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CARTELS, COLLUSION, CONSTRUCTION AND CLASSROOMS: WILL THE CMA HIT THE ROOFERS?

December 2024

On 11 December 2024, the UK Competition and Markets Authority (CMA) announced the opening of an investigation into possible collusive tendering practices between roofing and construction contractors in relation to contracts funded by the government’s Condition Improvement Fund (CIF).

The CIF, administered by the Department for Education (DfE), provides funds to schools in England and Wales on an annual basis for the purpose of ensuring school buildings are safe and fit for purpose.  Little else is known about the investigation or the practices being probed by the CMA.  At this stage, the CMA has not named the companies involved in the inquiry.

Chapter I of the Competition Act 1998 (CA 98) strictly prohibits agreements or concerted practices which have as their object or effect the restriction of competition in the UK.  Penalties for infringement of Chapter I include the following:

• Fines of up to 10% of companies group, worldwide turnover;
• Director disqualification for company directors and senior management;
• Criminal penalties for individuals guilty of the “cartel offence” (see below);
• Lawsuits for compensation for victims of anti-competitive conduct.

Collusive tendering and bid rigging are considered amongst the worst offending practices at both a civil and criminal law level.  Pursuant to S 188 of the Enterprise Act 2002, bid rigging is one element of the “cartel” offence punishable by an unlimited fine or a custodial sentence of up to 5 years.

This prohibition applies equally to both public and private sector tenders and to the rigging of tenders at main or subcontract level.  However, the CMA is likely to prioritise any matter involving taxpayers’ money as an enforcement priority.

Juliette Enser, Executive Director of Competition Enforcement at the CMA, emphasised:

“This fund is incredibly important and ensures that essential building improvements can be made to schools throughout England, meaning students are learning in safe and suitable environments. While no assumptions should be made that competition law has been broken at this early stage, we will be investigating this issue thoroughly.”

As explained below, this investigation (and others like it) could have significant implications for companies wishing to compete for government contracts regulated by the new Procurement Act 2023 (PA 23), which enters into force in February 2025.

Unannounced Inspections and Evidence Gathering

The CMA has powers under the CA 98 to conduct unannounced inspections of business premises and private homes.  In this case, it conducted on-site investigations of a number of companies.  The watchdog is working in collaboration with the Department for Education although it is not currently known whether the inquiry originated from suspicions or intelligence shared by the DfE.

Should the CMA provisionally conclude that competition law has been violated, it will issue a “Statement of Objections” (SO), detailing its findings and allowing businesses to respond.  This is an important aspect of the rights of defence, as it enables businesses to tell their side of the story and correct any misunderstandings before any fines are imposed.  In a case in which we were recently involved, representations made on our client’s behalf in response to the SO helped dissuade a competition authority from pursuing the matter further.  No fines or other penalties were issued.

The Potential Ripple Effect of the Leniency Programme

On-site inspections are not the CMA’s only source of intelligence.  Under the agency’s “leniency programme”, businesses involved in cartel activity may receive immunity from penalties or significant reductions in fines in return for reporting illegal activity and cooperating fully with investigations.

The leniency programme not only furnishes the watchdog with valuable information about anti-competitive cartels but also destabilises cartels, as companies can never be sure that other participants won’t “talk out of school”.

As an extra incentive, leniency applicants who receive full immunity will also ensure that the related conduct cannot form the basis for exclusion from a tender process under S 57 of the PA 23.

A key consequence of this programme is that cooperating parties may choose to disclose details of other anti-competitive cartels—potentially exposing practices of the CMA of which it was previously unaware.  This can create a “ball of wool” phenomenon, where the number of leads to anti-competitive conduct increase exponentially as new defendants are dragged in and look to improve their predicament.

As if the leniency policy didn’t already provide enough reason to be paranoid, the CMA also operates a rewards policy, offering up to £250,000 for information leading to action against anti-competitive cartels.

Roofing companies and schools: Not their first rodeo! 

This is not the first time that the roofing sector has come under scrutiny in the UK for alleged anti-competitive practices.

In the 2000s, the Office of Fair Trading (OFT) – the CMA’s predecessor – investigated cover pricing and other collusive tendering practices in the UK construction sector, revealing widespread illegal practices designed to rig the tender process for construction projects, including roofing contracts.

The OFT’s investigation began in the West Midlands but then spread like wildfire to other regions of the country, fuelled by new information offered by leniency applicants looking to minimise or escape financial penalties for previous wrongdoing.

Coincidentally, around the same time as the roofing investigations, the OFT also investigated allegations that independent schools were collusively fixing school fees to be charged for future terms.  The inquiry unearthed an infamous email from a school bursar stating, “confidential please, so we aren’t accused of being a cartel”.  Unlike then, the schools at the heart of the inquiry may have been the victims of anti-competitive conduct, rather than the perpetrators.

