The new cartel amendments to the Trade Practices Act pose some additional risks for structuring and successfully managing joint ventures between competing organisations.
Joint ventures have become increasingly common in the construction industry, permitting contractors who would be unable to carry out large infrastructure projects on their own to pool their resources and bid for projects together. Large projects such as tollroads, water projects, railways, pipelines, oil and gas projects and the like are commonly carried out as joint ventures.
Since July 2009, the Act makes it a criminal offence to make or "give effect to" a contract, arrangement or understanding that contains a cartel provision.
Australia's new cartel laws are now amongst the toughest in the world and carry severe penalties for companies and management alike - liabilities which cannot be indemnified or insured against.
A cartel provision is a provision of a contract, arrangement or understanding between two or more competitors which:
has the purpose, or has or is likely to have the effect, of directly or indirectly fixing, controlling or maintaining prices; or
has the purpose of:
preventing, restricting or limiting the production or supply of goods and services or the capacity to supply services;
allocating customers or geographical areas of operation; or
controlling the bidding by competing parties in a tender process.
The phrase "contract, arrangement or understanding" includes both formal and informal arrangements between competitors, as well as unwritten "understandings" such as a "nod and a wink" or other covert messages.
Who are my competitors for the purposes of the Act?
In the application of the new cartel provisions, its important to ask at the outset: are, or are the proposed consortium parties likely to be, competitors in relation to the specific project or services in question?
Will the parties otherwise be competitors for the services to be offered by the proposed consortium or joint venture, which they intend to form to bid for this project - and would they be competitors for that project, in the absence of their arrangement or agreement?
If yes, then the Act needs to be considered. If not, then cartel risks may not arise.
For example, assume that two major construction companies have fiercely competed against each other for a range of projects in the past. Then tenders for a new major rail project are called "the Great Inland Rail Link".
If the parties decide to team up together to bid in a new consortium for the Great Inland Rail Link, the important question under the Act is not whether they have been competitors in the past, but whether, but for their formation of this new consortium, is it likely in fact that otherwise they would be competing against each other to win the rights to construct the Great Inland Rail Link, either in their own right or with different consortium partners.
If the answer is yes, then the new cartel provisions will need to be considered.
The situation may be different, however, if parties would not be able to bid for the work on their own because of the size of the project, and therefore need to form a joint venture in order to participate.
Sanctions and consequences of contravention
Liability under the new Act laws is strict and does not requires any intent to reduce competition nor any awareness of wrongdoing.
The penalty for breaching these provisions can be significant: corporations may be liable for criminal fines or civil penalties for up to the greater of:
$10 million, or
three times the value of the benefits obtained from the activities, or
if the value cannot be determined, 10 percent of the corporation's annual turnover.
For executives and others personally involved who had knowledge of the elements of the offence, although no dishonest intent is required, jail terms of up to 10 years can be imposed.
The Act also operates retrospectively to apply to cartel provisions which were in place before the amendments to the Act were passed, to the extent that a corporation gives effect to a cartel provision.
Exception for joint ventures
The Act makes an exception for cartel provisions relating to joint ventures, but this exemption has been narrowly drafted and has been the subject of criticism in a number of submissions made to the Senate Committee.
In order for a cartel provision relating to a joint venture to be exempt from the application of the new cartel provisions, it must be established that:
Accordingly, where the parties arrive at a cartel provision by an informal arrangement or understanding for a joint venture which would not (and was not intended to) constitute a legally binding contract, the parties will risk falling foul of the civil and criminal penalty provisions of the Act.
We examine some possible scenarios below.
Scenario 1 - strategic alliance
Corporations X and Y typically compete with each other for construction projects but, in order to pool their resources, agree to form a strategic alliance to bid for any water projects that may be put to the market.
X and Y have agreed that they will only bid for water projects through the joint venture and not individually or as part of another consortium.
In order to take advantage of the joint venture exemption, the parties would need to prove that the arrangement made was for the purposes of a joint venture, and that the cartel provision was contained in a contract. "Contract" is not defined in the Act, but it is likely to be construed as meaning a legally binding agreement, as opposed to an informal arrangement or understanding which would not be enforceable in court.
If the arrangement between X and Y was not expressed in a legally binding agreement, but was made on the basis of an informal arrangement, X and Y may not be able to rely on the joint venture defence.
Scenario 2 - sourcing of materials
As part of their strategic alliance arrangement, X and Y have entered into a joint venture for the construction of a desalination plant. They put out a tender for a subcontractor to supply precast concrete to the joint venture. The joint venture receives a bid from PrecastCo at $500/tonne.
Meanwhile X is carrying out a road project 20 kms away and has received a bid from PrecastCo to supply precast concrete for $475/tonne on that project.
X and Y inform PrecastCo that they will accept its bid for the desalination plant if it reduces its price to $460/tonne and if that same price is offered to X for its road project as well.
In this situation is unlikely that X and Y will be able to rely on the joint venture exception because, from PrecastCo's perspective, they are competing customers and the arrangement is unlikely to be contained in a contract.
Joint ventures need to be careful about the level of separation between a parent that may compete in some respects against the joint venture, and the parent's representatives managing the joint venture, so as not to share information and commercial strategies as and when it suits them.
Related bodies corporate
An exemption that may be some of comfort to joint venture parties that commonly enter into joint ventures with each other is that the cartel provisions do not apply in relation to a contract, arrangement or understanding if the only parties to it are "related bodies corporate".
Points to think about
The amendments to the Act raise a number of questions for companies engaging in joint ventures with competitors:
are the parties likely to be competitors in relation to the project in the absence of their agreement?
is there a formal contract governing the joint venture arrangement?
do the provisions of the contract refer to the particular behaviour that may be considered as cartel-like behaviour under the Act?
what is the level of separation between the parents of the joint venture parties and are there any information sharing arrangements between them?
does the company have an up-to-date compliance program to ensure that staff are aware of the requirements of the Act?