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Criminal cartel offences in United Kingdom

Written by: Neeti Suri
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The pressing need to introduce a criminal cartel offence arose primarily because of the fact that the activities of cartels or agreements to form such cartels were proving grossly detrimental to the competition in the economy of UK. A healthy competition is indispensable for the growth of the economy and if that is stifled, the whole economic structure is destroyed and the growth of the country is bound to become unsteady.

A ‘cartel’ is basically, a union of producers, distributors, sellers, service providers or traders, who by contracts between themselves try to control the production, distribution, sale or price of or trade in certain goods or provision of services. In other words, they try to control or manipulate the market for their benefit. A cartel has been defined under section 188 of the Enterprise Act, 2002 which states that an individual will be guilty of an offence if he dishonestly agrees with one or more other persons to make or to implement or to cause to be made or to be implemented arrangements between at least two undertakings that are described as prohibited activities. These are price fixing, the limitation of production or supply, market sharing; and bid rigging.

Thus a cartel, as understood under this Act is such an association whose chief and primary motive is to practice anti-competitive activities which affect sound competition, adversely. Otherwise, agreements forming cartels are not null and void per se . It is only when the persons/enterprises form it with mala fide intentions and works dishonestly to suppress competition, is it considered unlawful and void . In the case of Mogul Steamship Company v. McGregor Gow and Co., the Court of Appeal has pronounced that "the right of the individual to carry on his trade or business in the manner he considers best in his own interests involves the right of combining with others in a common course of action, provided such common course of action is undertaken with a single view to the interests of the combining parties and not with a view to injure others"

But initially in England cartel agreements were not held void. They were merely regarded as criminal conspiracies which were indictable only when the element of dishonesty was present.

The case of Attorney - General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd, clarifies this fact. Thus the parties were free to act upon the terms of the contract, even if it was unenforceable under law. But subsequently, there was a shift in the outlook and cartel practices came to be recognized as improper and illegal and no irrelevant defenses were entertained.

This view was upheld in the case of Scott v. Brown, Doering, McNab and Co. However, there are certain cartels which are approved by the UK government and are granted exemptions from regulatory penalties. These are ‘Joint Venture agreements’ for the production of new products which cannot be produced without the contribution of both the parties to the agreement. But some restrictions are imposed on the market share of the joint venture agreement too.

The problem faced by the UK government was that it was getting extremely difficult to control the activities of cartels which were impairing the competition and were proving destructive for the economy. The cartels mainly try to limit competition by engaging in anti-competitive practices like exclusive supply agreement, tie-in-arrangement, resale price maintenance, bid-rigging, price-fixing, etc. They aim at driving their competitors out of the market in order to have full control over the market. Once they acquire the said control in particular goods or services, they tend to unreasonably raise the prices of goods/services; restrict the production or distribution thereof and perform such other practices which make the very existence of a cartel an illegal exercise. Despite the fact that the Competition Act which was in force and imposed heavy fine on the enterprises engaged in cartel activities, these enterprises continued their dealings undaunted even after being exposed. To control such a ruthless behavior government decided to take severe measures.

Moreover, the biggest lacuna in the Competition Act, 1998 was that it sought to punish the enterprise, while the persons comprising it went scratch-free and because of this loophole, cartels multiplied and were not afraid of the liability/punishment under the Act. The prevailing situation was that once a cartel was ordered to terminate its activities or to close down altogether, it resumed its dealings or a fresh cartel was formed, respectively, within a short span of time, rudely ignoring the order. Thus, controlling them had become a Herculean task and stringent and stern action was the need of the hour. Hence the Parliament enacted the Enterprise Act, 2002. The idea of formation of criminal cartel offence was first proposed by the ‘DTI White Paper: A World Class Competition Regime.’ This paper mainly talked about the pharmaceutical cartel formed to fix prices and share markets in the sale and distribution of certain vitamins. The cartel went unnoticed for a decade and it produced $ 500 million in US alone. But when the sinister practice was exposed the directors were successfully prosecuted and fine of $1 billion was imposed along with a term of imprisonment.

