RBG Lawyers / News / December 08,2016

In some procurements where there are a large number of industry participants, it may be advantageous for the procuring entity (such as a State) to identify common requirements or terms which should inform the request for offers. To achieve such an objective, the procurer may wish to engage or negotiate with industry representatives or a representative body. Despite the benefits of such a process, procurers and industry representatives need to ensure that they do not unwittingly breach Part IV of the Competition and Consumer Act 2010 (Cth) (the Act) which prohibits certain anti-competitive practices such as cartel behaviour.

This article will briefly explain how a State department or authority and industry representative bodies may breach the Act and assist in identifying such issues on which the procurer and offerors should seek legal advice before undertaking dialogue with industry.

Anti-competitive conduct provisions with Part IV of the Act bind the Crown to the extent that they are “carrying on the business” (as required in section 2B of the Act). It is relatively simple to determine whether government departments are “carrying on a business” but it can be less clear for statutory authorities or government corporations. It is necessary to consider whether the relevant entity is an “alter ego of the Crown” (as considered in NT Power Generation Pty Ltd v Power & Water Authority (2002) 122 FCR 399), the nature of the activities of the entity and the extent of ministerial control over its activities (see Townsville Hospitals Board v Townsville City Council (1982) 142 CLR 282 for further information).

In Hope v Bathurst City Council (1980) 144 CLR 1,  the court defined business in this context as “activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis”.

This raises the question of whether the conduct of a procurement constitutes a business. In ACCC v Baxter Healthcare Pty Ltd (2007) 232 CLR 1 this was specifically considered as the State health authority had lodged a bundled tender which led to an allegation of ‘exclusive dealing’ (being conduct which may be prohibited under the Act). Ultimately, in that case the Court determined that in undertaking the procurement, the authority was not conducting a business.

The Federal Government has supported changes to section 2B of the Act to include activities “in trade or commerce” which is a broader interpretation than merely “carrying on a business”. Such a change will require even more scrutiny in the future.

Cartel Conduct

In procurements seeking long term arrangements, an interactive procurement process may be used to determine industry capacity where these types of procurements are infrequent. However, where an industry representative body is used on behalf of several proposed offerors to negotiate common terms, the participants run the risk of such negotiations being seen as anti-competitive if each industry representative does not have the freedom to negotiate its own position thereby removing a degree of competitive tension.

The Act expressly outlaws this behaviour as it constitutes ‘cartel’ conduct in sections 44ZZRF, 44ZZRG, 44ZZRJ and 44ZZRK. A “contract, arrangement or understanding” which contains a “cartel provision” is considered an automatic breach of the Act.

Contract, Arrangement or Understanding

A “contract” is specifically defined in the Act. The terms “arrangement” and “understanding” have been judicially considered to mean a construct which is less binding than a contract. Essentially, there must be a “meeting of minds” between the parties (as considered in Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing & Allied Services Union of Australia v ACCC (2007) 162 FCR 466) and the parties commit to a course of action (as was the case in ACCC v Amcor Printing Papers Group Ltd (2000) 169 ALR 344).

Cartel Provisions

Even where an interactive procurement phase gives rise to a contract, arrangement or understanding, the Act will not be infringed unless this construct contains a ‘cartel provision’. The types of provisions arising out of an interactive procurement phase that may constitute a cartel provision include those which seek to fix prices such as section 44ZZRD(2) of the Act, allocate customers, suppliers or geographical areas between the parties (for example, a particular supplier will tender for a particular area of a State, such as section 44ZZRD(3)(b) of the Act).

Where the Act is breached in this way, the penalties are quite severe. Individuals who are knowingly concerned in the cartel behaviour may also be prosecuted as accessories. Even where a binding contract, arrangement or understanding containing a cartel provision is not reached, actions constituting attempts to form such arrangements may be subject of prosecution by virtue of section 76 of the Act.

Exceptions

The Act does allow for some exceptions, as proscribed in section 51. One such exception in section 51(1)(b) exists where a particular procurement is required or regulated under legislation which may allow the relevant Minister to authorise a contravention of the Act, provided the authorising legislation specifically references the Act and the relevant State is a party to the Conduct Code Agreement and the Competition Principles Agreement. Such exceptions are rare and complex.

Conclusion

When conducting a long-term procurement which involves interaction with industry representative bodies, care should be taken to ensure that the outcome of such interactive procurement process does not inadvertently amount to “cartel behaviour”.

While these issues can be addressed by external legal advisors, these advisors are often not involved in the day-to-day procurement strategy to the same extent a probity advisor would be engaged. Therefore, ensuring an external probity advisor is engaged who understands these legal issues is of critical importance.

For further information, please contact Matthew Rodgers on (07) 3009 9330.