Commercial notes No. 14

No. 14
24 February 2005

This issue

ACCC v Anglo Estates
ACCC v Admiral Mechanical Services
ACCC v Baxter Healthcare
ACCC v McMahon Services

Justin Jones

Justin Jones Lawyer
Australian Government Solicitor
T 08 9268 1125
F 08 9268 1196
justin.jones@ags.gov.au

Jane Hutchison

Jane Hutchison Lawyer
Australian Government Solicitor
T 02 9581 7460
F 02 9581 7413
jane.hutchison@ags.gov.au

Given the emphasis placed on the need for competitive
procurement processes in the latest revision of the Commonwealth
Procurement Guidelines, it is timely to highlight some
examples of recent anti-competitive and cartel conduct
engaged in by companies dealing with the public sector.
Such unlawful activity has the potential to substantially
increase costs to the public sector.

Mr Graeme Samuel, Chairman of the Australian Competition
and Consumer Commission (ACCC) recently stated at a conference
on 'Cracking Cartels' that the ACCC is implementing
a new campaign to assist government agencies to detect
and report cartel behaviour in government contracts. 1 Through publication of a procurement package later in 2005
the ACCC aims to better inform and motivate buyers or procurement
agents in both government and the private sector. He said:

Government purchasing is particularly exposed to cartel
formation and continuation because the transparency required
in government contracts provides cartels with the information
to allocate markets, fix prices and police their members
to ensure they stick to the deal. Purchasing or procurement
agents should therefore be in the front line of the fight
against cartels.

Mr Samuel also said:

When you think about it, those in charge of buying or
tenders should have reasonable knowledge of industries
from which they regularly obtain substantial goods and
services, and therefore are in a good position to identify
conduct that might indicate the existence of cartels.

This note briefly reviews the relevant law and then describes
four recent cases in which significant anti-competitive
conduct involving contraventions of the Trade Practices
Act 1974 (TPA) has been found or alleged.

Relevant law

Anti-competitive and cartel conduct is prohibited by Part
IV of the TPA. The three types of conduct most commonly
associated with such cartel conduct involve competitors
making contracts, arrangements or reaching understandings
with each other in order to:

  • substantially lessen competition in a market
  • fix, control or maintain the price for goods or services
    (commonly referred to as 'price fixing'),
    or
  • implement 'exclusionary' provisions.

Substantially lessen competition

The prohibition against provisions of contracts, arrangements
or understandings which substantially lessen competition
is contained in sections 45(2)(a)(ii) and 45(2)(b)(ii)
of the TPA. This prohibits both the 'making' of
such provisions and the 'giving effect to' (or
carrying out of) such provisions.

In order to determine whether particular conduct substantially
lessens competition it is necessary to understand the market
and the effect of the impugned conduct on that market.

Price fixing

Price fixing is prohibited outright, meaning that even
if the price fixing conduct does not have an adverse effect
on competition, it is illegal. In competition law parlance,
such outright offences are referred to as 'per se' offences.

Price fixing is defined in section 45A of the TPA as any
provision of a contract, arrangement or understanding which
fixes, controls or maintains the price or discount for,
or an allowance or rebate or credit in relation to, either
the supply of goods or services, or the acquisition of
goods or services.

Section 45A 'deems' such conduct to substantially
lessen competition. As a consequence, price fixing is prohibited
by sections 45(2)(a)(ii) and 45(2)(b)(ii) of the TPA as
conduct that substantially lessens competition.

Exclusionary provisions

Exclusionary provisions are prohibited by sections 45(2)(a)(i)
and 45(2)(b)(i) of the TPA. As with other provisions, both
the making of and giving effect to an exclusionary provision
is prohibited.

Exclusionary provisions themselves are defined in section
4D of the TPA and have been the subject of considerable
judicial debate in recent years. An exclusionary provision
is a provision of a contract, arrangement or understanding
made between two competitors which has the purpose of preventing,
restricting or limiting the supply of goods or services
to, or the acquisition of goods and services from, a particular
person or class of persons.

