On 29 April 2020, Hong Kong’s Competition Tribunal (Tribunal) handed down its first judgment (Judgment) on pecuniary penalties against 10 construction and engineering contractors (Respondents). This decision follows the judgment it handed down on 17 May 2019, which found that all 10 Respondents contravened the First Conduct Rule of the Competition Ordinance (Cap. 619) (Ordinance) by engaging in market sharing1 and price fixing2 in providing renovation services at Phase 1 of On Tat Estate, a public rental housing estate in Kwun Tong, Kowloon.
The Tribunal ordered the 10 Respondents to pay pecuniary penalties ranging from HKD132,000 to HKD740,000, and a significant amount of the Competition Commission's legal costs. How did the Competition Tribunal arrive at those figures and what are the implications of the magnitude of the pecuniary penalties imposed on the Respondents?
Section 93(2) of the Ordinance states the four factors that the Tribunal must consider when determining the amount of the pecuniary penalty a person or entity found to have contravened the Ordinance (Offender) should pay, namely:
(a) the nature and extent of the illegal conduct;
(b) the loss or damage caused by such conduct;
(c) the circumstance in which the conduct took place; and
(d) whether the Offender has previously been found to have contravened the Ordinance.
Section 93(3) of the Ordinance also sets out a limit on the pecuniary penalty the Tribunal can impose, which is 10% of the turnover of the Offender for each year in which the contravention occurred, up to a maximum of 10% of the turnover for the three years with the highest turnover.
To decide on the pecuniary penalties in accordance with the provisions of the Ordinance, the Judgment set out a four-step test:
1. Determining the "Base Amount"
Starting with the Offender's sales directly or indirectly related to the offence within Hong Kong in the relevant year (Value of Sales), a percentage is applied to that amount according to the gravity of the conduct (Gravity Percentage). This amount is then multiplied by the number of years of the Offender's participation in contravening the Ordinance (Duration Multiplier), to reach a Base Amount.
2. Making Adjustments for Aggravating, Mitigating and other Factors
This is a broad process that considers the surrounding circumstances of the offence, as provided in section 93(2)(c) of the Ordinance. Any aggravating and mitigating circumstances will increase and decrease the Base Amount respectively. This step will also take into account whether the Offender has previously contravened the Ordinance, as required in section 93(2)(d), in which case the Base Amount will increase. The Tribunal should also assess the proportionality of the penalty in this step.
3. Applying the Statutory Cap
This step takes into account the statutory limit on pecuniary penalties stated in section 93(3) of the Ordinance. The limit acts as an ultimate backstop in consideration of the impact of the penalty on the finances of the Offender.
4. Applying Cooperation Reduction and Considering Plea of Inability to Pay
This step involves applying a reduction to reflect the Offender's cooperation with the Competition Commission in its enforcement of the Ordinance, as well as taking into account the Offender's inability to pay the penalty.
Outcome of the Case
In brief, the four-step test was applied in the following manner for the present case:-
- In calculating the Base Amount, the Tribunal started with the Value of Sales, i.e., the revenue of each Respondent from the renovation work they conducted in Phase 1 of On Tat Estate. The Gravity Percentage was decided to be 24%, in line with international practices on similar anti-competitive conduct, and the Duration Multiplier was taken to be one.
- In applying aggravating and mitigating factors, the Tribunal found no aggravating factors to be considered. A one-third reduction of the Base Amount was granted for four Respondents as they were not direct participants in the illegal conduct.
- For the calculation of the statutory cap, seven out of 10 Respondents claimed that their Values of Sales were equivalent to their turnover for the relevant year, as they only generated revenue from the renovations on On Tat Estate. Therefore, the statutory cap amounts for those Respondents were in effect, 10% of their Values of Sales.
- A cooperation reduction and consideration of inability to pay were not relevant factors to the current case.
After going through the four-step test, the pecuniary penalties ordered ranged from HKD132,000 to HKD740,000. Although the absolute amount of the lower range seems not substantial, for seven of the 10 Respondents, the penalties reached the statutory cap, 10% of their turnover of the relevant year (i.e., the maximum amount that can be ordered). As for the remaining three Respondents, though they were not ordered to pay the statutory cap calculated according to their respective turnovers, their penalties were among the highest out of the 10 Respondents.
The Tribunal adopted a structured approach, detailing each element of the four-step test in the Judgment, which provides more certainty regarding calculations of pecuniary penalties in the future. The Judgment shows that the Tribunal views anti-competitive conduct such as market sharing and price fixing seriously and is willing to impose strict penalties to the maximum extent. It goes without saying that market participants in all sectors should ensure that they are not involved in any form of anti-competitive behaviour. However, to the extent that any market participant is already involved in anti-competitive conduct or in doubt as to whether it is engaged in any form of anti-competitive conduct, they should seek proper legal advice as soon as possible to see whether it should put any remedial or mitigating measures in place or even whether applying for leniency is feasible and available.
1 To learn more about market sharing, click here for our previous update: https://www.mayerbrown.com/en/perspectives-events/publications/2015/04/hong-kong-competition-law-series--part-5-cardinal
2 To learn more about price fixing, click here for our previous update: https://www.mayerbrown.com/en/perspectives-events/publications/2015/03/hong-kong-competition-law-series--part-3-cardinal