BritNed v ABB - The rise and fall of cost-based cartel damages
Cento Veljanovski
19th June 2020
BritNed v ABB [2018] EWHC 2616 (Ch) is the first and only decided cartel damages case in England. Briefly, BritNed was a follow-on action based on the European Commission’s Power Cables (Case AT.39610) decision that found that ABB was a member of a bid rigging cartel. ABB won a successful tender to build an electricity interconnection between the UK and the Netherlands, for which BritNed brought an action for overcharge and lost profit damages.
This is an interesting, paradoxical, and confusing judgment. The judge found that despite ABB being a member of the cartel it had not overcharged the claimant. Those in ABB responsible for the BritNed tender were unaware of the existence of the cartel, had adopted competitive principles to price the tender, and there had been vigorous negotiations with BritNed that had led to a lower contract price.
This should have been the end of the matter. Yet the judge awarded damages for two ‘losses’ – arising from ABB’s ‘cost inefficiencies’ and ‘common cost savings’; heads of damages not pleaded or proved by the claimant and disavowed by both parties.
Inefficient and Common Costs Damages
The basis for both these heads of damages are, in my opinion and in one case that of the Court of Appeal, spurious. Let me explain why.
First, cost inefficiencies damages. These were calculated by the judge based on a few documents which discussed the use by ABB of thicker and more costly copper cables than were needed for the type of interconnector specified in the BritNed tender. Bear in mind that the only way this was going to harm the claimant was if it led to an overcharge, which the trial judge had rejected. The evidence also showed that ABB continued to quote for thicker copper cables after the cartel – so it could not be said that ‘but for’ the cartel, thicker cables would not have been used. Thus, on factual (no overcharge) and causation grounds (continued use of thicker cables), there was no basis for awarding damages for cost inefficiencies.
Then there were what the judge called common cost savings. The judge said that because the cartel had allocated tenders to its members, ABB and its co-conspirators must have saved tendering costs; therefore, BritNed should be awarded damages for these cost savings. The problem was that there was no evidence of these savings generally or in relation to the BritNed tender. The judge instead inferred these cost savings using calculations of his own, which were entirely hypothetical and based on some contentious assumptions. This, however, was the least of the problems with this head of damages. The judge had accepted that any cost savings that there were had been passed onto the claimant in a lower price, so that instead of the claimant being out of pocket, it had benefited from these savings. Even if they existed, they were a gain to the cartelists and not a loss to the claimant. These savings only arose because of the existence of the cartel - the ‘but for’ costs would not have included these savings. The Court of Appeal (BritNed v ABB [2019] EWCA Civ 1840) agreed that the trial judge’s award of damages for common cost savings was an ‘error in law’ because it violated the fundamental common law principle that damages are compensatory - gains to cartelists are not compensable; only the losses of the claimant.
Gross Margin Approach
There is a generally accepted cost-based method of quantifying damages in these types of cases. This is to calculate a counterfactual price based on the reasonable costs to the defendant of supplying its products or services plus a competitive margin. The overcharge is the difference between this counterfactual price and the actual price.
The defendant in BritNed used a variant of this method to show that the BritNed project had been competitively priced. This was done by comparing ABB’s gross margin on the BritNed tender with ABB’s average gross margin for its tenders after the cartel ended. This showed that the gross margins were similar, with the implication that ABB had not overcharged BritNed.
While the trial judge accepted with qualifications the defendant’s gross margin approach, it was also flawed. This was because it compared the gross margin on the successful BritNed tender to the average gross margin of ABBs mostly unsuccessful tenders after the cartel had ended. The latter are not transaction prices but the gross margins on mostly failed bids. Further, it raises the critical question of why most of ABB’s post-cartel submarine tenders failed. One plausible reason is that they were ‘uncompetitive’ because their gross margins were excessive and hence a misleading basis for concluding that the gross margin on the BritNed project did not contain an overcharge.
For a fuller treatment of this case and cost-based damages see Cento Veljanovski, Cartel Damages: Principles, Measurement and Economics (OUP, 2020) paras 9.32-9.46 and paras 14.07- 14.17. Click to read Chapter 14: Cost-based Approaches for free.
Further relevant resources are also available in the Case Associates Cartel Hub.
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The views expressed herein are those of the author.