It may be likened to a 'boycott'; however,
the terms of exclusionary provisions apply beyond the commonly
understood meaning of a boycott. In essence this conduct
often involves 'market sharing' or 'bid
rigging' between competitors.

ACCC v Anglo Estates Pty Ltd
[2005] FCA 20 (21 January 2005)

Competition law can be complex. This recent case illustrates
the importance of obtaining good legal advice on whether
a proposed course of action complies with the TPA.

Anglo Estates concerned a small family company called
Anglo Estates Pty Ltd. The company owned a block of land
in Western Australia. In 2001 the company commenced the
subdivision and development of the land, which it intended
to sell to the general public.

Before commencing the development, the company claimed
that officers of the Shire of Esperance had represented
to them that the shire did not intend to start a competing
development. This representation was important to the company,
as competition from the shire would have limited the profitability
of the development.

After the company had begun its development, the shire
began to undertake a similar development. The company threatened
the shire with litigation and subsequently had a number
of meetings with shire officers in a bid to resolve the
matter.

During the course of those meetings, the company made
two proposals to the shire, which were later referred to
as the 'compromise agreement'. The proposals
were:

  • the shire would only sell residential lots at a price
    not less than a set minimum price, or
  • the shire would defer releasing its developed land
    until 2010.

The shire said that it would consider these proposals
only if the company obtained legal advice that the proposals
would not contravene the TPA. The company obtained legal
advice to that effect. The company forwarded that advice
to the shire in hope of proceeding with the compromise
agreement. The shire told the company that it disagreed
with a number of aspects of the legal opinion. The shire
then sought its own legal advice which stated that the
compromise agreement was likely to contravene the TPA.

In November 2003, the company sued the shire in the Supreme
Court of Western Australia, claiming damages for negligent
misrepresentation and misleading or deceptive conduct,
based on the shire's previous representations that
it would not develop the land. The proceedings were dismissed
by consent on 11 August 2004.

The ACCC instituted proceedings against the company and
two of its directors for attempting to contravene the TPA.

The company and the directors ultimately admitted that
they had attempted to breach the TPA, saying that had they
realised the illegality of the compromise agreement they
would never have pursued it.

By attempting to make the compromise agreement, they had
attempted to contravene certain sections of the TPA, which
gave rise to relief under the TPA. The Court made declarations
that:

  • by seeking an arrangement or understanding that the
    shire would not sell residential lots below a minimum
    price, they had attempted to contravene section 45(2)(a)(ii)
    of the TPA, in other words, they had attempted to make
    a price fixing agreement
  • by seeking an arrangement or understanding that the
    shire would not sell residential lots to the public before
    the end of 2010, they had attempted to contravene section
    45(2)(a)(i) of the TPA by making an exclusionary provision.

Text of the decision is available at: <http://www.austlii.edu.au/au/cases/cth/federal_ct/2005/20.html>

ACCC v Admiral Mechanical Services
Pty Ltd2

On 17 December 2004 the ACCC instituted proceedings against
seventeen companies and twenty-two directors and/or managers
in the commercial and industrial air conditioning industry
in Western Australia. As the proceedings are presently
before the Court, the matters raised in it are yet to be
determined. The case does, however, highlight the extent
to which cartel conduct and its consequences can impact
on public sector agencies.

By way of background, the commercial and industrial air
conditioning industry in Western Australia comprises 'projects' for
either:

  • the supply and installation of air conditioning systems,
    or
  • the refurbishment (or upgrading) of those systems

in commercial and industrial buildings. These buildings
include high rise buildings, offices, hospitals, schools,
shopping centres, cinemas, retail outlets and public buildings.

The managers of those projects, being builders, consultants,
architects or owners, generally put those projects to tender.

In simplified terms, the ACCC has alleged that competitors
in the industry held meetings and had discussions about
forthcoming tenders, with a view to arranging a 'winner' from
among themselves.

