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Penalties imposed on construction firms 'were too harsh'

Posted: 31st May 2011   In: Dispute Resolution

The Competition Appeal Tribunal has ruled that penalties imposed on construction firms for using cover pricing were too harsh and should be reduced.

The Tribunal said it was important to make a distinction between simple cover pricing and bid rigging, which is much more serious.

Bid rigging involved firms joining forces as a cartel in order to enable one of them to win a contract at a lucrative rate.

Cover pricing was less damaging. It usually happened when a company was invited to tender for a contract it may not want or be unable to carry out. The company might fear that if it didn’t submit a tender then it may be taken off the customer’s approved list and not be invited to compete for contracts in future.

In those circumstances, the company might ask a rival firm to provide it with a cover price that it could submit. This price would be inflated and ensure that it had no chance of winning the contract, but it would mean that it would remain on the customer’s approved list.

The Office of Fair Trading (OFT) recently imposed penalties totalling £129.2m on 10 construction companies who were found to have used cover pricing.

The companies argued that the penalties were disproportionate for “simple” cover pricing and the Competition Appeal Tribunal has now ruled in their favour.

It said that the OFT had made a number of miscalculations when imposing the penalties and had fined the companies 5% of their turnover. The Tribunal held that this was disproportionate when the maximum penalty for “the most heinous infringements” was only 10%.

The penalties should therefore be reduced to 3.5% of turnover.

Please contact us if you would like more information about the issues raised in this article.