Frequently asked questions
Here are some questions that other people have asked us. You might find these useful, but if you want to know something else, call us on 0800 943 600.
Why are we providing advice specifically for the construction industry?
Due to the amount of construction work going on in our largest centres — Auckland and Christchurch — many of you are facing a higher level of demand for your goods and services than usual. And in post-disaster construction zones like Christchurch, experience from around the world suggests that there is an increased risk of anti-competitive behaviour and misleading business practices.
And if your business is expanding in a short period of time, complying with competition and consumer law might not be high on the list of priorities. But it's important to make sure you know how the laws apply to you and your business so you can take steps to make sure you comply with them.
What is a cartel?
Cartels are illegal agreements between competitors where they agree not to compete with each other. This includes competitors agreeing to fix prices, rig bids, divide markets by customer or area, or restrict output of a good or service. And fixing prices is not limited to agreements between competitors setting a specific price for a good or service — it also includes competitors agreeing to fix any component or part of a price, or to set price according to a set formula.
Cartels are illegal under the Commerce Act because they harm the economy by removing the benefits of competition. Cartels can lead to higher prices and less choice for consumers.
Example of a cartel
Following an investigation into the markets for two wood preservatives, we brought proceedings against a number of companies and executives for breaches of the Commerce Act. The unlawful conduct included competitors agreeing to share pricing information, simultaneously raise prices, and not to compete on price or for each other's customers.
The defendants (including individual executives) were fined a total of more than $7.5 million for breaches of the Commerce Act.
I'm a procurer of construction services. What are the signs of unlawful bid-rigging or other anti-competitive activities that I should look out for?
Cartel conduct is generally carried out in secret and therefore it can be very difficult to spot. As a procurer, you are uniquely placed to spot unusual bidding patterns and/or practices that may indicate unlawful anti-competitive agreements. Combining your procurement experience and market knowledge, together with knowing how to spot the warning signs of collusion, you can increase your chances of detecting this kind of behaviour.
If I tender for a job, can the customer then share my tender price with a competitor? Isn't this a form of price fixing as well, and shouldn't the customer be prevented from doing this?
A customer is allowed to use quotes it has received from one supplier to negotiate a better rate from another supplier. The customer is seeking to get the best price from its suppliers — it’s one way competition takes place.
Illegal agreements occur where competitors communicate with each other and agree a price (or component of the price), or any arrangement or behaviour that interferes with how they set their prices (including agreements about who will win a contract, to charge or introduce a fee or surcharge).
Why is it okay for a large buyer to fix a price, for example an hourly rate for builders, but it’s not okay for anyone else to fix prices?
A large buyer of goods or services in the construction sector — like any buyer — is entitled to decide what price it is willing to pay for goods or services. Suppliers can then choose to accept that work or not.
However, we recognise that large buyers’ decisions and conduct can have a significant effect on individual providers of goods and services, and the market more generally. To understand more about how the Commerce Act applies to large buyers, see our fact sheets Agreements that substantially lessen competition and Taking advantage of market power.
I provide a specialist trade. Recently, a major procurer set a price for our service that was a lot less than we had been paid in the past, and less than what we were expecting. A competitor contacted me and invited me to a meeting of contractors to discuss the price, and to work out some ways to put pressure on the procurer to raise the price to a much fairer level. What should I do?
You should end the communication immediately. Any communication — even one phone call or email — between you and one of your competitors about current or future pricing risks breaching the Commerce Act.
You should also make a written record of what occurred and what action you took at the time. This can help protect you in case someone subsequently alleges that you were also involved in anti-competitive behaviour.
Who are my competitors? Is it just those I am currently competing with?
No, it is not just those you are currently competing with. Your competitors include both your existing competitors and any potential competitors — businesses that could choose to compete in a market even if they are not currently doing so.
For example, a residential building company that currently only operates in the North Island but has plans to operate in the Christchurch or wider South Island markets would be a potential competitor in the South Island. Likewise, a residential home building company may be a potential competitor in the market for light commercial buildings.
What about a business that I usually compete against but I have entered a sub-contracting relationship with — is it still my competitor?
