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Law on Collusive Tendering for Construction Contracts

3264 words (13 pages) Essay in Law

18/05/20 Law Reference this

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A1. Collusive Tendering Practices

The Australian law states that any attempt to manipulate or control prices is against the law. According to Section 45 of Australia’s Trade Practices Act (1974), the controlling of price is seen as a potential means of limiting or lessening the competition. This type of practice is illegal and can be investigated and sanctioned under the competition laws. Organizations often rely upon a competitive bidding process to achieve better value for money. In public organizations, such projects take resources from taxpayers which can diminish the public confidence in the competitive process (OECD 2009). Collusive tendering restricts the trading practices whereby the competition is eliminated because of the prior agreement between companies to set the bids to be either identical or marked higher than the other company. Hence, the main objective of tendering practices which is to ensure that bids are competitive is disregarded from the start. 

However, in a study by Ray, Hornibrook, Skitmore, and Zarkada-Fraser, (1999), a survey was conducted among 100 construction professionals from all over Australia; it states that one in four respondents saw nothing wrong in cover pricing or bid. Additionally, 46% of building contractors admit to having submitted cover prices and 88% of all quantity surveyors surveyed claimed that they knew of cases where cover prices had been submitted. Furthermore, half the respondents could not see anything wrong with tenderers discussing between themselves tendering arrangements, conditions or even prices (Ray, Hornibrook, Skitmore, and Zarkada-Fraser 1999). It shows that the ethical principles contained in the tendering laws, are not completely accepted or adhered to by all the players involved. The aim of this research is to further understand collusive tendering for construction contracts with regards to its discovery, geographic distribution, legal, proceedings, evidence and protective measures.

A1a. Discovery

According to the OECD’s Guidelines for Fighting Bid Rigging in Public Procurement (2009), bid rigging can be detected when the pricing patterns and unusual bidding is scrutinized. The possibility of bid rigging can be detected with regards to tfhe ff: the bid submission and documents, the prices, the suppliers’ and bidders’ statements and behaviors. These factors can be considered in detecting the existence of collusive behavior in procurement.

For the bid submission and documents, an example of possible collusive practices can be the use of the same wordings, errors and details that various companies submit. The companies can be sending each other their bids which can lead to them copying the format or prices. Moreover, some companies indicate last minute adjustments which results from consultation with other bidders. For the pricing, an example can be that the prices follow a pricing pattern that cannot be explained by the cost increase (OECD 2009). The companies may conspire together to provide higher cost estimates for similar tenders. This can lead to a large difference between the price of a winning bid with others. For suspicious bidding patterns and behaviors, an example can be a set of winning bidders who interchange winning the contracts over time. The companies can have a bid rigging arrangement where they either do price fixing or do cover bidding (OECD 2009). Additionally, there are patterns where bidders keep on participating even if they never win; or there are bidders who rarely bid, but always wins.

A1b. Geographic Distribution
Australia and New Zealand have a long history of close economic relations (Hutchins 2004). Both are former colonies of Great Britain and inherited its parliamentary and legal system. Therefore, it is possible that both countries experience the same collusive tendering practices.  According to Hutchins (2004), Australia introduced the Trade Practices Act 1974 while New Zealand introduced the Commerce Act 1975. Both, the Australian Trade Practices Act 1974 and the New Zealand Commerce Act 1986 seek to regulate the coordinated anti-competitive behavior, the unilateral anticompetitive behavior, and the mergers and business acquisitions (Hutchins, 2004). Moreover, both Acts take the same structural approach as the US antitrust law and regulates any conduct that may likely damage competition in the industry.

Additionally, New Zealand experiences anti-competitive behavior like Australia. There are associations where two or more businesses agree not to compete in order to make greater profits. Moreover, collusive conduct can take many forms, including price fixing, dividing up markets, rigging bids or restricting output of goods and services (Hutchins 2004). Most of which is present in both Australia and New Zealand.

A1c. Legal
In Australia, the Trade Practice Act 1974 applies to the collusive tendering practices in all types of market. The Act aims to prioritize the welfare of Australians through the promotion of fair competition for the protection of consumers. According to the Trade Practices Act (1974), Section 45 focuses on the prohibition of any contracts, arrangements that have the purpose to lessen competition in the market. Furthermore, the Section 45A states that any sort of action that can fix, control, maintain or discount, allowance for credit in relation to the price is deemed to have an anti-competitive effect. Tahus, price fixingis considered illegal (Trade Practices Act 1974).