This was allegedly done by selecting a 'designated
tenderer' from among the competitors tendering for
a project. The designated tenderer would then provide each
of the other tenderers with a 'cover price'.
When the time came to submit tenders, those other tenderers
would submit a tender price that was at least as high as
the cover price. This allowed the designated tenderer to
submit a price below the other tenderers and win the project.

These 'designated tenderer agreements' were
alleged to have been first made on an ad hoc basis from
the early 1990s until May 2003. During that period, other
industry forums also arose.

The ACCC alleges that the designated tenderer agreements
contravene both the price fixing and exclusionary provisions
of the TPA.

Significantly for government, a number of the projects
that are alleged to be the subject of a designated tenderer
agreement concern substantial projects relating to public
buildings, such as:

  • Exmouth Naval Station
  • public hospitals including Sir Charles Gardiner Hospital,
    Princess Margaret Hospital for Children and King Edward
    Memorial Hospital
  • public universities including Curtin University, the
    University of Western Australia, Murdoch University and
    Edith Cowan University.

This case, while not yet heard, demonstrates the need
for those responsible for public sector procurement to
be vigilant when tendering and to be alert for signs that
bidders might be colluding with each other.

ACCC v Baxter Healthcare3

In proceedings which are currently reserved for judgment
before Allsop J in the Federal Court, the ACCC has alleged
that contractual terms which were offered to various state
and territory government agencies involve a contravention
of the TPA by a company called Baxter Healthcare Pty Ltd.
Contracts were entered into, following extensive tender
and procurement processes in the case of some of the states.

Baxter is alleged to have misused its market power and
engaged in exclusive dealing in the supply of medical products
to Australian government health purchasing agencies in
contravention of the TPA.

Baxter entered into long term contracts of between three
and five years to be the sole or primary supplier of various
sterile fluids and kidney dialysis products, with government
agencies in New South Wales, the Australian Capital Territory,
Western Australia, South Australia and Queensland. Each
government agency acquires these products for supply to
publicly funded health facilities. Some also supply to
private health service providers which operate within their
state or territory.

Baxter is the only manufacturer in Australia of particular
essential sterile fluids but it competes with other companies
in the production of other health products. The ACCC alleges
that Baxter has taken advantage of its market power in
relation to the product over which it is alleged to have
a monopoly by requiring the state or territory to acquire
the products as a tied bundle of products if it wishes
to have the benefit of significantly lower prices.

The ACCC alleges that this conduct was engaged in for
the purpose of damaging Baxter's competitors. The
ACCC further alleges that the bundling of all of these
products into long term exclusive contracts contravened
the exclusive dealing provisions of the TPA. It is alleged
that Baxter engaged in this conduct for the purpose and
with the effect or likely effect of substantially lessening
competition in the relevant markets in contravention of
section 47 of the TPA.

Baxter and the state and territory agencies have argued
that Baxter is protected by the doctrine of Crown immunity
and this doctrine prevents a contravention from being found
because it was contracting with the Crown. A judgment is
not expected for some months.

ACCC v McMahon Services Pty Ltd
[2004] FCA 1425 (4 November 2004)

In early November 2000, the Department of Defence invited
a number of companies to tender for a project at its Salisbury
site in South Australia. The project was valued at approximately
$2.4 million and involved the removal of asbestos and demolition
of all structures at the site before its sale to the South
Australian Government for development as an automotive
supply park. McMahon Services Pty Limited and SA Demolition & Salvage
Pty Limited were two of the companies invited to tender.

Prior to the tender, McMahon Services and SA Demolition
arrived at an understanding that SA Demolition would submit
its tender for a total figure of around $2,488,600. Further,
McMahon Services would submit its tender at a figure that
was lower than the figure communicated to SA Demolition,
such that SA Demolition would not be successful in winning
the tender ahead of McMahon Services.

McMahon Services' tender nominated D&V Services
as its subcontractor for the removal of the asbestos component
of the works which were the subject of the Request for
Tender.

SA Demolition's tender was considered by the Department
of Defence as a 'poor submission', and McMahon
Services was selected as the successful tenderer.

