On 2 June 2022, the Honourable Mr Justice Poon CJHC, the Honourable Madam Justice Kwan VP and the Honourable Mr Justice Au JA handed down the judgment for the appeal in Competition Commission v. W. Hing Construction Co Ltd and Others [2022] HKCA 786 [1] (Judgment). This article discusses the first appeal heard in the Hong Kong Court of Appeal (Court) in respect of the assessment of pecuniary penalties for contravention of the First Conduct Rule[2]. This appeal hearing concerned two appeals brought by the Competition Commission (Commission) on the sanction judgments handed down by the Hong Kong Competition Tribunal (Tribunal) in CTEA 2/2017[3] (W Hing) and CTEA 1/2019[4] (Fungs) respectively.
Introduction
The respondents in the two cases (Respondents) were licensed (Licence) by the Hong Kong Housing Authority (HA) and appointed under the HA’s Decoration Contractor System (DC System). All the Respondents were found to have contravened the First Conduct Rule by engaging in market sharing and price fixing arrangements (Contravention) in the earlier judgments on liabilities[5]. A few Respondents (Sub-contracting Respondents) had sublet their Licences to sub-contractors (Sub-contractors), who engaged in the Contravention in the names of the Sub-contracting Respondents.
In the sanction judgments handed down by the Tribunal in W Hing and Fungs, the Tribunal considered that there should be a reduction of the Base Amount[6] to the Sub-contracting Respondents to reflect their roles as part only of the undertaking[7] (Reductions), taking into account they might not be able to recoup part or all penalties from their respective Sub-contractors.
Appeal against the Reduction of the Base Amount
The Commission appealed against the Reductions on three grounds:
- Pecuniary penalties should be specific to the relevant undertaking, and persons comprising the undertaking shall be jointly and severally liable;
- It is against public policy to allow the Sub-contracting Respondents to rely on their unlawful conduct (ie sub-contracting in violation of the requirements of the DC System and Licences) (Unlawful Conduct) as a mitigating factor; and
- The Contracting Respondents had not discharged their evidential burden in advancing inability to recoup penalties from their Subcontractors as a mitigating factor.
(1) Pecuniary penalties specific to undertakings
The Commission contended that the Tribunal erred in imposing pecuniary penalties on each Respondent as part only of the undertaking and awarding Reductions based on such Respondent’s individual role within the undertaking. Instead, drawing on EU jurisprudence, pecuniary penalties should be imposed on and determined with reference to the economic activities and conduct of the relevant undertaking as a single unit. It follows that persons comprising the undertaking should be jointly and severally liable for the pecuniary penalties imposed on the undertaking.
The Court concurred with the Commission’s view and confirmed that:
- “Undertaking” is a fundamental concept in Hong Kong competition law modelled on EU jurisprudence. Accordingly, pecuniary penalties should be “imposed and remained determined with reference to the economic activities and conduct of the undertaking”[8] (emphasis added) instead of pertaining to the separate infringement by the legal or natural person comprising such undertaking, notwithstanding enforcement is in practice against such entities. It follows that no reduction should be given to reflect a respondent’s individual role within the undertaking contravening a competition rule.
- The Commission is at liberty to proceed against any entities comprising the undertaking, without the need to bring all such entities before the Tribunal which will be highly onerous to the Commission. The entities comprising the undertaking are jointly and severally liable for the pecuniary penalties imposed on that undertaking, and the Commission’s role in the proceedings will cease once payment is made by any entities held liable. There is no inherent injustice with this pro-enforcement approach insofar as the entities within an undertaking are welcomed to seek indemnity and/or contribution from any other liable entities.
- In a similar vein, any alleged inability to recoup from other liable entities carries no weight in the determination of pecuniary penalties. How the internal affairs are organized within an undertaking and the attribution of liabilities between those jointly and severally liable are matters reserved for subsequent indemnity and/or contribution proceedings, in which the Commission has little interest.
(2) Public policy
Upholding the Commission’s contention, the Court dismissed the Tribunal’s earlier view that the Unlawful Conduct falls outside the remit of competition law and is therefore not punishable by the Tribunal. Instead, since public interest is engaged in the DC System and the Unlawful Conduct is contrary to public policy, it is wrong to recognize the Unlawful Conduct as a mitigating factor.
(3) Inability to recoup
Notwithstanding the contention of inability to recoup has no bearing on the determination of penalties, the Court agreed with the Commission’s contention that the burden rested on the Respondents to adduce evidence or proper grounds to demonstrate their alleged inability to recoup, and the Respondents failed to discharge the said burden.
Accordingly, the Court allowed the Commission’s appeal in respect of the Reductions.
Conclusion
The Court confirmed the relevance of EU jurisprudence in Hong Kong competition law and recognized the conduct of an undertaking as the cornerstone in determining penalties. The finding that entities within an undertaking are jointly and severally liable for the penalties imposed is not restricted to sub-contracting arrangements alone, and may have wider implications on the potential legal liabilities on related companies organized in a single undertaking. The Judgment also signalled a pro-enforcement approach insofar as the Commission has unfettered discretion in pursuing any of the entities comprising an undertaking.
*Any reference to "Hong Kong" or "Hong Kong SAR" shall be construed as a reference to "Hong Kong Special Administrative Region of the People's Republic of China".
[1] King & Wood Mallesons acted for the Competition Commission.
[2] The First Conduct Rule prohibits “agreements and concerted practices having the object or effect of preventing, restricting or harming competition” as laid out in the Competition Ordinance (Cap. 619) (Ordinance).
[5] W Hing [2019] 3 HKLRD 46, [2019] HKCT 3 and Fungs [2020] HKCT 8.
[6] In W Hing (see paragraphs 45 to 75 of the sanction judgment), the Tribunal adopted a structured methodological approach to determine the quantum of pecuniary penalties in 4 main steps:
Step 1 – determine the Base Amount (being the value of sales of the undertaking attributable to the contravention x the gravity percentage x duration multiplier);
Step 2 – making adjustments fort aggravating, mitigating and other factors;
Step 3 – applying the statutory cap; and
Step 4 – applying cooperation reduction and considering plea of inability to pay, if any.
The Tribunal then applied a reduction to the Base Amount as part of its consideration of any mitigating factors under Step 2.
[7] In W Hing, the Tribunal awarded a general one-third reduction to the Sub-contracting Respondents, whilst in Fungs, the Tribunal awarded reductions in the range of 30% to 50% to the Sub-contracting Respondents taking into account their profit-sharing arrangement with their respective Sub-contractors.
[8] Paragraph 48 of the Judgment.
