Fact sheet: Project Agreements

Undertakings often collaborate on responses to invitation to tender for the supply of goods and services. Such collaborations can result for instance in a collusive tendering or bid rigging where there is an explicit collusion between the tenderers aiming at market-sharing or price-fixing. Cooperation agreements can result in the reduction of the number of tenderers and thus contribute to the restriction of competition. On the other hand, collaboration between undertakings in relation to tendering agreements can offer substantial economic benefits to the consumers, e.g. in case of project agreements where the cooperation occurs between undertakings which independently would not be able to bid or tender for the project covered by the cooperation.

Published: 15 August 2008 - please see right column for PDF version

Tendering agreements were prohibited under Section 3-2 of the Competition Act 2003, whereas the so-called project agreements were permitted under Section 3-5 of the Competition Act 2003 provided certain conditions were fulfilled. These provisions were revoked by the Norwegian Competition Act 2004 and the legality of tendering and project agreements is now assessed following the provisions of Section 10 which prohibits cooperation agreements between undertakings that have the object or effect the restriction of competition.

The Norwegian Competition Authority has already published sector specific Guidance on Price and Tendering agreements in the taxi market, as well as Guidance on tendering agreements to the Building Construction Association, The Norwegian Dental Association and the Bergen Sentrum øre nese hals. Uncertainty has also been expressed by other professional associations in relation to the application of the Competition Act 2004 on cooperation agreements. On these grounds, the Norwegian Competition Authority considers it appropriate to issue a general guidance on tendering and project agreements which will further elaborate on its previous guidance notices.

The purpose of this document is to present how the Norwegian Competition Authority will apply Section 10 of the Competition Act to assess tendering and project agreements. It is emphasised however that each case will have to be assessed individually and that it is up to the individual undertaking to assess the legality of its activities. Under the Competition Act 1993 the Norwegian Competition Authority had the right to grant individual exemptions but this is not the case under the Competition Act 2004. The Norwegian Competition Authority cannot provide in advance binding commitments in relation to different areas of activities or discharge undertakings from liability.

2. Relationship to the EEA rules
Section 10 of the Competition Act is equivalent to Article 53 of the EEA Agreement. Pursuant to Section 6 Paragraph 1 of the EEA Competition Act the Norwegian Competition Authority is entitled and obliged to apply Articles 53 and 54 of the EEA Agreement where trade between Norway and the other EEA Member States is affected.

The present document relates to Norwegian competition law and presents the considerations the Norwegian Competition Authority will take into account when applying the Competition Act to assess tendering and project agreements. However, Section 10 of the Competition Act is modelled on Article 53 of the EEA Agreement and Article 81 of the EC Treaty and as it is emphasised in the preparatory works of the Competition Act, the interpretation of Article 53 of the EEA Agreement and Article 81 of the EC Treaty is relevant and carries great weight when assessing Section 10 of the Competition Act.

3. Collusive tendering or bid rigging
Tendering is the offer made by a tenderer when he receives an invitation to tender for the supply of goods and services. An invitation to tender is an acquisition process which allows all (open invitation to tender) or invited (restricted invitation to tender) contractors (tenderers) to submit a tender for a particular purchase. The process should increase market competition between the tenderers and it is assumed that each tenderer is acting independently. It should be noted that a tendering in this connection relates to every acquisition process. Tendering is not limited to formal tendering processes but encompasses also informal forms of invitation to tender.

Collusive Tendering occurs where undertakings collaborate on responses to invitations to tender. Such cooperation agreements should be assessed under Section 10 of the Norwegian Competition Act witch prohibits agreements restrictive of competition, and in particular it should be assessed whether they have as their object or effect the restriction of competition. In case the cooperation agreements restrict competition, they are in principle prohibited.

The practice of collusive tendering puts in an unfavourable position the principal of the tendering contract who does not receive as high profits as he would receive in case the tendering process was between independent tenderers. There is a further risk that neither the principal of the contract nor the final consumers will get any share of the profits of the collusive tendering. When there is a secret collusion, the buyer will be under the erroneous impression that he achieved a profitable contract. Collusive tendering can further reduce competition and counteract the main purpose of the Norwegian Competition Act on effective use of society’s resources. It is important therefore to ensure healthy competition in invitations to tender processes.

There are various forms of illegal tendering agreements and they can result in both price-fixing and market-sharing. There can be cooperation agreements where the tenderers share among themselves the tender or agree on the lower offer to be submitted. Such agreements are considered to have as their object the restriction of competition pursuant to Section 10 of the Competition Act, and constitute a serious infringement subject to civil and criminal sanctions pursuant to Section 29 and 30 of the Competition Act.