In January 2011, the Competition and Consumer Act 2010 replaced the Trade Practices Act 1974 (Attorney-General 2019).  The Competition and Consumer Act 2010 aims to give businesses a fair and competitive operating environment. It covers the relationships between suppliers and consumers. Its purpose is to promote fair trading and competition and provide protections to customers. The Act also sets out consumers’ rights and responsibilities (Australian Competition Law 2017). Section 45AG of the Competition and Consumer Act 2010 requires the parties be penalized for their offences. According to the Australian Competition Law 2017, Section 45AG states that:

(1) A corporation commits an offence if:

(a) a contract, arrangement or understanding contains a cartel provision; and

(b) the corporation gives effect to the cartel provision.

(2) The fault element for paragraph (1)(a) is knowledge or belief.

(3) An offence against subsection (1) is punishable upon conviction by a fine not exceeding the greater of the following:

(a) $10,000,000;

(b) if the court can determine the total value of the benefits that:

(i) have been obtained by one or more persons; and

(ii) are reasonably attributable to the commission 3 times that total value;

(c) if the court cannot determine the total value of those benefits—10% of the corporation’s annual turnover during the 12‑month period ending at the end of the month in which the corporation committed or began committing the offence (Australian Competition Law 2017).

A1d. Proceedings
The Australian Competition and Consumer Commission (ACCC) administers the Competition and Consumer Act 2010. The ACCC promotes competition and fair trade in markets to benefit consumers, businesses, and the community. The ACCC aims to ensure that consumers and businesses comply with Australian competition, fair trading, and consumer protection laws (Australian Competition and Consumer Commission 2017). On the other hand, the Independent Commission Against Corruption (ICAC) is an NSW Government agency established in 1988. The main objective of ICAC is corruption investigation and corruption prevention in the public sector (Independent Commission Against Corruption n.d.). It is an independent and accountable entity which is not subject to any higher authority. The ICAC does not have a role in the ACCC which mainly focuses on the trading of the markets. 


Additionally, the owner can claim damages against a colluding contractor who is found to have colluded while tendering. Since there is a contract between the owner and the contractor, both parties are under a legal obligation to follow the contract. Hence, violation of the contract can an owner claim damage against the tenderer. According to Section 82 of the Competition and Consumer Act 2010, in the instance where the tenderer is proven to be participating in collusive practices, claims to damages can be done. A person who suffers loss or damage may recover the amount of the loss or damage against that other party.  Additionally, claims for damages can be commenced at any time within 6 years after the day which cause of action that relates to the conduct occurred (Australian Competition Law 2017). 

A1e. Evidence
In Australia, a conspiracy may be proven by direct evidence, circumstantial evidence or a combination of both. According to Beaton-Wells and Fisse (2010), an arrangement between the parties that can be private or public entities, companies, individuals or officials can be proven using witness statements or incriminating documents that record illicit agreement. An example is where evidence showing the rotation of winning bidders in a collusive scheme which implicates more than one party. An example would refer to the efforts to defeat competition by artificially raising the price (OECD 2009). The arrangement can be proven by direct evidence or inferred from circumstances such as unusual bidding patterns, the exclusion of bidders or quotation of unreasonably high prices. Evidence of inter-firm meetings and other forms of direct communications among alleged conspirators can also be considered (Beaton-Wells and Fisse 2010). 

Previously, the Section 46D of the Trade Practice Act states the defense to have proceedings relating to price fixing provisions (Australian Competition Law 2017).  Section 46D states that proceeding against a person can provide evidence in their defense. It shows that the provision is for the purposes of a joint venture; and it does not have a purpose, and does not have the effect, of substantially lessening competition (Australian Competition Law 2017). Currently, the Competition and Consumer Act 2010 Section 45AH states that a corporation cannot be found guilty of an offence if all other parties to the contract, arrangement or understanding have been acquitted of such offense. The other parties to the contract have a finding of guilt that is inconsistent with their acquittal (Australian Competition Law 2017).