The ACCC took proceedings against McMahon Services, SA
Demolition and D&V Services and representatives of
those companies. They admitted that the conduct that was
engaged in was a contravention of the TPA and acknowledged
that the understanding contained provisions which were
likely to have had the effect of fixing and/or controlling
the price for the services which were the subject of the
tender. Under section 45A of the TPA, this conduct is deemed
to be likely to have had the effect of substantially lessening
competition, in contravention of section 45 of the TPA.

By consent, each of the companies and individuals gave
undertakings to the Court. The undertakings relate to the
provision of asbestos and demolition services and include
that the parties refrain from price fixing, making available
to competitors, or discussing with them, tender pricing
information, and acting upon tender pricing information
provided by competitors. The parties also undertook to
establish and/or attend trade practices compliance training.

Selway J noted that the knowledge that the parties had
regarding SA Demolition's bid not being a 'serious
bid', was itself uncompetitive. The understanding
had a commercial effect and affected the contract ultimately
entered into by the Department of Defence. He stated that '[c]ollusive
bidding practices are unacceptable whatever their effect
in a particular transaction. Those involved in them must
expect significant penalties' [16].

Text of the decision is available at: <http://www.austlii.edu.au/au/cases/cth/federal_ct/2004/1425.html>.

What can be done

Look for warning signs of anti-competitive behaviour including
price fixing, exclusive dealing, market sharing, bid rigging
and misuse of market power. If you have any basis for being
suspicious consider seeking legal advice or referring the
matter to the ACCC. Your legal adviser or the ACCC will
be assisted if you retain and make available documents
including:

  • those recording any communications between your agency
    and tenderers
  • copies of pre-tender documents, including calls for
    expressions of interest and requests for tender
  • copies of all tenders received
  • logs of when and who delivered the tender
  • your records relating to any of the suspicious behaviour
    described below.
  • There are certain industries where anti-competitive
    behaviour is more likely to occur. They may have characteristics
    such as:
  • the products involved are 'homogenous',
    that is, the competing products have identical, or nearly
    identical, characteristics (e.g. concrete blocks, cement
    or petrol)
  • the industry is dominated by a small number of large
    companies with few new companies entering the market
  • the product or service is uncomplicated
  • the product has few or no close substitutes (e.g.
    petrol or cement)
  • the industry has an active trade association which
    facilitates meetings of competitors and assists in coordinating
    activities among firms
  • the industry has historically been part of government
    sanctioned 'orderly marketing arrangements'.4

Market sharing or bid rigging are sometimes present where:

  • tendered prices exceed published price lists or pre-tender
    estimates given by the same firms
  • the successful bidder subcontracts work to its competitors
    that submitted higher bids for the same contract
  • tender documents from competing companies are in similar
    form or contain the same irregularities (such as spelling
    or calculation errors)
  • competitors submit tenders containing identical prices
    or other terms and conditions
  • tenders of two or more competitors are submitted in
    the same envelope or are delivered by one person
  • competitors meet or communicate somewhere in the vicinity
    of where tenders are submitted
  • a tenderer expresses to you some knowledge of the
    detail of a competitor's tender before the tender
    has been awarded
  • you are aware that only one bidder contacted wholesalers
    to obtain the prices logically required to prepare bids
  • tenders received from local companies contain the
    same transport price as competing companies that must
    transport the product further
  • bidders explain their prices by referring to industry
    suggested pricing or 'standard market prices'.5

Signs of possible misuse of market power include:

  • one tenderer has a very large share of the market
    and it is difficult for other companies to provide products
    or services at or near the price offered by that tenderer
  • the unsuccessful tenderer or tenderers cease to supply
    products which compete with those of the successful tenderer
  • one tenderer has substantially lowered its prices
    below what you believe its costs are likely to be.

