Hello, I am Attorney Um Sang-yun from Cheongchul Law Firm.
Today, we will learn about the penalties for bid collusion.
[Question]
What is the level of punishment for participating in bid collusion?
[Answer]
1. Definition of Bid Collusion
The so-called 'collusion' is referred to as 'unjust joint conduct' in Article 40 (1) of the Monopoly Regulation and Fair Trade Act ("Fair Trade Act"), and unjust joint conduct means 'to agree to engage in conduct that falls under any of the following categories that unjustly restrict competition with other businesses through contract, agreement, resolution or any other means'. Also, clause 8 of the same article defines 'conduct that determines the successful bidder, bid price, successful bid price or other matters prescribed by Presidential Decree when bidding or auctioning' as one form of unjust joint conduct.
For example, if Company A and Company B pre-agree that Company A will be awarded the bid in a specific public bidding and Company B only participates formally, this corresponds to typical 'bid collusion'.
2. Types of Penalties for Bid Collusion
Bid collusion is regulated by various laws, including the Fair Trade Act, the Penal Code, and the National Contract Act, and not only the companies that participated in the agreement but also the employees who actually committed the act can be punished.
[Administrative Sanctions]
A. Fines
The Fair Trade Commission can impose fines on bid collusion, up to 20% of the relevant sales. The method for calculating the relevant sales amount is provided in Article 13 of the Enforcement Decree of the Fair Trade Act and the "Detailed Standards for Imposition of Fines" ("Fine Notification"), and in the case of bid collusion it is defined as follows.
Fine Notification IV. 1. (d) 1) d) Regarding bid collusion (defined as violating Article 40 (1) (8) of the Act), the following treatment applies. (1) In cases where a contract is concluded after being awarded the bid (including successful auctioning), the contract amount will be considered the relevant sales amount. If awarded but no contract is concluded, then the bid amount will be used, and if not awarded, the expected price (if there is no expected price, then the bidding price of the expected bidder) will be used. For bids with only expected quantities specified, if awarded and a contract is concluded, the sales amount occurring as of the review date will be considered; if awarded but no contract is concluded, the bid unit price multiplied by the expected quantity will be used, and if not awarded, the expected unit price (if there is no expected unit price, then the expected bidder's bid unit price) multiplied by the expected quantity will be considered the relevant sales amount for each participating business in the bid collusion. However, for members of a consortium, the calculation basis can be reduced within 1/2, with businesses holding more than 70% of the shares being within 1/10, businesses holding between 30% and 70% being within 1/3, and those holding less than 30% being within 1/2. (2) For those who were excluded or did not participate in the bid (dummy bidders), if the number of dummy bidders is 4 or less, the calculation basis can be reduced within 1/2, and if the number of dummy bidders is 5 or more, it can be reduced within the range of N/(N-2) (N refers to the number of dummy bidders, and in cases of consortium participation, it refers to the number of consortiums). e) In cases falling under any of the subparagraphs of Article 13 (3), the calculation basis will be determined within the range of penalty standards based on the severity of the violation. (Article 43 (proviso))
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B. Corrective Measures
The Fair Trade Commission may order businesses that have engaged in unjust joint conduct to cease the act, publish the fact of the corrective order, or take other necessary corrective measures. In practice, in the case of bid collusion, since the collusive behavior is typically ceased after the Fair Trade Commission's investigation, a 'prohibition order' is issued to prevent repeating the collusive act and a 'notification order' is issued to publish the fact of the legal violation.
C. Restriction of Bid Participation Qualifications
The heads of each central authority may restrict the bid participation qualifications of anyone who has engaged in bid collusion for up to two years according to Article 27 (1) of the Act on Contracts to which the State is a party ("National Contract Act"). Furthermore, the Fair Trade Commission can request the head of the administrative agency to impose restrictions on the bid participation qualifications of those engaged in bid collusion.
[Criminal Sanctions]
- Those who have committed unjust joint actions by violating Article 40 (1) of the Fair Trade Act or have caused others to do so can be subject to imprisonment for up to three years or a fine of up to 200 million won (Article 124 (1) (9) of the Fair Trade Act).
- In addition, those who disrupt the fairness of bidding through deception, coercion, or other means may face up to two years in prison or a fine of up to 7 million won for bid obstruction (Article 315 of the Penal Code). Here, deception refers to any act that causes the other party to be misled or mistaken (2018Do18582), and if there is an agreement among bidders regarding the bidding price or expected bidder, this can be considered as deception. Also, even if the bid obstruction acts have resulted in the actual bid not being conducted or participants giving up their bids, if there is a degree of risk that undermines the fairness of the bidding, then the crime of bid obstruction is established.
- According to the joint punishment regulation in Article 128 of the Fair Trade Act, if a representative or employee of a corporation engages in collusive acts concerning the corporation's business, not only can the perpetrator be punished, but the corporation can also face fines. Thus, companies involved in bid collusion can be fined up to 200 million won, while the actual perpetrators may face up to three years in prison or a fine of up to 200 million won. It is important to note that both the company and its employees can be subject to criminal penalties.
[Civil Liability]
Acts of bid collusion are evaluated as illegal acts under civil law, so they may incur liability for damages under Article 750 of the Civil Act. There have been many cases where public institutions or consumers have claimed damages against companies involved in collusion after the Fair Trade Commission's decisions have been finalized, and specific damage amounts can vary based on the benefits gained from the collusion, the damages incurred by the ordering party, and the expected bid price that would have formed without the collusion.
3. Response to Bid Collusion Investigation
The level of punishment for bid collusion can vary depending on the scale of the collusive acts, the duration, the degree of economic harm, the roles and leadership in the collusive acts, and whether cooperation with the investigation is provided. Bid collusion is often detected through on-site inspections by the Fair Trade Commission, and companies should promptly verify the allegations and quickly consider whether to apply for leniency if they are under investigation. Typically, on-site inspections related to collusion are conducted simultaneously against the participating companies, so if the leniency application is delayed, the company may miss the opportunity to qualify for reduced penalties. In particular, if there is concern about investigations, such as on-site inspections by the Fair Trade Commission, it is advisable to contact a law firm with expertise in fair trade in advance to prepare for immediate assistance during the on-site inspections.
Cheongchul Law Firm is comprised only of attorneys from top five large law firms in Korea, including Kim & Chang, Bae, Kim & Lee, Lee & Ko, Shin & Kim, and Yulchon, as well as those from corporate legal teams, and it forms teams of specialized attorneys related to specific issues to respond effectively. Cheongchul provides comprehensive solutions across business areas, going beyond merely resolving specific issues to focus on achieving what the client desires through legal consulting. If you need help in achieving your goals, feel free to contact Cheongchul.
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