Yes. You can still be considered to be in competition with another business when you have entered a sub-contracting relationship with each other. For example, sometimes a business sub-contracts to a competitor for a particular contract because it is difficult for one of the businesses alone to meet the customer's full demand. In such a case, these two businesses are still considered to be in competition with each other in the market in which they usually compete.
While the businesses in such a sub-contracting relationship can discuss the price relating to the sub-contract with each other, it must be the lead contractor who independently decides what price to offer to the customer. For more, read our price fixing and cartels fact sheet.
What about large businesses who supply me with products at the manufacturer/wholesale level but who also sell products into the same market as me? Are they still seen as my competitors, even though they have a supply relationship with me?
Yes. If you are competing with any division or business unit of a business, then that business is seen as your competitor.
You are free to discuss and negotiate the supply price for any products you purchase from the supplier. But you cannot discuss prices (including levels, discounts, rebates or margins) or how you decide your own prices for the goods and services you sell in competition with that supplier.
What is cover pricing?
Cover pricing is a practice designed to give the appearance of a competitive bid process, when in fact the competitive process is being undermined.
Cover pricing occurs when a competitor, A, who wishes to be seen as tendering for a project but does not want to win the tender, approaches a competitor, B, who is also tendering for the same project. B provides a “cover price” to A. The cover price is always higher than B’s bid but it will appear to be a competitive bid, as it is based on a genuine bid. For more on cover pricing, check out our website.
What is the harm in cover pricing? Any cover price is always going to be higher than other bids and is therefore unlikely to win the bid, or even to affect the lowest competitive price.
Cover pricing raises serious risks under both the Commerce Act and the Fair Trading Act.
Cover pricing is misleading and distorts the competitive process — those involved in the cover pricing know that competition for the tender is not as strong as it could have been or, in some cases, that there is no competition for the tender at all (see example below). This can ultimately affect tender prices.
Cover pricing can also breach the Fair Trading Act. This is especially the case where tenderers who have taken part in cover pricing attest that they independently, without communication with competitors, prepared the tenders.
Example of cover pricing
A recent case of cover pricing in the Queensland construction industry (Woollham) was found to be both price fixing and misleading conduct. Between 2004 and 2007, three construction companies (TF Woollam & Son, JM Kelly and Carmichael Builders) engaged in cover pricing when bidding on four Queensland and local government projects. The companies also misled their clients by signing statements that they had not colluded with their competitors during the bidding process. For one project, the Rockhampton Airport Project, three "independent" tenders were received in the range of AUD $8.75 million to AUD $8.9 million. But only one of the three bids was genuine, with the second bid and third bids being a result of cover pricing agreements (and based on the lowest bid).
The customer chose the lowest bid, thinking it was genuinely the lowest of three independent, competitive bids. In 2011, the Federal Court of Australia described this conduct as "illegal price controlling conduct" and the making of the false statements as "a betrayal of trust".
The three companies were penalised a total of AUD $1.3 million and two key individuals received penalties totalling AUD $80,000.
I am considering entering a joint venture with one of my competitors, so that we can put in a joint bid for a contract that is too large for either of us to be able to fulfil alone. What steps should I take to ensure I comply with the Commerce Act?
Anyone considering entering into a joint venture should consider seeking legal advice on their proposed arrangements.
While the Commerce Act contains an exemption from the price fixing rules for certain joint venture arrangements, the joint venture must meet certain requirements, as set out in the Act. You can read more in our fact sheet on exemptions under the Commerce Act.
Even if the exemption applies, such arrangements are still subject to the rules against agreements that substantially lessen competition. You can read more in our fact sheet on agreements that substantially lessen competition.
I’ve recently realised that an agreement I made several years ago with three of my competitors was probably price fixing. What are my options if I want to come clean and report it to the Commission? Will I still be liable?
You should seek legal advice and report the matter to the Commission (contact details).
We will grant immunity from legal action to the first person in a cartel to come forward with information about the cartel, providing you continue to provide information and cooperate fully with us. If you are not the first-in-the-door to report a particular cartel, or we are already aware of the cartel when you report it to us, we can offer a discounted penalty. Again, you must provide information and fully cooperate with us. For more information, read our leniency policy for cartels fact sheet.
