question the OFT’s methodology for calculating penalties intended to deter other companies from breaking competition laws. “This decision is of great significance for all businesses at risk of OFT fines, not just the construction companies,” said Gillian Sproul, a lawyer at Mayer Brown who represented one of the companies.
The appeal stemmed from the OFT’s decision to impose fines totalling nearly £130 million on 103 construction companies for so-called “cover pricing” in September 2009. Twenty-five companies challenged the size of the fines, although none denied breaching competition law. The first batch of appeals was decided in one judgment yesterday, in which the fines against the six firms were slashed from a total of £41.8 million to £4.4 million.
Advertisement
Kier Group, the FTSE 250 construction company that received the largest fine of £17.8 million, had its penalty slashed to £1.7 million. Ballast Nedam, which was fined £8.3 million, had its fine cut to £534,375; Bowmer & Kirkland’s penalty was reduced from £7.6 million to £1.5 million; John Sisk & Son from £6.2 million to £356,250; Thomas Vale from £1 million to £171,000; and Corringway Conclusions from £769,592 to £119,344. The OFT said that it would consider challenging the tribunal’s decision in the Court of Appeal, although lawyers said that the regulator was more likely to cut its losses and accept the ruling.
The investigation began in April 2004 with a tip-off from an auditor for an NHS trust in Nottingham, who claimed the bidding process for works at a local hospital had involved collusion. Over the next five years, an OFT investigation identified 4,000 tenders in which construction companies had secretly agreed to submit artificially high quotes for building projects. The practice, known as “cover pricing”, was widespread in the industry. Companies that did not have the resources to take on new projects but that did not want to be excluded from future tenders would knowingly submit higher bids than their rivals so that they would not win the work.
The OFT’s final decision in September 2009 imposed hefty fines on some of the building industry’s best-known firms: £8.3 million against Galliford Try, £5.5 million against Connaught and £5.2 million against Balfour Beatty — of which only Galliford appealed.
Kier argued that the OFT’s formula for calculating deterrents, based on a firm’s global turnover, took no account of its underlying financial position and would have wiped out an entire year’s profits. Ballast Nedam argued that its penalty was “manifestly unfair” and “perverse”.
In its judgment, the tribunal ruled that the OFT was wrong to adopt a blanket approach to calculating fines and found that the fines were excessive given the nature of the offences. Although cover pricing is illegal and may deceive customers, the tribunal said, it was far less serious than price-fixing. There was no evidence that prices ultimately paid by the customers in any of the tenders involved in the proceedings had been increased as a result of the collusion, the tribunal said.
Advertisement
No date has been given for judgment in the other 19 appeals.