The Buck Stops Here – Contractors Held Fully Liable For Subcontractors In Hong Kong Cartel

On 2 June 2022, the Hong Kong Court of Appeal (“Court”) handed down a judgment almost doubling the financial penalties imposed by the Competition Tribunal (“Tribunal”) on five respondents in two decisions. The Tribunal had earlier found the respondents to have contravened the Competition Ordinance (“Ordinance”) by engaging in market sharing and price-fixing in providing renovation services to tenants in two new public housing estates. In determining the financial penalties, the Tribunal had given the respondents a reduction on the basis that it was the respondents’ subcontractors that had entered into the anti-competitive agreements and the respondents did not participate directly in such conduct. The Hong Kong Competition Commission (“HKCC”) appealed, and the Court ruled that the subcontracting arrangements could not be considered as a mitigating factor. 

This decision 1 sends a clear message to businesses that the reach of the Ordinance might be far wider than what some may think, and that businesses will be jointly and severally liable with their subcontractors forming the same undertaking (i.e. economic unit) that has contravened competition law. This alert discusses the Tribunal’s decisions, the Court’s reasoning on appeal and the practical steps that businesses can take to minimise being caught by the Ordinance as a result of the conduct of their business partners.

Competition Tribunal decisions and the HKCC’s appeal

The first decision appealed was the landmark decision on penalties in the W Hing case. 2 In that decision, the Tribunal for the first time laid down the four-step approach in determining financial penalties under the Ordinance (see our alert here). Amongst other things, the Tribunal gave a one-third reduction of the base amount (i.e. a base amount linked to the volume of commerce affected by the contravention of the competition rule) to three respondents.

For two of the respondents, the Tribunal gave the reduction on the basis that they did not directly participate in the anti-competitive conduct but became liable by letting their licence to a subcontractor who engaged in the infringing conduct. For the remaining respondent, the Tribunal gave the reduction on the basis that the renovations were actually carried out by another in that respondent’s name. In giving the reduction, the Tribunal considered various factors such as the ad-hoc and temporary association of the contractors and the subcontractors, the inability of the respondents to recoup part or all of the financial penalties from the subcontractors, and the roles of the respondents as part only of the overall “undertaking”.

The second decision appealed was the Fungs case 3 which also followed the same four-step approach and reduced the base amount for two respondents for similar reasons. The main difference between the two cases is that the subcontractors or representatives involved in the Fungs case were made respondents whereas the respective subcontractors or representatives were not made respondents in the W Hing case.

On appeal, the HKCC sought to set aside the one-third reduction and raise the penalties for these respondents. The HKCC argued that the Tribunal had acted on a wrong principle and had taken irrelevant factors into account or failed to have regard to relevant factors.

Court of Appeal – reduction of base amount not justified

The Court allowed the HKCC’s appeal in both cases in respect of the reduction of the base amount on the following grounds:

Ground 1: joint and several liability

Despite the respondents’ contentions that the determination of pecuniary penalties was a “localised affair” and that EU jurisprudence should not be applied, the Court affirmed that the concept of an undertaking, derived from EU jurisprudence, “lies at the heart” of the Hong Kong competition law regime. Similar to EU law, persons forming an undertaking are jointly and severally liable for the undertaking’s contravention of competition rules as well as the financial penalties imposed on the undertaking.

The Court held that each of the respondents in the appeal formed a single economic unit or undertaking with their respective subcontractor and should be liable for the entire financial penalty. The Court stated that it would be wrong in principle to reduce the financial penalties by a percentage to reflect a respondent’s role that it only formed part of an undertaking. The apportionment of responsibility between entities within an undertaking for the payment of the penalties was not an issue for the HKCC to get involved in.

Ground 2: public policy or illegality

The HKCC submitted that the respondents should not be permitted to rely on their own unlawful conduct (i.e. subcontracting the works in violation of the contractor system and licence terms of the Hong Kong Housing Authority which restricted subcontracting) as a mitigating factor. The Court agreed with the HKCC that the respondents’ subcontracting arrangements were in breach of the licensing terms and were against public interest and contrary to public policy. Therefore, it was wrong in principle to give recognition to the subcontracting as a mitigating factor. The respondents’ lack of knowledge of the anti-competitive conduct was also irrelevant.