The Canadian Competition Bureau (CCB) has published an
electronic guide to competition law issues for use by those
responsible for assessing tenders – its 'Bid-Rigging
Presentation', located on the CCB website under 'Business
Services' <http://cb-bc.gc.ca/epic/internet/incb-bc.nsf/en/ct02301e.html>.
The guide contains suggestions on action that tendering
agencies can take to prevent collusive conduct in a tender
process. For example, it suggests keeping the identity
of bidders secret, requiring the disclosure of potential
subcontractors and their pricing in tender documents and
training your staff in how to detect anti-competitive or
collusive conduct. AGS understands that in the first half
of 2005 the ACCC intends to publish a procurement package
which will be an interactive model similar to the Canadian
guide.

If you are concerned about the conduct of any company
that you deal with, you should ensure that those concerns
are raised in the first instance with your CFO, who may
seek legal advice and contact the ACCC.

Justin Jones practises primarily in competition,
commercial and property law and has experience in government
tender processes, including reviewing RFTs, evaluation
reports and providing probity advice. Before joining AGS,
Justin was an investigator at the ACCC in Perth.

Jane Hutchison practises predominantly in
competition law, as well as telecommunications, broadcasting
and administrative law. Jane has developed her competition
law and trade practices experience through working at AGS
in Sydney, Perth and Canberra, and through previously working
at the ACCC in both Perth and Canberra.

Notes

1 24 November 2004, Sydney <http://www.accc.gov.au/content/index.phtml/itemId/550606/fromItemId/459302>.

2 See ACCC media release # MR 291/04, issued:
21 December 2004 <http://www.accc.gov.au/content/index.phtml/itemId/557064>.

3 See ACCC media release # MR 266/02, issued:
1 November 2002 <http://www.accc.gov.au/content/index.phtml/itemId/88219>.

4 Most of these matters are listed in the Canadian
Competition Bureau's Bid-Rigging Presentation (see
page 7) under the heading 'Detection'.

5 Most of these matters are listed in the Canadian
Competition Bureau's Bid-Rigging Presentation under
the heading 'Warning Signs'.

AGS contacts

AGS has national teams of lawyers specialising in government
procurement and competition and trade practices law. For
further information on the articles in this issue, or on
other procurement or competition issues please contact
John Scala (procurement) or Glenn Owbridge (competition),
or any of the lawyers listed below.*

John Scala

John Scala Chief Counsel, Commercial
T 03 9242 1321 F 03 9242 1481
john.scala@ags.gov.au

Glenn Owbridge

Glenn Owbridge Senior Executive Lawyer
T 07 3360 5654 F 07 3360 5795
glenn.owbridge@ags.gov.au

* Competition and trade practices team lawyers are indicated by
'C' and procurement team lawyers by 'P' following their
name.

Canberra

Tony Burslem (C)
Linda Richardson (P)
John Snell (P)

02 6253 7460
02 6253 7207
02 6253 7025

Sydney

Marcus Bezzi (C)
Ian McNeilly (C)
Jackie Gleeson (C)
John Berg (P)
Simon Konecny (P)

02 9581 7470
02 9581 7541
02 9581 7427
02 9581 7624
02 9581 7585

Melbourne

Ross McClure (C)
Susan Pryde (C)
Paul Lang (P)
Kenneth Eagle (P)
Lynette Lenaz (P)

03 9242 1395
03 9242 1426
03 9242 1322
03 9242 1290
03 9242 1358

Brisbane

Glenn Owbridge (C)
Robert Claybourn (P)

07 3360 5654
07 3360 5767

Perth

Nick Gvozdin (C)
Lee-Sai Choo (P)

08 9268 1119
08 9268 1137

Adelaide

Sarah Court (C)

08 8205 4231

Hobart

David Wilson (C)
Peter Bowen (P)

03 6220 5471
03 6220 5474

Darwin

Jude Lee (C)
Ashley Heath (P)

08 8943 1405
08 8943 1408

ISSN 1443-9549 (Print)
ISSN 2204-6550 (Online)

The material in these notes is provided
to AGS clients for general information only and should
not be relied upon for the purpose of a particular
matter. Please contact AGS before any action or decision
is taken on the basis of any of the material in these
notes.

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