Price is not the only consideration to be taken into account when assessing the successful contractor. It is important therefore to ensure fair competition in relation to all contractual terms, and the prohibition of cooperation agreements that have as their object or effect the restriction of competition can affect any kind of agreement related to the submission of a tender. The main consideration in relation to tendering agreements is that the tenders are not assessed based on purely economic considerations. Every cooperation agreement should be appraised individually against the prohibition of Section 10 of the Competition Act.

4. Generally on project agreements
Cooperation agreements that relate to specific projects, the so-called project agreements, can under certain circumstances be lawful under the Norwegian Competition Act.

Single project in this context is to be understood as an individual purchase of goods or services aiming for e.g. the construction of housing (building contract) or the purchase of production factors. The essence of project agreements is the existence of a horizontal or a vertical cooperation between undertakings which results in the undertakings submitting joint tenders or offers for the joint supply of goods and services in connection to the whole or part of an individual project. An agreement is of horizontal nature when it is between undertakings operating at the same level in the market. It should be stressed that vertical cooperation agreements can also fall within Section 10 of the Competition Act, and vertical cooperation relates to cooperation between undertakings operating at different levels in the market.

Before the assessment of single projects it should be emphasized that the traditionally harmful restriction of competition can also take place in connection to single projects; where an offer or a tender relates to the whole or part of the project. There might have been agreed a price coordination when submitting different tenders, a beforehand agreement of the contractors that they will submit tenders for different parts of the project or that they will share the various tenders. These forms of agreements normally constitutes a serious breach of Section 10 of the Competition Act, see further point 3.

Cooperation agreements that result in the creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity (the so-called full function joint venture), must be notified according to the Merger Regulation contained in Chapter 4 of the Competition Act. Cooperation agreements that result in the establishment of such a joint venture are not discussed any further in this document.

5.  Assessment of project agreements

5.1 Overview Single project agreements involve different problematic areas. The most important are elaborated in this Guidance, but it is emphasized that it might appear various issues in specific cases related to one or more of the conditions of Section 10 which are not dealt with in the present Notice.   The prohibition contained in Section 10 Paragraph 1 of the Competition Act relates only to cooperation agreements which have as their object or effect the prevention, restriction or distortion of competition. Collusive tendering agreements that are considered to have as their object the restriction of competition infringe Section 10 of the Competition Act (see above point 3), and no further economic analysis should be undertaken to establish their actual or potential effects in the market. In these cases it will be rather improbable that the agreement will fall within the exception in Section 10 Paragraph 3 (see below para. 5.8). Agreements that do not have as their object the restriction of competition need to be further examined to decide whether they have potential restrictive effects on competition. It must be examined whether the particular agreement can restrict competition. A collusive tendering agreement that restricts competition might generate efficiency gains that outweigh the anti-competitive effects, and it might even promote the purpose of the Competition Act on effective use of society’s resources, so that it falls within the exception in Section 10 Paragraph 3. The Norwegian Competition Authority has no right to grant an exemption, and the parties have the burden to prove that the conditions of Section 10 Paragraph 3 are fulfilled.

For a more detailed discussion on the conditions related to the prohibition of competition restrictive cooperation agreements under Section 10 Paragraph 1 and the exception of Section 10 Paragraph 3, see the Norwegian Competition Authority’s fact sheet on Section 10 Paragraph 1 of the Competition Act, Section 10 Paragraph 3 and the fact sheet on market definition. Points 5.2 and 5.3 discuss the main considerations to be taken into account when assessing the compatibility of project agreements with the provisions prohibiting agreements restrictive of competition.

Project agreements raise further questions in relation to the spill-over effects the particular agreement can have on neighboring markets, when the parties acquire sensitive information on each others pricing structure or strategy (point 5.5). There is also a risk that a single project agreement evolves to a permanent cooperation between the competing contractors, which can over time lead to considerable restriction of competition among them (point 5.4).

The cooperation agreement must restrict competition to an appreciable degree in order to fall under the prohibition of Section 10 of the Competition Act. The requirement that competition has to be affected to an appreciable degree is not based on the letter of the law but arises from the interpretation of the equivalent provisions of Article 81 of the EC Treaty and Article 53 of the EEA Agreement. The requirement that competition has to be affected to an appreciable degree is discussed in point 5.7.

In case a single project agreement is prohibited under Section 10 Paragraph 1 of the Competition Act, it must be assessed whether the cooperation agreement generates efficiency gains which may outweigh the restrictive effects on competition, see Section 10 Paragraph 3 of the Competition Act. The conditions for the application of the exemption of Section 10 Paragraph 3 are shortly discussed in point 5.8. Finally the Block Exemption covering certain forms of specialization agreements is discussed in point 5.9.