Ground 3: inability to recoup from subcontractors or representatives  

Finally, the Court agreed with the HKCC that the HKCC did not have the burden of disproving the respondents’ alleged inability to recoup all or part of the penalties from the subcontractors or representatives. As the respondents failed to provide any evidence in relation to the alleged inability to recoup, it was inappropriate for the Tribunal to take into account or give the reduction to reflect the alleged inability. If there were legal reasons for the inability, the Court suggested that such issue should be determined in subsequent contribution or indemnity proceedings.

HKCC’s appeal on costs  

In the W Hing case, the Tribunal granted the HKCC a certificate of costs for two counsel, instead of all three counsel actually engaged by the HKCC. Despite the Tribunal’s recognition of the efforts of three counsel in dealing with multiple respondents, the Tribunal considered that this was not an exceptional case to warrant a certificate for all three counsel. The HKCC appealed on this point. The Court dismissed the HKCC’s appeal because costs were a matter of the Tribunal’s discretion and the Court was not satisfied that the Tribunal was wrong in principle or plainly wrong.

Key takeaways

This decision is a reminder for businesses that they cannot shield themselves from liability under the Ordinance by engaging subcontractors or rely on limited participation to seek a reduction in penalties on the basis that it was their subcontractors that directly participated in the infringing conduct. Even if the HKCC chooses to pursue only one entity within an undertaking before the Tribunal, that entity can be made to answer for the whole of the infringement by the undertaking. 

The position under this decision is largely in line with the EU jurisprudence that recognises joint and several liability of all entities within an undertaking participating in the anti-competitive conduct. In fact, the term and concept of “undertaking” is an EU law invention, intended mainly to reflect both the business reality that several entities of a single group of companies can jointly infringe competition law as well as to overcome the EU-specific problem that EU member state laws have very different company law regimes. 

However, the impact in Hong Kong as a result of the Court’s judgment is arguably more far-reaching compared to the EU.  In most of the EU judgments shaping the concept of undertaking, the entities making up the undertaking were affiliates within the same corporate group. In contrast, in the W Hing and Fungs cases, the undertakings were found to consist of the respondents and their unaffiliated subcontractors or representatives. The Court pointed out that knowledge of the contravention was not required, so this leaves the possibility that the respondents’ liability was engaged for conduct by third parties without their knowledge. In addition, in Hong Kong, the Ordinance goes one step further by establishing an accessory liability regime. This means that not only can the undertaking actually infringing the Ordinance be liable, the Tribunal can also impose financial penalties on persons “involved” in competition rule contraventions. This concept casts a wide net over acts such as attempts, aiding, abetting, counselling, procuring, inducement, attempts to induce and conspiracies.

The practical effect of the Court’s judgment may be to get businesses to step up competition law compliance among all their staff and  business partners such as subcontractors. While this case considered contractors and subcontractors to constitute the same undertaking, parent companies and subsidiaries, suppliers and distributors and licensors and licencees may also be treated in the same way in future cases. Therefore, and in light of the broad reach of the Ordinance, it is crucial for businesses to ensure that all their employees – and business partners – comply with the Ordinance.

Competition compliance strategy

Competition law compliance efforts may need to become broader and more pro-active (also towards third parties) than in the past where businesses essentially focused on their own employees, and mostly those at the centre of operations. In that way, competition law compliance may start to resemble compliance efforts in other fields such as anti-bribery and fraud.

The competition compliance strategy to be adopted may differ from one business to another, depending on the size of the business, the risks that the business is exposed to and the likelihood of those risks occurring. In general, practical steps that businesses can take to ensure compliance include:

  • conducting regular competition audits to identify business areas which pose competition law risks (such as pricing and rebate arrangements, distribution arrangements and engagements at trade associations or industry bodies);
  • putting in place group competition compliance policies;
  • appointing a compliance officer;
  • arranging regular competition law training for relevant employees (such as marketing and sales employees and in-house legal counsel) and potentially for business partners;
  • implementing a system where all contact with competitors is logged;
  • implementing an organisation whistle-blower system to allow employees and business partners to report potential concerns;
  • requiring business partners to endorse partner codes of conduct requiring compliance with competition law; and
  • including competition compliance clauses in agreements with business partners.

 

 

 

Authored by Adrian Emch, Mark Lin, and PJ Kaur.
 

References
1 In CACV 143/2020, CACV 46/2021 and CACV 157/2021.
2 Competition Commission v W. Hing Construction Company Limited and others [2020] 2 HKLRD 1229.
3 Competition Commission v Fungs E&M Engineering Company Limited and Others [2020] HKCT 9.

 

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