The sentencing judgment in New Zealand's first criminal cartel case is a stark reminder for businesses that a basic understanding of our competition laws is essential, and that good intentions are no excuse for breaking the law.
What happened?
At the end of last year, Auckland-based company MaxBuild Limited (MaxBuild) and its sole director, Manesh Kumar, were sentenced in New Zealand's first criminal prosecution for cartel conduct (price fixing in the form of bid-rigging) under the Commerce Act 1986.
MaxBuild received a fine of $500,000, and Mr Kumar was sentenced to six months' community detention, and 200 hours of community work.
MaxBuild and a competitor company were both involved in tendering processes for two major infrastructure projects:
- The Northern Corridor Improvement (NCI) Project, a $700m infrastructure project designed to improve transport links for the North Shore and through central Auckland
- The Middlemore Bridge Project, a refurbishment of the Middlemore Rail Bridge in Māngere, Auckland.
MaxBuild offered a variety of services, but was one of a few industry participants that undertook all aspects of bridge jointing work (which allows bridge joints to adapt to things like changes in temperature or atmospheric conditions).
MaxBuild was one of three entities who were invited to tender in respect of the NCI Project, and one of four in the Middlemore Bridge Project. The competitor company was also invited to tender for the projects.
In each case, Mr Kumar contacted the director of the competitor company, and both agreed that the competitor company would place a higher bid than MaxBuild to make it more likely that MaxBuild would win the tenders. This conduct is referred to as "cover pricing" and is a form of price fixing (ie, cartel conduct).
For both projects (and unbeknownst to them) Maxbuild and the competitor company were the only parties to submit tenders. MaxBuild was then awarded the tenders for both projects.
The Commerce Commission became aware of the cartel during the tender process for the NCI Project. In submitting its tender, the competitor company inadvertently included a spreadsheet which showed MaxBuild's prices, and how the competitor company had calculated its prices based on MaxBuild's prices. The staff working on the NCI Project who received the email then alerted the Commerce Commission.
The law against cartels
A cartel is an arrangement between two or more businesses in which they agree not to compete with each other. Cartel arrangements can take many forms, including price fixing, dividing up customers or markets, or restricting output of goods and services. Bid-rigging is a form of price fixing, and may also involve allocating markets or customers.
Bid-rigging involves some or all bidders agreeing about who should win, or have an advantage in, a tender. Where proposed bidders agree that one or more parties will submit a bid at an inflated price to increase the chances that another firm will win the tender, this is called "cover pricing".
Cartel conduct is strictly illegal under the Commerce Act, and is punishable with a term of imprisonment of up to seven years for individuals. Substantial financial penalties are also available.
What did the Court consider?
Justice Wilkinson-Smith acknowledged that she must have regard to the purposes and principles in the Sentencing Act 2002, and take into account Mr Kumar's personal, family, whānau, community and cultural background, the gravity of the offending, and the general desirability of consistency with appropriate sentencing levels.
The Judge also agreed that the Court can assess culpability with reference to the aggravating and mitigating factors adopted under the previous civil pecuniary penalty regime, such as:
- The impact on the market
- Whether the conduct was deliberate
- The extent of any benefit derived from the contravening conduct.
Determining the appropriate sentence in a criminal context involves:
- First, identifying the appropriate starting point, by assessing the seriousness of the offending
- Secondly, considering the factors relating to the offender, and adjusting the starting point accordingly.
Justice Wilkinson-Smith stated that the offending "strikes at the heart of business confidence". In this case, she concluded that the most aggravating factors in relation to the offending were the serious and deliberate nature of the conduct, the level of control Mr Kumar personally exercised, and the fact that public funds were involved.
This was weighed against the fact that the commercial gain was moderate (approximately $160,000 on the NCI Project) and Mr Kumar's motivations for engaging in the conduct – to avoid any of his 29 staff losing their jobs as a result of financial strain on MaxBuild during the COVID-19 period.
Justice Wilkinson-Smith adopted a starting point for Mr Kumar of two years' imprisonment, using cases where criminal sanctions were imposed for fraud-based offending for reference. To reach Mr Kumar's ultimate sentence (six months' community detention and 200 hours community work), the Judge took into account a range of factors, including:
- Mr Kumar's lack of any previous convictions
- His prompt admission to the bid rigging and cooperation with the Commerce Commission
- A pre-sentence report which described Mr Kumar as remorseful and taking full responsibility – it was noted by the Judge that she had "seldom seen such a positive pre-sentence report in terms of remorse"
- Mr Kumar's willingness to make a genuine offer of reparation of $500,000 (the value of the NCI Project contract)
- His family and personal challenges.
In relation to MaxBuild, a starting point of $1m was adopted. The Judge appeared to reach the view that a fine of $500,000 would be appropriate, and then applied discounts to the starting point based on the factors that applied to Mr Kumar personally to reach the final amount.
The Judge stated that a conviction and discharge would be a "poor precedent", but concluded that the starting point of $2m proposed by the Crown would be too high when compared against similar cases under the civil penalties regime, and a conviction is itself a considerable penalty. She also stated that the offending was not "so egregious that the penalty should be one that would drive MaxBuild out of business. The company has specialist skills, and this offending was an out of character aberration".
Key messages
Justice Wilkinson-Smith noted that the criminalisation of cartel conduct in 2021 is a clear signal from Parliament that a fine will generally be an insufficient penalty for that type of offending.
We can expect that the Commission will take an active interest in this type of offending. As we mentioned in a previous update, its 2025 enforcement priorities include bid-rigging cartels, and more specifically, cartel conduct involving procurement of public services and infrastructure contracts.
In addition, the Commission has stated that it intends to overcommit its annual litigation fund this year to be a more active enforcer. We therefore expect that the Commission may be more willing to take criminal prosecutions even in cases that are not at the highest levels of egregiousness, and where a number of mitigating factors are at play. As evidenced by this case, the penalties for an individual, or a business, will be substantial.
If you would like to discuss Commerce Act compliance or training for your business, please contact one of Buddle Findlay's specialist competition team below.