What about businesses that use their market power in order to drive a competitor out of business or prevent a new competitor from starting up?
It is illegal for any business with a substantial degree of market power to take advantage of that power for an anti-competitive purpose. This can reduce or eliminate competition from a market, harming consumers and the wider economy.
This could include, for example, businesses pricing below their costs with the intention of driving their competitors out of business and raising their own prices afterwards. For more on this, see our fact sheet on taking advantage of market power.
Can buyers break the price-fixing rule if they enter into price fixing agreements with their competing buyers?
Yes. A buyer could break the price-fixing rule by making an agreement with one or more of its competitors that would fix, control, or maintain the prices of the goods or services being purchased. Such an agreement may be illegal, but in some cases, an exemption may apply.
Sometimes, buyers may wish to join forces to collectively acquire goods or services, for example, they may wish to take advantage of bulk rates for a particular product. In these situations, an agreement between competing buyers to purchase at a set price may qualify for an exemption from the rule against price fixing.
We may still challenge an agreement or behaviour, however, if we believe it may substantially lessen competition in a market. This means that even where an exemption from the price-fixing rules applies, we may still look at the overall effect of the agreement or behaviour on competition to consider whether it is legal. You can read more about the joint buying exemption in our factsheet Exemptions under the Commerce Act.
When can I advertise a free quote?
You may only do this when you are not intending to charge anything for your quote. If you advertise a free service, it must be free. It will not be free if you include a fuel surcharge, for example.
You may want to advertise that you have lowest fee or the best deal in town, but when the customer comes to pay, it may be misleading if you then charge for extra costs that mean that your fee is actually higher than you advertised. Such conduct puts honest competitors who make their costs clear upfront at an unfair disadvantage.
You can read more in our fact sheet on pricing.
When can I claim membership of a professional organisation or group?
You may only claim membership of a professional organisation when your membership is approved and is current. Claims should not be based on lapsed membership or pending applications.
What can I say about my qualifications or skills when advertising my services?
Any claims you make about your qualifications or skills, or the qualification or skills of your employees, must be true and must not be misleading. This includes claims you may make about your success, skills, test results or backing, or that of your employees, products or services.
You can read more in our fact sheet on Claiming you’re something you’re not.
Example of claiming you're something you're not
An advertisement for servicing electronic devices in the Yellow Pages gave the impression that the business owner was a qualified technician who carried out full repairs. However, the owner did not have any formal qualifications and he contracted the majority of repairs to another appliance repair service, only carrying out minor repairs himself. The advertisement also implied that the business had the endorsement of major electronic brands, when neither the business, nor the contracted repairer, was an approved service agent for some of the brands advertised.
The business owner was fined $4,500 with costs of $650 in the Christchurch District Court for misleading conduct.
When can I advertise a sale as discounting from our usual retail prices?
You can compare the discounted price with the usual retail price using terms such as “usual”, “was”, “normal” or “everyday” price, providing that price is the price at which the goods or service is commonly sold, or the price at which the goods or service was offered immediately before it was marked down.
If your business makes these types of claims, you might be misleading consumers if, for example:
- you have never charged the "usual" price
- you have a strategy of deliberately inflating the usual price of goods or services knowing it will lead to no or few sales, in order to later attract customers by offering the goods or services at a discounted price
- you have claimed that a price is the “usual” price, but it is in fact one of many prices at which you commonly sell the good or service.
You can read more in our fact sheet on pricing.
Example of misleading pricing
Plumbing World's "half yearly bathroom sale" flyers represented that there would be discounts of 25% off the recommended retail prices for showers and vanities. In fact an investigation showed the discounts at Plumbing World stores were much smaller than advertised. The true discounts being offered on several products during the sale relative to the previous four months were only between 5 - 10%.
The Commission discovered that in calculating its sales prices, Plumbing World had used "trade guild prices", which were much higher than market prices. Plumbing World had also previously calculated its retail prices by discounting down from these guild prices. Plumbing World was fined $10,000 for misleading advertising under the Fair Trading Act.
