Guarding free enterprise

Following hard on the heels of the reforms to UK competition law brought about by the Competition Act 1988 (which came into force in March 2000), the Enterprise Act 2002 brings further significant change.

These further reforms impact on the construction and engineering industries and their professionals as they include criminalisation of cartels, disqualification of directors and reform of merger control. The main substantive provisions of the Act came into force on 20 June 2003. The Act also introduces reforms to insolvency law, but this article addresses only the key changes to competition law.

The Competition Act introduced fines to companies of up to 10% of UK turnover for infringement of the prohibitions on anti-competitive agreements and abuse of a dominant position. The new Act now raises the bar higher by also imposing criminal liability on individuals (ie employees and directors) who are dishonestly engaged in hard-core cartels in the UK, that is by arrangements by competitors to fix prices, share markets, rig bids (collusive tenders) or limit production or supply.

The offense is limited to cartels, which the Office of Fair Trading (OFT) sees as the core infringement of competition law, rather than extending to the full spectrum of anti-competitive agreements and behaviours caught by the Competition Act. Both formal and informal arrangements will be caught by the offense, and no actual effect on the market needs to be proven. Possible examples of cartels in the construction and engineering industries may be found in agreements between competitors about tendering for construction or engineering work or arrangements for the supply of equipment or materials.

The penalties for committing the cartel offense are up to five years' imprisonment and/or an unlimited fine. Individuals may also face extradition to other jurisdictions such as the US. The criminal concepts of conspiracy and attempt apply, meaning that unsuccessful attempts can also lead to prosecution.

The requirement to show dishonesty is a key element of the offense (and will be decided by a jury assessing whether the individual in question realised their actions were dishonest by the standards of a reasonable and honest person) but the offense can be committed regardless of whether or not the individuals participating in the cartels have authority to act.

Consistent with the approach taken under the Competition Act, the OFT will make use of its leniency programme and has the power to issue 'no action letters' to individuals who come forward and whistle-blow on a cartel. The 'no-action letters' can however come with serious strings attached: the whistleblower will have to provide the OFT with all the information, documents and other evidence available to them, and may have to continue attending cartel meetings wearing a wiretap to catch out co-conspirators.

Criminals and competition
The Serious Fraud Office will work with the OFT in investigations and prosecutions. In undertaking its criminal investigations, the OFT is given power to bug a wide range of premises (including hotels, homes and cars) to record meetings of cartel members and can seize documents, compel answers to questions and search premises. Non-compliance with investigations (for example, by making false or misleading statements) can also result in prison sentences and fines.

The Act will also give the OFT the power to apply to disqualify directors for up to 15 years who have been involved in any infringement of competition law (not just the cartels offenses referred to above). To do so the OFT will need to apply to the courts for a competition disqualification order (cdo) and the courts may order disqualification if the director's conduct was such as to make him or her unfit to be involved in the management of the company (for example, by planning or encouraging the infringement of competition law).

Unlike the cartel offenses referred to above, it is not necessary that the director has acted dishonestly for a cdo to be made.

A cdo could effectively put a director out of action for the remainder of his or her career. A further reform introduced by the Act is the opportunity for third parties who have suffered loss as a result of a competition law infringement to bring an action for damages before the competition appeals tribunal.

The Act also limits the role that has until now been played by the government (in the guise of the Secretary of State) in deciding whether any particular merger should be investigated and, ultimately whether to approve or block a merger.

These decisions will now be made by the OFT and Competition Commission themselves. The Act also changes the substantive test to be applied in assessing mergers by replacing the public interest test with a substantial lessening of competition test. This focuses assessment on economic factors and removes consideration of non-competition related factors.

The introduction of the Act reinforces the message sent by the Competition Act that businesses, and now their directors and employees, ignore competition law at their peril.

The importance of comprehensive and up to date compliance programmes consisting of written guidance for staff, a programme of training and procedures in the event of a dawn raid cannot be under-estimated.