5.2 Restrictive of competition by object or effect Single project agreements can have anti-competitive effects as far as it concerns the individual project covered by the cooperation. Where two competitors cooperate for the fullfilment of a project this involves that one competitor disappears and that competition between them is eliminated. Single project cooperation can however also have favorable effects on competition and on the effective use of the society’s resources.

In the Commission’s Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements it is mentioned that ‘cooperation between competing companies that cannot independently carry out the project or activity covered by the cooperation’ does not fall under “Article 81(1). ”

Single project agreements do not have a restrictive effect on competition provided that the contractors cannot independently carry out the project in question. To the extent that the contractors cannot independently carry out the project, a joint tender is not considered to exclude a competitor and thus the joint tender is not considered to restrict competition.

It should be undertaken an individual assessment of the particular single project agreement in order to see if it restricts competition. A decisive factor will be whether the cooperating parties in the single project are actual or potential competitors.

A single project agreement will be considered not to fall under Article 81(1) provided in addition that the undertakings do not enjoy significant market power and that the agreement does not cause foreclosure problems vis-à-vis third parties, see paragraph 24 of the Commission’s Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements. In this respect it is emphasized that an undertaking can be considered to have significant market power even though it is not dominant.

It should be mentioned that paragraph 24 of the Commission’s Guidelines refers to projects or activities limited in time. Long-term and permanent cooperation agreements should be assessed following the provisions of Section 10, on this point see further point 5.4.

A joint tender submitted by undertakings involved in different professional activities, for example a joint tender of carpenters, electricians and plumbers for a property development, does not usually have a restrictive effect on competition. However, it is not a requirement that the undertakings are involved in different professional activities. Where the undertakings are involved in the same professional activities, an individual assessment is needed in order to evaluate whether there is a real possibility for each undertaking to carry out the project independently on the terms and conditions given on the tendering invitation. The cooperation agreement will not however be considered having restrictive effects on competition where only a theoretical possibility exists that both undertakings can submit a separate tender.

There might be cases where even though the involved undertakings are generally in a competitive relationship, they are not competitors in relation to the single project. The reason might be that the undertakings contribute only products and/or services that the other undertaking cannot deliver. The undertakings will not be considered competitors in relation to the specific project where there is lack of special knowledge and experience or lack of economic resources to undertake the economic risk for the specific project. Other examples could include lack of the necessary resources or geographical presence, including cooperation between Norwegian and foreign companies.

When assessing whether the contractors have the resources to perform the project independently, their resources must be assessed in relation to the resources of the other contractors in the group or the companies controlled by these contractors. It will also be significant whether the undertaking can perform the contract by providing the necessary skills or equipment, for example by hiring employees or acquiring the necessary equipment. It is assumed that contractors in such a case will be able to substantiate their lack of resources. As mentioned above an undertaking with lack of resources might not be able to enter into a cooperation agreement if it has significant market power or the agreement can cause foreclosure problems vis-à-vis third parties.

It should be emphasized that even if some contractors cannot perform the contract independently, the cooperation will be likely to have anti-competitive effects where more than two contractors cooperate in a case where the cooperation of only two would be sufficient and similar situations where there is cooperation of several undertakings.

To the extent that there is a competitive relationship between the cooperating parties, the spill-over’ effects and the possibility that the cooperation might extend beyond the specific project should be taken into consideration, see below points 5.4 and 5.5.

A particular competition problem arises where the cooperating parties could have performed parts of the contract independently, but submit a joint tender for the whole project. If the project can be performed in parts, an undertaking without the necessary resources cannot enter into a cooperation agreement to perform the whole project, however the possibility of efficiency gains cannot be excluded and should be assessed under Section 10 Paragraph 3 of the Competition Act (see below point 5.9). If the contract can be performed in parts, undertakings which are neither actual nor potential competitors can in principle cooperate for the performance of the whole project, unless the agreement can reduce the number of the competitors within parts of the project in a way that can outweigh the positive effects of the cooperation.

As mentioned above cooperation between contractors who are not actual competitors can have restrictive effects on competition in case those contractors are potential competitors. In footnote 9 of the Commission’s Guidelines on horizontal cooperation agreements are mentioned the conditions necessary for two undertakings to be considered potential competitors. As it is mentioned characteristically:

“A firm is treated as a potential competitor if there is evidence that, absent the agreement, this firm could and would be likely to undertake the necessary additional investments or other necessary switching costs so that it could enter the relevant market in response to a small and permanent increase in relative prices. This assessment has to be based on realistic grounds, the mere theoretical possibility to enter a market is not sufficient […].Market entry needs to take place sufficiently fast so that the threat of potential entry is a constraint on the market participants' behavior.”

