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Until 8 April 2021, cartel conduct was punishable only by civil penalty in New Zealand. In R v Kumar [2024] NZHC 3955 the High Court imposed the first criminal convictions and sentences for cartel conduct under s 30 of the Commerce Act 1986. During time of economic distress, cartel conduct often increases. Those in the construction industry need to be mindful of anti-competitive behaviour, particularly in the procurement phase.
What is cartel conduct?
The Commerce Act 1986 aims to “promote competition in markets for the long-term benefit of consumers within New Zealand”. Cartel conduct is a particular form of conduct which is deemed to be anti-competitive. A cartel provision includes:
- Price fixing;
- Restricting output;
- Market allocation.
The practice of “bid rigging” or “collusive tendering” is not specifically covered by s 30A Commerce Act. However, it does fall under each of the specified cartel practices. This can include practices such as using “cover” prices to ensure one party is the successful party on a given tender, agreements not to bid on particular projects (or to submit and then withdraw a bid), or bid rotation.
The prohibition includes entering into a contract or understanding (it does not have to be a formally signed contract – a verbal understanding is enough) or giving effect to a cartel provision.
Before April 2021 cartel conduct (and other anti-competitive conduct) was punishable by civil penalties. In 2021, following the lead of other jurisdictions, cartel conduct became a criminal offence.
Individuals who intentionally engage in cartel conduct now face a criminal conviction, with a maximum penalty of a seven-year prison sentence and a fine of up to $500,000.
Bodies corporate can be subject to a fine of the greater of:
- $10 million;
- three times the value of the commercial gain obtained because of the cartel conduct; or
- if the value of the gain is not readily ascertainable, 10% of the entity and all interconnected body corporates’ turnover from each accounting period during the time the cartel conduct occurred.
Facts
Mr Kumar was a director of Maxbuild Ltd (Maxbuild) a construction company that undertook highly specialised remediation work on bridges. Due to financial difficulties, Mr Kumar colluded with a competitor to secure work on two significant infrastructure projects. Mr Kumar pleaded guilty to two charges of entering into a contract or arriving at an understanding that contained a cartel provision, and two representative charges of giving effect to a cartel provision. That conduct arose out of an arrangement for a competitor to submit high prices in its bids so that Maxbuild’s tender would appear more attractive and be successful. It would also allow Maxbuild to inflate profit margins, less constrained by true competition.
The Commerce Commission was alerted to the collusion when the competitor company accidentally included, as a part of its tender, a spreadsheet detailing Maxbuild’s prices and the competitor’s subsequent bid calculations.
Penalty
Both Mr Kumar and Maxbuild were convicted. In considering personal liability against Mr Kumar, the Court examined the deliberate nature of the conduct, and the level of control that he personally exercised over the offending conduct. Individuals involved in such conduct can expect to attract scrutiny.
The Court took account of previous good character and genuine remorse, an underlying motivation to secure employment for employees, prompt admission and cooperation with authorities, and a willingness to make a significant financial reparation.
The presence of these substantial mitigating factors resulted in Mr Kumar being sentenced to six months’ community detention and 200 hours of community service. After considering factors such as the amount Maxbuild stood to gain, the company’s relatively small size, and the nature of the offending. Maxbuild was sentenced to a fine of $500,000.
Our Comment
The Court noted that while the case was unusual being the first facing criminal penalty, the underlying conduct itself was not. The case represents a clear intention by Parliament, enforced by the Courts to take cartel conduct seriously. The level of fine imposed on MaxBuild was approximately 10% of its annual revenue, over twice the actual gain from the conduct, and resulted in loss of clients. The Court also indicated that the size of the company will be relevant in assessing an appropriate factor, with large companies having the potential to cause greater harm to business confidence and New Zealand’s commercial reputation.
With well publicised difficulties in the construction industry, and procuring a pipeline of work being ever important, this case should serve as a reminder to the construction industry to ensure that not only are senior executives aware of their responsibilities under the Commerce Act, but also those who are involved in the procurement process. It is important that individuals know what to do if they are approached by competitors with proposals that may risk constituting cartel conduct, so that any risk of an arrangement (inadvertent or otherwise) is mitigated. The risks of getting it wrong are significant.
If you have any questions about the risks of cartel conduct or construction procurement practices, please get in touch with our Construction Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
