In December 2024, the High Court imposed New Zealand’s first criminal sentence for cartel conduct under the Commerce Act 1986. The decision marks a significant milestone in the enforcement of competition law in New Zealand and highlights the serious consequences that may follow for businesses and individuals who engage in cartel behaviour.
The Commerce Commission included cartel conduct in its list of priorities for 2024/2025, stating:
“We will prioritise cartel conduct which impacts the competitive process for the procurement of public services and infrastructure contracts. We will take action in this area. Protecting the integrity of processes concerning the expenditure of public funds is essential.”
It was therefore no surprise that the Commerce Commission recently took action against a company and its director for cartel conduct with those exact features, culminating in the High Court imposing New Zealand’s first ever criminal sentence for cartel conduct under the Commerce Act 1986 (Commerce Act) in December 2024.
The message for both companies and directors to take away from this case is that cartel conduct will be taken very seriously by both the Commerce Commission and the High Court, and could result in significant sanctions, including large fines, up to seven years imprisonment and community service. It is therefore essential that companies and directors understand their obligations under the Commerce Act, including regarding cartel conduct, and ensure that effective education and training is implemented within their companies.
For an overview of the cartel provisions in the Commerce Act and our recommendations on what businesses can do to protect themselves, please see our previous article. Otherwise, read on to find out more about the case.
MAXBUILD’S AND KUMAR’S CRIMINAL CONDUCT
During the period from January to May 2022, MaxBuild and Kumar engaged in cartel conduct known as ‘cover pricing’ (a form of illegal bid-rigging). Driven by financial difficulties, on two separate occasions they agreed with a competitor to rig bids for public infrastructure projects.
In early 2022, Kumar agreed with the competitor’s director that the competitor would bid higher than MaxBuild to ensure that MaxBuild was awarded the contract for the Northern Corridor Improvement Project. Other companies were invited to bid but only MaxBuild and the competitor placed bids. MaxBuild was awarded the contract and inflated its profit margins. Later in 2022, having been rejected for the Middlemore Bridge Project, Kumar agreed with the competitor’s director that the competitor would bid higher for that project than MaxBuild.
However, before this agreement could progress, the competitor’s estimator inadvertently emailed a spreadsheet to the principal contractor, containing MaxBuild’s prices and how the competitor had used them to calculate its own prices. The estimator tried unsuccessfully to recall the email. Staff of the principal contractor who received the email reported it to the Commerce Commission, which then began investigating. This ultimately led to charges being filed against MaxBuild and Kumar, with each party facing two charges for entering into a contract or arrangement, or arriving at an understanding, that contains a cartel provision, and two representative charges of giving effect to a cartel provision.
SENTENCING AND FACTORS CONSIDERED
The High Court considered various aggravating and mitigating factors of the case. The High Court noted that the most aggravating factors were the serious and deliberate nature of Kumar’s conduct, the level of control that Kumar personally exercised, and that the projects were publicly funded. Additional aggravating factors included that there were multiple occurrences and that the conduct would have continued if it had not been discovered. However, there were also numerous mitigating factors considered including the financial position of the company, and Kumar pleading guilty, having no criminal convictions, expressing remorse and cooperating with authorities.
The High Court emphasised the seriousness of the offending and the need to deter similar conduct. Justice Wilkinson-Smith noted that the sentences were kept low to reserve harsher penalties for more serious offending in future. However, the High Court also interpreted the criminalisation of cartel conduct to be a message from Parliament that penalties for cartel conduct need to be more significant than a fine. MaxBuild was ordered to pay a fine of $500,000 and Kumar was sentenced to 6 months’ community detention (a sentence involving a curfew with limited monitoring during set hours) and 200 hours community service.
With the Court having accepted as an aggravating factor the fact that the bid was for a public contract, businesses should be wary when tendering for public contracts to ensure that their team fully understands the rules and what is required of them to comply with competition laws.
FURTHER INFORMATION
For further information please see our previous article. The Commerce Commission also has more general information and resources available here.
If you would like to know more, please contact your usual Jackson Russell Business Law advisor or one of our Business Law team below. We have multiple resources available to help you to understand cartel and competition laws, and we can help train your team.