 

A1f. Protective Measures
Collusive tendering in all its ramifications is not readily amenable to treat. Therefore, protective measures should be done to avoid it from happening. The OECD (2009) states the bidders should be informed of the different characteristics from the market that may affect the tender process. The information of potential suppliers, their products and their cost should be researched. Additionally, the information about past and recent prices of products should be considered in their tender. Moreover, an anti-collusion tender clause may be included in the tender documents to warn suppliers and bidders that procuring authorities are aware of the risks of bid rigging and will take the necessary actions to prevent such behavior (OECD 2009). Furthermore, there is a need to blacklist and deregister professionals and companies that are caught in the act of collusion as this will enhance project performance (OECD 2009). These protective measures may help alleviate the collusive practices in the industry. This can help to ensure that construction projects are completed to time, cost, quality and satisfaction of stakeholders and subsequently improve the image of the construction industry.

A2. Inconsistencies, Discrepancies and Ambiguities
The Australian court states that contracts are to be interpreted by what the parties intended (Ashurst n.d.). The court operates under the assumption that the terms are in their most simple and ordinary meaning and is assessed objectively. The meaning of the terms of the contract are determined to be a business and commercial interpretation. Moreover, the court interprets the extent to which the circumstances that surround the contract can be considered (Ashurst n.d.). According to Lacey (2018), the contract must have ambiguity present for it to reference the surrounding circumstances for further interpretation. 

A2a. Resolution
In the instance where there is inconsistency, discrepancy or ambiguity present in contract documents, the court may have regard to the circumstances surrounding the contract such as evidence of the background known to the parties at or before the contract, including evidence of the genesis and objective the aim of the transaction, and pre-contractual negotiations (Ashurst n.d.). However, there are exceptions that would make the evidence in admissible. There are words used in the contract that would have special or technical meanings that are specific to local trade and customs. Furthermore, the court can look beyond the terms of the contract. This is termed the “parole evidence rule” which means that prior negotiations are not admissible to the interpretation of contract terms unless evidence is provided. The evidence becomes admissible, but it not in aid for the subjective interpretation (Ashurst n.d.). 

According to Haarsma Lawyers (2008), the “contra proferentum rule” provides that a clause in a contract is to be construed strictly against the person seeking to rely on the benefit of the clause. As set out above, the “contra proferentum rule” applies to exclusion and limitation of liability clauses only in the case of ambiguity. According to Klausner, Rachman, and Schatzman (2004), there is a general rule that a court will construe ambiguous contract terms against the drafter of the agreement. Therefore, the drafter of the contract has the most risk in this type of ambiguous situation. In cases of uncertainty, the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist (Klausner, Rachman, and Schatzman 2004). Although, some contracts include a clause that modifies this statutory interpretation rule (Last n.d.). Such clauses will state, in part, that the contract should be construed as though both parties to the agreement drafted it.

A2b. Practices
Most disputes arise as a result of the parties disagreeing as to their respective interpretations of the contract terms and conditions. As a result, inconsistencies, discrepancies and ambiguities arise. In order to minimize this possibility, the contracts, including the plans and specifications, should be objectively and carefully reviewed before signature (Alden, Ottaway and Tetstall 2012). According to Alden, Ottaway and Tetstall (2012), it is possible to challenge the plain language of a contract on the basis that the agreement reached by the parties has been incorrectly recorded in the document.  A court can rectify the problem clause to make it accord with what the parties agreed.  Also, there is a heavy burden on a party attempting to persuade a court to rectify a contract (Lacey 2018).  According to Ashurst (n.d.), even form contracts should be tailored to the specific contract and additions and deletions in order to completely integrated new changes into the agreement. 


If there is a disagreement relative to the interpretation of the contract documents, the parties should review the contract to determine if it includes interpretation-related clauses (Alden, Ottaway and Tetstall 2012). However, if the contract doesn’t include such clauses, the parties may be able to turn to Australian court to get further guidance. In particular, parties may wish to expressly go to court for guide of an authority for this type of situations.

 

A2c. Non-Financial
Contractors and owners are under heavy burden when inconsistencies, discrepancies and ambiguities arise. In the construction industry, delays are often experienced by contractors and owners alike. In the instance where the tender documents have problems that causes delay it brings forth numerous loss. The most common loss is the liquidated damages which is the protection the owner has against the contractor for failure to complete on time (Haarsma Lawyers 2008); however more than financial loses there are other loses that hold greater value. The workers can experience damage and injury from the delays that are happening. Additionally, workers can be put at risk and experience accidental death. This can result from any act, omission, neglect or breach of contracts. Finally, there can be property damages which will be liable to the contractor. This will cause the contractor liabilities that happened under his area of jurisdiction. 