The Enterprise Act, 2002 mainly concentrates on imposition of criminal liability on the individuals. The principle of independent corporate existence as enunciated in the case of Salomon v. Salomon & Co. implies that after incorporation an enterprise acquires its own corporate existence. It becomes a body corporate and is distinct and separate from the members constituting it. However, this principle cannot be stretched to unnatural limits. It must not be forgotten that an enterprise is comprised of individuals only, who are the brains behind its workings. A business does not have any hands or brains of its own to work so it cannot be held responsible for any dishonest, illegal activities. With the enactment of the Enterprise Act in 2002, the persons working behind the ‘corporate veil’ are caught hold of and strict sanctions are imposed on them. This certainly has a strong deterrent effect because earlier, only fines were imposed on cartels for engaging in illegal activities, but now the persons engaging in them are punished with fine or imprisonment or both and in some cases disqualification orders are passed against individuals, the effect of which is that such individual cannot engage further in any other business. It is pertinent to mention that the current Act does not supplant, but supplements the earlier enactment. Thus the regime of the Competition Act would continue alongside the criminal cartel offences.

According to the Act of 2002 cartel offence is aimed at those involved in:

1. Price-fixing agreements;
2. Agreements to limit supply or production of goods or services;
3. Agreements to share out markets or customers;
4. Bid-rigging agreements.

For holding a person liable under this Act, it is significant to prove two elements. Firstly, that he has acted ‘dishonestly’ while he is a member of a cartel i.e. he has bad intentions to injure the competition, economy, consumers, etc. Mere negligence is not sufficient to convict him for a cartel offence. The test of dishonesty has been best explained in the case of R v. Gosh.

The second element is ‘reciprocity’ in the horizontal cartel agreements [i.e." agreements relating to products or services at the same level in the supply chain" ]. This means that a person cannot be punished if he tries to control prices alone; he is punished if he commits a cartel offence in collusion with other persons. Vertical cartel agreements [which operate at different supply chains between the undertakings e.g. between a distributor and a retailer or a manufacturer and distributor] do not come under the purview of the Act. Thus, an agreement to form a cartel between two or more persons must exist. Further, under the Act it is absolutely not necessary to show that an implementation of the cartel agreement was done, even if it is shown that the cartel agreement was entered into with dishonest intent, the parties to such contract/agreement cannot escape liability.

Under, both the new and the old Act, exemptions are granted to ‘whistle blowers’ against prosecution and punishment. Whistleblowers, basically, are the persons who assist the OFT in nabbing the persons involved in prohibited acts. In the event of investigation, the OFT does not prosecute some persons, who otherwise are liable to prosecution for a cartel offence. They are prevented from being prosecuted because of the ‘no-action’ letters issued to them for which the condition precedent is that the person to whom it is issued has not instigated or compelled other persons for involving themselves in cartel offences or he had not played a chief role in the formation of the cartel. He is a person who now wants to cooperate with the OFT to nab other perpetrators. This is also termed as the ‘leniency and no-action policy’ of OFT.

Prior to the enactment of the Enterprise Act, the Competition Act, 1998 was in force and by way of that Act only civil liability was imposed on the enterprises engaging in cartel activities. Since the latter was found incapable of preventing cartel activities, the Enterprise Act, 2002 was formed to assist it in such prevention. Earlier, when an enterprise was found distorting or disturbing competition or abusing its dominant position, financial liability was imposed on it. The punishments were, a heavy fine imposed which amounted to 10% of the annual worldwide turnover of the enterprise. But prior to such imposition, the OFT had to prove that the enterprise was engaged in an illegal activity. Another method to restrain enterprises was the "Naming and shaming" policy. This is basically resorted to, to adversely affect the reputation of the enterprises so that consumers and the government get alert. It does play an efficacious role in stopping illegal interference in economic advancements, yet has not a very strong curb. Thirdly, the persons affected by the cartel activities could only sue for damages for the loss suffered by them. A few of these still continue to be used as punishments. Despite the afore-mentioned liabilities, the cartels were not dissuaded from continuing with their dealings. Where a cartel was forced to close down, its members within a short span of time opened up another one and continued with their illegal activities.

The criminalization of cartel agreements and involvement in cartel activities has indeed played an important role in restricting illegal exercises in UK. Since the sanctions under the former Act were proving inadequate in curtailing them, the government enacted the Enterprise Act under which cartel offences were formed. Under the criminal law the guilt of the accused has to be proved beyond reasonable doubt and not ‘on the balance of probabilities’ as is required under the civil law.

In the end the author has to state briefly that the introduction of criminal cartel offence is an achievement and in the long run would save the economy of UK against the illegal activities of cartels. These cartels really have the potential to harm the country’s economy very badly and they may not even be traced for a long time like the pharmaceutical cartel could not be traced for a decade. Thus stringent and stiff action was needed to curb the criminal cartel offences from being performed by the individuals who constitute the enterprises, who went unnoticed prior to the enactment of the Act of 2002.

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