Legal Insights

The frenemy in Australian Competition Law

By Robert Gregory

• 23 August 2015 • 6 min read
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In Australia, it is prohibited to agree with your competitor to fix prices, restrict your businesses’ outputs, allocate markets, territories or customers or rig bids or tenders. These are called cartel provisions

I'm old, so when I think of frenemies, I think of Paris Hilton and Nicole Ritchie or Brittney and Christina.

Younger colleagues in the office tell me that most of the ladies on the Bachelor are frenemies (if not actual enemies).

In business, as well as popular culture, frenemies are common.

Sometimes they are your supplier or customer, but sometimes they are your competitor.

Supermarket magazines, BuzzFeed and Google are full of ways to spot and deal with frenemies, but unfortunately most of those techniques aren't particularly useful when your frenemy is a rival company with whom you also need to regularly do business.

In Australian competition law, it is strictly prohibited to agree with your competitor to fix prices, restrict your businesses' outputs, allocate markets, territories or customers or rig bids or tenders. These are called cartel provisions.

Entering into or giving effect to a contract, arrangement or understanding which contains a cartel provision could result in multi-million dollar fines for corporations. Officers and executives of corporations who are knowingly involved in cartel conduct can be jailed or receive heavy fines.

The Australian Competition and Consumer Commission (ACCC) has an immunity policy which encourages individuals or corporations who think that they might have become involved in (or been encouraged to become involved in) a cartel to report it to the ACCC in return for immunity from civil and criminal liability by the ACCC and, usually, the Director of Public Prosecutions.

This is intended to encourage 'dobbing' by cartel members, which is another thing frenemies do to each other. The ACCC considers that serious hard core cartel activity is among the most serious misconduct a business and its executives can be involved in.

On the other hand, in normal business it is essential to agree the price for a good or service with a customer or supplier – without an agreement about price (or the method for setting the price) and other essential terms, there is no legally enforceable contract.

In a nice, well ordered world, friends would be friends, enemies would be enemies, suppliers would be suppliers, customers would be customers and competitors would be competitors. Everyone would know who's who and would play their role consistently.

Unfortunately like scripted dramas (and 'unscripted', 'reality' TV) in the real world of business competitors in an industry can also be suppliers or customers of each other. Sometimes, in a bizarre plot twist, it turns out that even though everyone thought they were enemies (like travel agents and airlines, or banks and mortgage brokers), they aren’t.

Take for example, two mobile crane companies.

Mostly they compete with one another for jobs from construction companies lifting up heavy things. In this role, they are competitors and must not agree or attempt to agree with one another the price or rates they'll charge or the discounts they'll give, when they'll take cranes off the road 'for maintenance', which customers or jobs they will each take or how they'll arrange the outcomes of bids or tenders.

If they do any of those things (and one dobs on the other, or the ACCC finds out some other way) they're in for a world of hurt, spending much more time with their lawyers than they'd like, big fines and maybe jail.

But sometimes, one of them will have won all of the work for a big project fair and square, but a particular job on the project comes along which they don't have the right crane for or which needs more cranes at the same time than they have. So, they'll subcontract some of the work to their competitor.

In this role they are friends, supplier and customer, and must agree price, timing, which cranes are to be used, who'll do what and when, who deals with the end customer (and who doesn't), how they'll allocate the liability if the big heavy things come crashing down to earth, etc. If they don't agree those things, they probably don't have the essential terms for a legally binding contract.

Sometimes, they'll recognise that a job they are both bidding for is too big for either one of them and will require them to team up and agree on all of those things, even before they've got the work– what then? Are they friends or enemies or both? If they form a written joint venture to bid for the project, they'll probably be ok as there is a defence for joint ventures, but the joint venture defence can be a tricky thing, particularly if circumstances change and they don't update the written joint venture agreement.

What happens if all of these things (competing for work, arranging subcontracting deals on the fly and sorting out JVs for big projects) are happening at the same time and they meet to deal with things in a businesslike fashion, perhaps over lunch at a pub in Richmond or at the next industry association meeting?

In theory, so long as they keep their roles straight, they'll be fine. It's okay to agree price, customers, outputs and bid terms with suppliers or customers and joint venturers, but not with competitors.

However, the dedicated professionals at the ACCC are, rightly, a bit suspicious when they see two competitors agreeing about such things. Particularly if there are emails passing back and forth (or recordings of phone calls) in which executives of the competitors are talking about giving each other 'cover' on a bid or are agreeing prices or margins.

So, what should you do when dealing with your frenemy? Here are a few useful tips:

  1. Deal with one thing at a time, so far as possible.
  2. Even if a number of things need to be dealt with at a single meeting (with or without lunch) have an agenda which separates out the matters where they are your supplier, customer or JV or potential JV partner.
  3. Keep your role straight in your head – if you're competing for a job (and not considering a JV for it), don't discuss it with them.
  4. Keep notes of the agenda and what was discussed and agreed.
  5. Confirm the deal by email, making sure to make it clear that they are your supplier, customer or JV partner as the case may be.
  6. Think about the language you use – be careful with words like 'cover' and 'agreed margin' – what would a naturally suspicious person reading it next year think?
  7. If you think your frenemy has crossed the line and is trying to induce you to enter into or give effect to a cartel provision, think about claiming immunity from the ACCC (but remember if your frenemy has had some competition law training, they could be trying to maneuvre you into a position where they can dob you in first).

By Robert Gregory

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