A2d. Detriment
The AS 4300 is a design and construct contract that the contractor usually takes responsibility for the design of the works (Williams and Newell 2007). According to the Contractor’s Design Obligations, the contractor will have to perform all tasks required to design the works according to the contract, including preparing the design documents necessary for the construction of the works and, if necessary, developing the owner’s design (Williams and Newell 2007). Furthermore, the contractor is liable to assume all the risk and responsibilities for all errors, omissions or inconsistencies in any documents, including those prepared by the owner. Finally, the contractor takes responsibility for ambiguities or discrepancies which exist in or between the design documents or between the design documents and the project requirements. Often owners seek to amend the relevant clause to make the contractor responsible for ambiguities or discrepancies existing in or between all of the various contract documents (Williams and Newell 2007).

Reference List

  • Alden, S., Ottaway A. and Tetstall J. 2012, Drafting contracts: guidance on managing ambiguity, Mondaq, accessed September 26, 2019, <http://www.mondaq.com/australia/x/163072/Contracts+Deeds/Drafting+contracts+guidance+on+managing+ambiguity>
  • Ashurst n.d., Interpretation of contracts under Australian law, accessed September 26, 2019, <https://www.ashurst.com/en/news-and-insights/legal-updates/quickguides—interpretation-of-contracts–under-australian-law/>
  • Attorney-General, J. 2019. The Competition and Consumer Act. Accessed September 25, 2019, <https://www.business.qld.gov.au/starting-business/licensing-obligations/legal-obligations/competition-consumer-act>
  • Australian Competition and Consumer Commission 2017. About us. accessed September 25, 2019, <https://www.accc.gov.au/about-us>
  • Australian Competition Law 2017, Action for damages, accessed September 25, 2019, <https://www.australiancompetitionlaw.org/legislation/provisions/2010cca82.html>
  • Australian Competition Law 2017, Giving effect to a cartel provision, accessed September 25, 2019, <https://www.australiancompetitionlaw.org/legislation/provisions/2010cca45AG.html>
  • Beaton-Wells, C., and Fisse, B. 2010. Broadening the Definition of Collusion? a Call for Caution. Federal Law Review, 38(1), 71–95. Accessed September 25, 2019, from Australasian Legal Information Institute Database, doi: 10.1177/0067205×1003800103
  • Haarsma Lawyers 2008, Errors, Omissions and Other Issues in Modern Contract Drafting, accessed September 26, 2019, <http://www.haarsma.com.au/errors-omissions-and-other-issues-in-modern-contract-drafting-2/>
  • Hutchins, A. 2004, ‘Moving towards a single economic market: Should Australia and New Zealand further co-ordinate their competition policy?’, Master of Law Thesis, University of Toronto. Accessed September 25, 2019 from Australian Government Productivity Commission, <https://www.pc.gov.au/inquiries/completed/trans-tasman-consumer-protection/submissions/sub001/sub001.rtf>
  • Independent Commission Against Corruption n.d., About the NSW ICA. accessed September 25, 2019, <https://www.icac.nsw.gov.au/about-the-nsw-icac>
  • Klausner, N., Rachman, M. and Schatzman, J. 2004, How Courts Interpret Ambiguous Contracts, Corporate Counsel Business Journal, accessed September 26, 2019, <https://ccbjournal.com/articles/how-courts-interpret-ambiguous-contracts>
  • Lacey, A. 2018, The ongoing ambiguity in interpreting a contract: what is admissible? accessed September 26, 2019, <https://mccabecurwood.com.au/ongoing-ambiguity-interpreting-contract-admissible/>
  • Last, W. n.d., If There Are Disputes Concerning Ambiguities in A Contract, Whose Interpretation Should Prevail? An Overview of Contract Rules of Interpretation, Last & Faoro, accessed September 26, 2019, <https://www.lhfconstructlaw.com/Articles/If-There-Are-Disputes-Concerning-Ambiguities-….-Of-Interpretation.shtml>
  • OECD 2009, Guidelines for Fighting Bid Rigging in Public Procurement, accessed September 25, 2019, <https://www.oecd.org/competition/cartels/42851044.pdf>
  • Ray, R. S., Hornibrook, J., Skitmore, M., and Zarkada-Fraser, A. 1999. Ethics in tendering: a survey of Australian opinion and practice. Construction Management and Economics, 17(2), 139–153. doi: 10.1080/014461999371646
  • Williams, J. and Newell, C. 2007, Building Contracts: A Contractor’s Perspective – Part 2, Australian Construction Newsletter #114
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