Introduction

The Court of Appeal (the “Court”) laid down its first appeal judgment on the enforcement action of First Conduct Rule contravention in the case Competition Commission v W Hing Construction Co Ltd (永興聯合建築有限公司) and Others [2022] HKCA 786. Upon appeal by the infringers in CTEA 2/2017 (“W Hing No 3”) and CTEA 1/2019 (“Fungs Case”), the Court discussed the availability of a reduced pecuniary penalty for parties with a lower degree of participation in the infringing act. To review our discussions on the previous judgments on CTEA 2/2017, please refer to our previous articles in May 2019 and October 2021.

Background

The respondents in both W Hing No 3 and Fungs Case were contractors of the Hong Kong Housing Authority (“HKHA”) providing renovation services to tenants in new public rental housing estates (the “Respondents”). By colluding with one another, they carried out a floor allocation arrangement and a package price arrangement to eliminate competitions among contractors. They were ruled to have breached the First Conduct Rule and were all respectively sentenced to a pecuniary penalty.

The order under appeal

Calculation of pecuniary penalty

Section 92(1) of the Competition Ordinance (the “CO”) entitles the Competition Commission (the “Commission”) to apply to the Competition Tribunal (the “Tribunal’) for a pecuniary penalty to be imposed on any person believed to have contravened a competition rule. Under section 93(2), the Tribunal will consider the following factors when determining the amount of pecuniary penalty: -

1.       the nature and extent of the conduct that constitutes the contravention;

2.       the loss or damage, if any, caused by the conduct;

3.       the circumstances in which the conduct took place; and

4.       whether the person has previously been found by the Competition Tribunal to have contravened the Competition Ordinance.

 

The Tribunal in W Hing No 3 also applied a four-step approach in determining the amount of pecuniary penalty imposed on the Respondents: -

Step 1:    To determine a “Base Amount”, which is the value of the undertaking’s sales directly or indirectly related to the contravention within Hong Kong in the financial year in question and to apply a “Gravity Percentage” of 15% to 30% multiplied by the number of years of the undertaking’s participation in the contravention;

Step 2:    To make adjustments in accordance with gravity, mitigating and other factors, including the factors listed under s. 92(3);

Step 3:    To apply the statutory cap under s. 93(3), which is 10% of the turnover of the undertaking concerned for each year in which the contravention occurred; and

Step 4:    To give reductions to reflect co-operation with the Commission, and to consider the plea of inability to pay, if any.

Orders in dispute

In W Hing No 3, the Tribunal allowed a one-third reduction of the Base Amount of some Respondents in view of their limited degree of participation in the infringing acts. They were held liable merely because they let their licences to a sub-contractor who had engaged in the infringing conduct and the Tribunal considered their association ad hoc and temporary. As it could not be ascertained if they could recoup the penalty from their sub-contractor, the Court reduced the Base Amount to reflect their limited participation in Step 2 of the 4-step approach.

The Commission sought to set aside the one-third reduction, on the grounds that (1) the Respondents shall be held jointly and severally liable with their sub-contractor; (2) it is impermissible for the Respondents to rely on their unlawful conduct of subcontracting; and (3) the Respondents failed to discharge the burden to prove their inability to recoup from their sub-contractor.

Decision

Pecuniary penalty specific to undertakings

The Court first referred to the European Union (EU) jurisprudence on competition law, from which Hong Kong Competition Law originated. In the EU, liability under the First Conduct Rule was assessed with reference to the economic activities of each undertaking i.e. an economic unit, so that the Commission is bestowed with a strong power to recover fines. In this regard, the Court concluded that the pecuniary penalty must be specific to the undertaking and the undertaking’s contravention, not to the natural persons constituting the undertaking or their role in respect to the infringement. All the parties within the same undertaking will be jointly and severally liable for the infringement of the undertaking.

The Respondents invited the Court to deviate from the EU jurisprudence as the determination of pecuniary penalty is a localised affair. However, the Court considered “undertaking” as a key organising concept on which the competition law in Hong Kong was founded. Previous judgments on competition law in Hong Kong also embrace the concept that an infringing act is to be committed by an undertaking made up of a number of legal or natural persons, not individuals.

The Court hence considered it is wrong in principle to reduce the fine by a percentage to reflect the Respondents’ respective role in an undertaking. When going through the four-step approach, the Tribunal shall assess the penalty for an undertaking as a whole, not every entity within the undertaking. Neither is the Tribunal at a position to inquire into the internal relationship of the parties within the undertaking as the apportionment of responsibility is not to be resolved in the enforcement proceedings.

Public policy / illegality

In relation to the sub-contracting of the Respondents in violation of the licence granted by the HKHA, the Tribunal considered that sub-contracting itself does not contravene competition law and the Tribunal was not to penalize the Respondent’s breach of licence. In Fungs Case, the Commission appealed and submitted that allowing reduction on this basis is contrary to public policy as they shall not be allowed to rely on their own unlawful conducts. The Court, contending that the Tribunal’s view of the matter was too narrow, agreed that it is wrong in principle to give recognition to the sub-contracting arrangements as a mitigating factor.

Inability to recoup from sub-contractor

The Commission, assuming that the inability to recoup the penalty from a sub-contractor can be a mitigating factor, submitted that the burden is on the Respondents to prove the same before the inability is considered by the Tribunal for reduction of penalty. The Court sided with the Commission that proper evidence shall be provided for deciding the penalty discount. The Tribunal is not obliged to inquire into parties’ ability to recoup penalty as the internal relationship between entities is not to be resolved in the enforcement proceedings.

Based on the above grounds, the Court allowed the appeal of the Commission in respect of the reduction in pecuniary penalty.

Key takeaways

The Court clarifies that pecuniary penalty of the contravention of Competition Rules will be assessed with reference to the conduct of an undertaking as a whole. As such, an entity in effect with no participation in the infringing act conducted by its sub-contractor will still be liable for the same penalty. That said, entities within an undertaking can still seek compensation against the infringing entity by including an indemnification clause in their contracts. Companies are thus advised to seek legal opinion to pre-empt the risk of bearing legal liability for the misconduct of their sub-contractors.     

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2022