The Auckland High Court has ruled on New Zealand’s first-ever criminal prosecution for cartel conduct under the Commerce Act 1986 since the shift from civil liability in 2021. R v Kumar [2024] NZHC 3955 sets out the Court’s sentencing of Munesh Kumar, the sole director of MaxBuild Limited. In that decision, we can see how the courts will deal with this conduct under the new regime following amendment of the cartel provisions in 2021 to introduce criminal liability.

New penalties

In terms of sentence, the new penalties see an individual liable for up to seven years’ imprisonment or a fine of up to NZD $500,000. The penalty for non-individuals is the greater of either: a maximum fine of NZD $10 million; three times the value of commercial gain resulting from contravention; or 10% of turnover in each accounting period in which the contravention occurred. 

Background

MaxBuild was not a large company, but it operated in highly specialised market: bridge maintenance and specialist contracts, including concrete repairs. It was one of the few businesses in New Zealand which attended to all aspects of bridge jointing work. MaxBuild engaged in ‘cover pricing’ with a competitor company – which is where a company collaborates with a competitor to submit fraudulent bids for a job. Mr Kumar engaged in two unlawful agreements with a competitor company on two separate construction tenders. In both cases, Mr Kumar and the competitor company’s director met and agreed that the competing company would bid higher than MaxBuild on the tenders.

First unlawful agreement - Northern Corridor Improvement Project

The Northern Corridor Improvement project is a $700 million transport project, occurring on the North Shore of Auckland. A tendering process for concrete remediation was opened and run by a joint venture with three companies invited to tender, including MaxBuild and the competitor company. A third did not bid.

Around late January to early February 2022, Mr Kumar and the competitor company’s director met to discuss the bidding process. During this meeting, both directors came to the agreement that the competitor company would place a higher bid than MaxBuild so that MaxBuild would win the tender. This constituted the first unlawful agreement. The competitor submitted a bid five per cent higher than MaxBuild. Soon afterwards, the joint venture contracted with MaxBuild to perform urgent remediation work. In undertaking the work on these bridges, MaxBuild made approximately $160,000 in profit. Once completed, this was removed from the scope of the remaining work to be done on the Northern Corridor project.

Further bids were then invited on the remaining work. The competitor company’s second offer was, on average, eight per cent higher than MaxBuild’s. Upon resubmission of these bids, the competitor company inadvertently attached a copy of MaxBuild pricing and failed to retrieve the email. The joint venture reported this to the Commerce Commission.

Second unlawful agreement - Middlemore Bridge Project

In April 2022, Auckland Transport released a request for quotes (RFQ), seeking tenders for the replacement of parts of the Middlemore Bridge. Prior to the release of the RFQ, MaxBuild had offered an indicative quote to Auckland Transport’s consultants which had been declined. When the RFQ opened, four companies (including MaxBuild and the competitor) were invited to bid. Again, the other two companies did not bid.

Mr Kumar met with the competitor company’s director to discuss the tender and again asked that they bid higher on the Middlemore project to ensure MaxBuild would win. The director agreed. This constituted the second unlawful agreement.

Before a deal could go through, the Commerce Commission began their investigation into MaxBuild and Mr Kumar. Mr Kumar applied for leniency with the Commerce Commission and contacted Auckland Transport to admit to price-fixing.

Sentencing for cartel conduct

Both agreements contained a cartel provision as they had the purpose, effect, or likely effect of fixing, controlling, or maintaining both MaxBuild and the competitor company’s prices for both projects. The companies both operate in a highly specialised field, and the making of the agreements and the accompanying conduct were serious and deliberate.

Under the previous civil regime, matters to be considered when assessing conduct included aspects such as the impact of the conduct on the market, whether it was deliberate, the extent of benefit and loss to each party involved, and the market share of the defendant. In deciding the case, Justice Wilkinson-Smith took cases under the old regime into account for the purpose of assessing the damage done in the current situation. However, the fines issued in those cases were all agreed to in advance between the Commerce Commission and the offending party, and simply affirmed by the courts. That process does not apply to criminal proceedings.

Sentencing decision

The Court considered the factors of the offending. Significant factors included that two contracts were involved, the action was not an isolated event, and it appears the conduct only stopped because it was discovered. In particular in raising prices for public investment projects, Mr Kumar did damage to both the New Zealand public and the commercial community. Mr Kumar was sentenced to six months’ community detention and 200 hours’ community work. No personal financial penalty was ordered, as anything ordered in respect of MaxBuild would likely be sheeted home to Mr Kumar as the sole director.

As for MaxBuild, while counsel sought that MaxBuild be convicted and discharged, Justice Wilkinson-Smith made clear that “companies engaged in this sort of behaviour can expect a financial penalty.”¹

MaxBuild employed 29 people but is a significant player in quite a small industry, and like many other businesses, COVID-19 caused it great financial strain. Justice Wilkinson-Smith stated that “this sort of behaviour by a large company with a national profile is more damaging both to business confidence and NZ’s commercial reputation.” ² Small, local companies with a small market share engaging in price fixing constitute the lower end of the spectrum while large companies with hundreds of employees, a large market share, and a turnover in the many millions comprise the highest end.

The offending here was not so egregious that it warranted a fine to put MaxBuild out of business, and sentencing principles dictate the least restrictive penalty to be imposed. Justice Wilkinson-Smith imposed a fine of $500,000.

The lessons from MaxBuild

As this is the first case to ever deal with the criminal penalty for cartel conduct, it sets the groundwork for future cases under the new regime. Justice Wilkinson-Smith’s consideration of old civil cases and the metric for determining the offending company’s size will likely continue to be developed in future decisions. For now, it provides a useful starting point for assessing penalties in future offences. 

This article was written with the assistance of Genevieve Austin, a Summer Clerk in the Public Law and Dispute Resolution team.

1. At [92].
2. At [61].