Tendering: when does co-operation become collusion? EU Commission issues new guidanceApril 2022
Competition Law regulates when businesses who are rivals may work together. It prohibits agreements or arrangements between firms which have the purpose or effect of restricting competition. There are harsh penalties for infringing competition law, including fines of up to 10% of group, worldwide turnover, damages actions and director disqualifications. For serious infringements, individuals may even face jail time. There are different sets of competition rules across European jurisdictions, although substantively the prohibitions they impose are very similar.
It is common in construction and engineering – along with other sectors – for companies to work together in presenting joint bids in response to tender opportunities. This will often result in purchasers receiving a better quality of bids where participants have pooled their resources and/or taken a particular aspect of the job which plays to their strengths.
On the other hand, collaboration may also serve as a cloak for collusive tendering, where rivals deliberately work together to reduce or distort competition, with no real benefit to the client. Even where the intent is not anti-competitive, the overall effect of the collaboration may be, which could spell legal trouble for the participants.
Businesses frequently ask where the boundary lies between permissible and impermissible cooperation. This is a theme addressed by the EU Commission in its draft guidelines on Horizontal Co-operation, released on 1 March 2022. In this note, we discuss the Commission’s guidance specifically on the question of joint bidding and the lessons it provides for tenderers.
As the Commission observes in its guidelines, collusive tendering or bid rigging involves competing tenderers acting to restrain the competitive process in some way through agreements between themselves. Common forms of this include the following:
- Cover pricing – one tenderer provides the other with a token price or set of prices (such as rates) to submit to the customer. While this has the veneer of being a genuine financial offer, it has been set deliberately higher than the price of the party which has provided it, thereby ensuring that the recipient places an uncompetitive bid;
- Bid suppression – one bidder agrees with another that it will not provide a bid in the competition;
- Bid rotation – an arrangement whereby bidders agree to take turns to secure contract opportunities put out to tender (often by deciding who will submit the lowest price);
- Market allocation – the parties carve up the market, agreeing not to compete for certain customers, contracts of a certain type or based within an agreed geographic area.
In each of these cases, the parties do not act in accordance with their own independent commercial judgment. Instead, their conduct is determined by clandestine agreements between the parties themselves, of which the customer is usually unaware.
There have been many previous cases where undertakings have been fined for involvement in these practices. In the 2000s for example, the UK Office of Fair Trading fined roofing contractors and other construction firms millions of pounds for cover pricing activities.
Joint bidding – can the parties tender separately?
In contrast to collusive tendering, joint bidding usually involves a more open form of co-operation between participants. The participants will submit a combined bid together, often allocating specific parts of the work or service scope to individual consortium members or sub-contractors.
The Commission notes firstly that a joint bid arrangement is not anti-competitive where it “allows the undertakings involved to participate in projects that they would not be able to undertake individually. As the parties to the consortium agreements are therefore not potential competitors for implementing the project, there is no restriction of competition”. There will also not usually be a problem where the businesses“ involved quote cannot carry out the contract individually, due to the size of the contract or its complexity”.
Whether or not the parties are able to bid independently will depend on the requirements of the tender itself, assessed from the tender documentation. Those requirements must be considered against the attributes and capabilities of the tenderers.
There are a number of caveats to this. The Commission notes, for example, that the parties may be able to bid for specific lots in the tender, whilst not being able to bid for the tender overall. If that is the case, they will be considered competitors; the structure of the tender would allow them to compete for different parts of the project as a whole.
If bidders can tender separately – what are the benefits of them working together?
Even where the parties are able to compete for the project opportunity individually, it may still be permissible for them to bid together. For tenders with an EU dimension, the parties must be able to satisfy the four point test for individual exemption set out at Article 101(3) TFEU. In the UK, this is mirrored for the purposes of UK Law at s.9 of the Competition Act 1998.
Effectively, this requires the parties to show that the loss of competition is offset by the benefits generated by them providing a combined tender, which could be in the form of lower prices, an improved range of goods or enhanced quality of the solution presented. The Commission indicates that the parties’ track record from previous bids may be helpful in measuring the importance of the loss of competition. There must also remain effective competition for the opportunity coming from other bidders.
Where the benefits fail to outweigh the loss of competition, the parties may be subject to penalties. Ski Taxi SA v Norway (EFTA Court, Case E-3/16) concerned a case where two taxi companies submitted a combined tender in response to a bid process organised by Oslo University Hospital. The Norwegian Competition Authority considered there to be no barrier to the companies submitting individual bids. It rejected the companies’ arguments that the joint bid allowed them to meet peak capacity requirements and treated this an instance of illegal price fixing. The EFTA Court largely agreed that the arrangement was problematic and that may still be the case even where the collaboration had been disclosed to the customer.
While it is still in draft form, the Commission’s guidance is a helpful starting point in any self-assessment exercise for tenderers. As UK competition law remains largely aligned with that of the European Union, it also provides useful advice for domestic tendering situations.
Some of the key questions which bidders need to consider are the following:
- Are we able to bid for this opportunity independently?
- Is the opportunity divided into lots? Could we bid for specific lots if we are unable to bid alone for the project as a whole?
- If we can bid independently, what benefits will collaboration bring for the customer?
- Will those advantages outweigh the cost of the loss of competition between ourselves and our co-tenderer(s)?
- Is there adequate competition from other sources?
- Have we firewalled the collaboration to ensure no unnecessary sharing of sensitive information? Is our discussion limited to the project at hand?
Questions such as whether bidders are able to tender individually often involve complex factual, economic and legal considerations. Given the inherent complexity and high stakes for getting it wrong, parties should seek professional advice on whether joint bidding structures are compliant for the purposes of competition law.Download PDF