What would happen if a business told a customer they needed goods or services that they didn’t actually need?
This is likely to be misleading under the Fair Trading Act. Any claims made that goods or services are needed must be based on fact. A business shouldn't claim that goods or services are needed due to some legal, mechanical, technical, medical or other requirement if this is in fact not true.
Example of misleading claims
The owner of a home appliance business instructed his staff to tell customers that replacement parts were necessary when they were not, and to say that second-hand appliances for sale in the company's showroom were newer than they were.
The court found the business had made a false or misleading representation to a customer that she needed a new part for her washing machine when she did not. The business was fined a total of $20,769, including costs. The court stressed the vulnerability of consumers in these situations and the importance in being able to rely on the honest expression of expert opinion.
Can my business be held liable if my subcontractor has misled my customer?
Yes. You can be held liable for the actions of those who are acting on your behalf, including your subcontractors, agents and employees, providing they are acting within their actual or apparent authority.
If I require customers to pay when I complete the job, or within a short grace period, but they don’t pay on time, am I providing credit?
No. Unless there is an agreement in place that allows your customers to defer payment, then you are not considered to have provided credit under the Credit Contracts and Consumer Finance (CCCF) Act. However, if your customer doesn’t pay promptly, and you then come to an agreement giving your customer time to pay their account, you will have provided credit (see example below).
I have had some customers who’ve struggled to pay their accounts. What are my obligations if I allow such customers several months to pay off their account but I don’t charge any fees or interest?
You are providing credit, but not entering into a consumer credit contract, as long as:
- you do not have an agreement that would allow you to charge fees or interest, and
- you haven’t taken any security interest, such as a mortgage, to ensure that you get paid.
When you are only providing credit, and not entering into consumer credit contracts, your only obligation is to ensure that your agreement with your customer is not oppressive.
You can read more in our fact sheet on Oppressive contracts - protections for borrowers.
What’s a credit fee?
A credit fee is an additional charge added to the amount loaned under a credit contract, such as an establishment, late payment or administration fee.
You can read more in our fact sheet on Fees under a consumer credit contract.
Do I have any obligations under the CCCF Act if I refer one of my customers to a finance company for credit?
The obligations under the CCCF Act fall on those who actually provide the credit to your customer. So if you are referring your customer to a finance company, then you do not have obligations under the CCCF Act. Your customer should understand they are entering into two distinct agreements, one with your business to purchase your services, and a separate agreement with the finance company to repay the credit.
However, if a customer cancels your services because the services did not comply with the Consumer Guarantees Act 1993, and you arranged finance to enable your customer to pay for those services, you could be held responsible for the customer’s obligations under the loan contract. For more information, visit the Consumer Affairs website.
Examples of different ways a builder could provide credit
A kitchen builder quotes to put in a kitchen for a customer. Both agree that terms are payment within seven days of completion.
When the job is finished, the builder invoices the customer $16,000. The customer apologises and says due to some unforeseen expenses, she can only pay $4,000 now. She asks if she pay the remaining $12,000 over three months.
The builder agrees that she can pay the rest off in three payments of $4,000 each month for three months.
In this case – the builder has provided credit but has not entered into a credit contract (as he is not charging fees or interest). His only obligation is not to be oppressive.
The same facts as above apply. The customer asks if she can pay $4,000 now and pay the remaining $12,000 off over three months.
The builder agrees but says he will need to charge interest at 10%. He adds that he has allowed customers to pay off jobs on a regular basis in the past. The customer agrees to pay 10% interest on the outstanding balance each month.
The builder and the customer have now entered into a consumer credit contract.
This is because:
- the payment terms includes interest
- it’s being paid back over a period of more than two months
- the builder has provided credit regularly in the past.
The builder is now obliged under consumer credit legislation to ensure he gives initial disclosure of key information including fees, charges, unpaid balance and right to cancel. Disclosure must be in writing and must be clear and not misleading. The builder must also ensure any credit fees are reasonable.
You can read more in our fact sheet on Fees under a consumer credit contract.