In assessing whether two or more cooperating contractors are potential competitors, the Norwegian Competition Authority like the European Commission, will examine whether the contractors have sufficient “know-how” for the performance of the particular project as well as whether every party is familiar and has access to the appropriate resources, including the extent of necessary switching costs and additional investments. Further it will be examined whether the actual or potential demand is such to enable the contractors to provide the particular services independently. In addition it will be evaluated whether the contractors can bear the technical or economical risks involved in providing the service independently, including the percentage the particular project represents of their annual turnover.  If there are high entry barriers in the relevant market, this might reduce the probability for the entry of the particular contractor in the market. The starting point for the analysis is the market as defined in the definition of the relevant market.

If the parties are actual or potential competitors and they are able to perform the project independently, an agreement between them will be considered to infringe Section 10 Paragraph 1 of the Competition Act. An agreement related to a single project that has anti-competitive effects, might be considered lawful under Section 10 Paragraph 3 of the Competition Act if it generates efficiency gains which outweigh the restrictive effects on competition.

5.3 Subcontracting between competitors In agreements between undertakings related to single projects, an undertaking can act as a subcontractor for another undertaking.

The starting point for the evaluation of subcontracts between competitors is to be found in the Commission’s Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements, where it is stated that individual purchases and sales between competitors do not fall under Article 81. The Commission states characteristically that subcontracting agreements between competitors do not fall under the prohibition “if they are limited to individual sales and purchases on the merchant market without any further obligations and without forming part of a wider commercial relationship between the parties.”

Where undertakings agree to cooperate in relation to an invitation to tender, the agreement must be assessed according to the principles described in the present Guidance notice. Where the undertakings have agreed to cooperate, the potential competition restrictive effects should normally be the same as with joint tendering that means that a competitor disappears.

Where an undertaking which is assigned a contract elects at a later stage to offer parts of that contract to a competitor, it will not be considered to act in a manner which restricts competition. Such agreements will normally fall outside Section 10 if they are limited to individual assignments and do not form part of a wider cooperation between the parties.

5.4 Network of agreements What has been discussed above relates to single project agreements connected to particular projects. Undertakings that adopt a pattern of behavior involving rapidly cooperation on single projects might infringe Section 10 of the Competition Act.

5.5 “Spill-over” effects Where the parties have a competitive relationship in other markets or in relation to other projects, it should be evaluated whether the agreement will increase the risk of coordinating their behaviour in relation to these other markets. “Spill-over” effects can be produced for example by exchange of information, which gives access to the other party’s estimates, costs and capacity levels. “Spill-over” effects can mainly arise in markets where there is high transparency and the market participants often cooperate on the performance of projects.

Where “spill-over” effects arise, they must be assessed pursuant to Section 10 Paragraph 1 and 10 Paragraph 3 of the Competition Act.

Consequently, it is important that cooperation agreements on single projects are limited to individual projects and that the cooperating undertakings implement measures which prevent the exchange of information that is not absolutely necessary for the performance of the particular project.

5.6 The significance of information in advance When a legal joint tender is submitted, it is normal that the parties are informed of the cooperation. The same is true where the tenderer has entered into a subcontract.

Under Section 3-5 of the Competition Act 1993 the contractors had a duty to give information on the project cooperation together with the submission of the tender in order to use the exception of project cooperation under Section 3-5. The Competition Act 2004 does not contain a similar provision and information in advance to the principal cannot be considered as a prerequisite under the Competition Act 2004. However, information in advance to the principal should be considered as a good practice also under the new Competition Act, because advance information contributes to the transparency of the market and will normally have a positive effect on the assessment of the restrictive effects of competition under Section 10 Paragraph1 of the Competition Act.

5.7 Appreciable effects As mentioned at point 5.1, an agreement falls under the Competition Act provided it is capable of having an appreciable effect on competition. This is not based on the letter of the law but arises from the preparatory works to the Competition Act where it is stated that there is a requirement that competition is affected to an appreciable extent as it is an established practice when interpreting the equivalent provisions of Article 53 of the EEA Agreement and Article 81 of the EC Treaty.

Pursuant to the Commission Notice on agreements of minor importance (de minimis) agreements between competing undertakings whose aggregate market share does not exceed 10% as well as agreements between non-competing undertakings whose aggregate market share does not exceed 15% should be considered not to restrict competition appreciably. The Norwegian Competition Authority has not issued an equivalent Notice. The Commission Notice on agreements of minor importance (de minimis) should be used as guidance for the notion of restriction of competition to an appreciable extent, whereas other arguments could also be used for the assessment of this condition when applying Section 10 Paragraph 1 of the Competition Act.

