Warning – new anti-cartel legislation no longer ‘under construction’
Prohibited cartel conduct in New Zealand has recently been expanded. In this article, the authors discuss how the new rules will operate under the Commerce Act, and how competitors can protect themselves.
Competition and construction go hand in hand. Businesses in the construction industry are constantly competing for customers, tenders and contracts. Such behaviour results in lower prices, greater incentive for firms to innovate and greater resource allocation.
But where there is competition, there is of course going to be parties that would rather play by their own rules. Cartels exist in many competitive markets, not least the construction industry, a sector which has long been known for its susceptibility to collusion, both abroad and in New Zealand.
Research carried out by the Commerce Commission in 2010 shone a light on the prevalence of cartels in the industry. Cover pricing in particular was identified as a significant issue, a practice whereby competitors agree on a winner and everyone else puts in a believable but not so genuine bid for the job, creating the illusion that the winner’s quote is competitive.
Eight years on and anti-competitive behaviour is still undoubtedly an issue for the sector. But with the recent refurbishment of New Zealand’s cartel laws, the game will be a whole lot riskier for those engaging in cartel conduct.
AMENDMENTS TO THE LEGISLATION
It has been a long legislative road to New Zealand’s new cartel laws. First introduced as a bill on 13 October 2011, the Commerce (Cartels and Other Matters) Amendment Act 2017 was assented to in August last year.
It makes a number of amendments to the Commerce Act 1986 (‘the act’). Most notably, it replaces the former prohibition on price fixing with a new broader prohibition on cartel conduct, and introduces three exceptions to the cartel prohibition for collaborative activities, vertical supply contracts and joint buying agreements.
Every agreement entered into after 15 November 2017 can be caught by the new cartel provisions. However, there is a nine-month transition period during which pre-existing agreements cannot be caught.
With this transition period due to end on 15 May 2018, it is timely to remind competitors how the new rules will operate.
GENERAL PROHIBITION ON CARTEL CONDUCT
Provisions in a contract, arrangement or understanding between competitors that have the purpose or (likely) effect of ‘price fixing’, ‘output restricting’, or ‘market allocating’ are now prohibited under the act.
Competitors should be wary that there is no need for a formal legal agreement to be in place; a nudge or a wink – an informal arrangement agreed over a beer or on the side of a sport field – will be caught by the act.
The three categories of cartel conduct have been broadly defined as follows:
- Price fixing occurs when parties enter into or give effect to an agreement fixing,controlling or maintaining the price of goods and services, or any discount, allowance, rebate or credit of goods and services that two or more of the parties to the agreement supply or acquire in competition with each other
- Output restricting occurs when two ormore competitors arrange to prevent, restrict or limit their supply or production (or likely supply or production) of goods or services, or acquisition (or likely acquisition) of goods or services
- Market allocation occurs when two or more competitors arrange to allocate between themselves the customers or suppliers to whom, or the geographic area in which, each will supply or acquire their goods or services.
While these definitions appear to cast a wide net over what constitutes cartel conduct, competitive conduct that is legitimate will be excused where a competitor can prove on the balance of probabilities that they fit into one of the following three exceptions.
Exception applies if:
- The parties to an agreement are involved in an enterprise, venture or other activity, in trade, or in cooperation (‘collaborative activity’)
- Their involvement in the collaborative activity is not for the dominant purpose of lessening competition between the parties to the agreement
- The cartel provision is reasonably necessary for the purpose of the collaborative activity.
Vertical supply contracts
Exception applies if:
- There is a contract (not an arrangement or understanding) between a supplier and customer of that supplier
- The cartel provision relates to the supply of goods or services to the customer
- The cartel provision does not have the dominant purpose of lessening competition between the parties to the contract.
Joint buying and promotion
Exception applies if competing buyers arrange to purchase goods or services collectively on terms that an individual buyer would be unlikely to negotiate on their own.This exception only applies to price fixing.
PENALTIES FOR BREACHING THE COMMERCE ACT
The civil sanctions for cartel behaviour are significant. Penalties can be up to $500,000 for individuals, or the greater of $10 million or three times the commercial gain for companies.
The possibility of criminal sanctions for more serious cases of cartel behaviour has also recently been revived. Despite the idea being quashed in December 2015, a bill is currently before Parliament which seeks to introduce a new criminal offence for cartel conduct, and which would include a penalty of imprisonment.
Australia, the United States, the United Kingdom, Canada and Japan have already adopted the stance of criminalising cartel behaviour, which is believed by the NZ government to be a greater deterrent for stopping cartel conduct and a better reflection of the seriousness of the harm that is caused.
With such high costs at stake, businesses need to be mindful of their compliance with the act on an ongoing basis. Always avoid discussing and exchanging any information to do with price, output, suppliers, customers or strategies. Decisions about these factors should always be made independently. When in doubt, seek legal advice.