The discovery that schools may have been paying over the odds, “cartel prices” for building works will spark anger amongst educational institutions, many of whom are already smarting from the need for expensive remediation works related to the use of “reinforced autoclaved aerated concrete” (Raac) in school buildings.

More recently, the CMA has confirmed it is keeping a close watch on the construction sector, which rightly or wrongly, it perceives as a hotbed of anti-competitive conduct.  In 2023, it announced fines totalling £60 million on construction firms, principally in relation to a number of demolition projects.

Wider Implications and the Debarment Regime

Where it occurs in relation to government contracts, bid-rigging undermines public procurement.  Public contracts account for almost a third of government expenditure.  The PA 23 introduces new grounds of exclusion and a new debarment regime, set to take effect in February 2025.

Individual government purchasers are able to block would be tenderers if one or more “grounds of exclusion” applies to them.  Whilst this also applies under the existing public procurement regime, the new law will toughen things up a lot.  Public buyers will also have the implied right to terminate contracts with a supplier who becomes subject to a ground of exclusion (S 68) or deny them new call-offs under frameworks to which they are party (S 48).

Under the Act, the following are grounds of exclusion from tender competitions:

• involvement in anti-competitive cartels (Schedule 6, para 41) and equivalent infringements under competition laws in other jurisdictions (e.g. the Irish Competition Act 2002, S 1 of the US Sherman Act or Article 101 of the TFEU) (now a mandatory ground of exclusion)
• offences under Ss 1, 2 or 6 of the Bribery Act 2010) (a mandatory ground of exclusion)
• other anti-competitive agreements (not cartels) (Schedule 7, para 7) (a discretionary ground of exclusion)
• abuse of dominant position contrary to Chapter II of the CA 98 (Schedule 7, para 8)

As stated above, successful applicants for full immunity under a competition authority’s leniency programme will be spared the possibility of exclusion related to that conduct.

The Act for the first time introduces a debarment list, which will act as a register of suppliers to whom known grounds of exclusion apply.  When conducting a procurement, public bodies will be required to check the names of tenderers (and their consortium partners and key subcontractors) against the list.  In most cases, listed suppliers can expect to be excluded.  Where listed for mandatory grounds, the authority will have no power to allow them to compete (unless the authority is a private utility company).

Under Ss 57 – 66, Schedules 6 and 7, bidders may face exclusion or debarment not only for their own actions but also for acts committed by “associated persons” (such as consortium members) or “connected persons” (such as directors, parent companies or subsidiaries).  Businesses should therefore choose their trading partners and suppliers very carefully.

This broadens accountability, indicating that main contractors risk exclusion from public tenders due to the actions of their subcontractors or associated persons.

Furthermore, businesses involved in illegal cartels may also find themselves excluded from subcontracting opportunities, as main contractors will seek to avoid the risk of being excluded from public tenders themselves.

However, under the PA 23, any party granted immunity from fines by a regulator will also be immune from exclusion, at least in relation to the practices for which they were granted leniency.  Even ahead of the entry into force of the Act in February 2025, there are reports that the UK Cabinet Office is investigating.

Conclusion

To mitigate the risks of exclusion or debarment under the PA 23, businesses should adopt proactive measures, including:

• Self-cleaning: if the organisation has previously been tarred with relevant legal breaches, it is important to show it has effectively “self-cleaned” since the indiscretion. This may involve payment of compensation to victims, bringing to an end the perpetrators’ service with the company or taking any of the other steps listed in S 58 of the PA 23;
• Risk assessment: consider the key areas of risk for the company in terms of competition compliance before developing policies to tackle these (e.g. protocols for involvement in trade associations);
• Compliance Training: Ensure all employees understand the company’s legal obligations – and their own –in relation to competition law and other areas where noncompliance risks debarment. Training should focus on red flag activities and key do’s and don’ts.  The format should be informed by the risk assessment to ensure the key messages are conveyed;
• Internal Audit: Forewarned is forearmed. Check through previous trading practices to identify any anti-competitive skeletons in the company closet.  If there are, the company should consider applying for leniency from the CMA, not only to avoid financial penalties but also to ward against debarment;
• Due diligence: given the new provisions of the PA 23, it becomes critical to check sub-contractors and tender partners carefully for previous indiscretions – at home or overseas – in order to avoid removal from the process.

We anticipate the new Act will lead to interesting new dynamics.  One is a likely tendency for competitors to report on one another with a view to depriving rivals of commercial opportunities.  Another is an outgrowth of procurement-related litigation as companies are forced into court to preserve their ability to compete for business-critical contracts at main contract or sub-contract level.  Prevention is better than cure, however.  In this brave new world, it is essential to ensure your organisation commits to good governance and stays away from the debarment list.

With all of this in mind, now is a great time to consider your compliance policies and strategies in order to safeguard your reputation and commercial interests.  If we can assist, please do not hesitate to contact us.

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