As far as it concerns agreements which have as their object the restriction of competition, in practice it will be of little importance whether the requirement of restriction to an appreciable extent is fulfilled.  There is not any de minimis implied condition for such agreements which have such restrictive effects on competition.  The main reason is that such agreements have usually negative effects on competition. The European Commission said characteristically for example in the European sugar industry :

‘[…] in a system of tendering, competition is of essence. If the tenders submitted by those taking part are not the result of individual economic calculation, but of knowledge of the tenders by other participants or of concentration with them, competition is prevented, or at least distorted and restricted.’

5.8 Exception under Section 10 Paragraph 3 Agreements restrictive of competition that have beneficial effects which are passed on to the consumers, under certain conditions will be held not to be illegal according to Section 10 Paragraph 3 of the Competition Act.

Where several competitors agree on a tender for a project which should be considered prohibited under Section 10 Paragraph 1 of the Competition Act, an assessment should be made following the considerations set out above in order to evaluate whether the agreement will generate beneficial effects which outweigh the anti-competitive effects.

An agreement infringing Section 10 Paragraph 1 is considered exempted under Section 10 Paragraph 3 provided four cumulative conditions are fulfilled. The agreement must contribute to the improvement of the production or distribution of goods or promote technical or economic progress. Secondly, the agreement must ensure that a fair share of the benefits achieved is passed on to the consumers. Thirdly, the undertakings must not impose restrictions that are not indispensable for achieving these benefits. Finally, the agreement should not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

However it would be difficult for cartel agreements, which are considered to have as their object the restriction of competition, to fall within the exception of Section 10 Paragraph 3 of the Competition Act.

It should be emphasized that the parties have to assess whether the conditions of the exception are fulfilled in each particular case. The Norwegian Competition Authority has no right to grant an exemption from the prohibition of Section 10 Paragraph 1. The burden of proof under Section 10 Paragraph 3 is on the parties to the agreement who have to prove that the conditions of Article 10 Paragraph 3 are fulfilled.

For a further discussion on the exception of Section 10 Paragraph 3 of the Competition Act see the Norwegian Competition Authority’s fact sheet on Section 10 Paragraph 1 of the Competition Act.

5.9 Block exemption Regulation 1195 of 17 August 2005 that applies Section 10 Paragraph 3 of the Competition Act to groups of specialization agreements exempts on certain conditions agreements related to joint production; see further Regulation paragraph 1(c). The Regulation is equivalent to EEA Specialization block exemption Regulation.

A production’s agreement, which is covered by the Regulation, will also be exempt where it relates to single projects. An agreement on joint production, which satisfies the requirements of the Regulation, will be exempt whether it has been entered into as a single project or not.

However, joint submission of tenders is not covered by the Regulation. Those agreements should be considered to extend beyond joint production to include also joint sale of products or services. The Regulation exempts various kinds of joint production agreements, but requires that the parties act independently as far as it concerns the marketing and sale of the products or services. This appears from Article 5 Paragraph 1 of the Regulation, which explicitly excludes arrangements, which jointly fix prices. According to the Competition Authority’s view joint submission of tenders cannot be considered as ‘joint distribution’, see Article 3(b) of the Regulation.

The scope of the application of the Regulation does not extend either to agreements, which require that one or more parties partly or wholly should restrain from submitting a tender.

1 Commission’s Notice ‘Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements’, OJ 2001/C 3/02, para 24.
2 See Commission’s decision 88/578/EEC Eurotunnel I, OJ 1988 L 311 p.36, para 17. See also Commission’s Notice ‘Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements’, OJ 2001/C 3/02, para 24 and 143, and the previous Notice on Cooperation Agreements of 1968 para. 5. (1968 C 75 3 CELEX number 31968Y0729).
3 See Commission’s Thirteenth Report on Competition Policy, and Faull & Nikpay, The EC law of Competition, p.356 et seq.
4 Commission’s Notice ‘Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements’ OJ 2001 C 3 p.2, para.89.
5 See e.g.  the Norwegian Competition Authority’s Guidance Notice to the Building Construction Association.
6 See for example European Night Services v. Commission T-374/94.
7 Commission Notice on ‘Agreements of minor importance which do not appreciably restrict competition under Article 81(1) of the Treaty establishing the European Community (de minimis)(1), para.11, OJ C 368, 22.11.2001 p.13-15. 8 OJ 1994 L 131/15.

 

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