COMPETITION COMMISSION v. KAM KWONG ENGINEERING COMPANY LTD AND OTHERS

CTEA 1/2018

[2022] HKCT 2

IN THE COMPETITION TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COMPETITION TRIBUNAL ENFORCEMENT ACTION NO 1 OF 2018

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DECISION ON PENALTIES

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Introduction

1.  The present proceedings concern contravention of the First Conduct Rule in relation to tendering for renovation and redecoration work pursuant to the Hong Kong Housing Authority (“HKHA”)’s Decoration Contractor System (“DCS”).  On 3 June 2020 I entered judgment by agreement between the Commission and the 1^st, 2^nd and 4^th Respondents for declarations that the 1^st, 2^nd and 4^th Respondents had contravened or been involved in the contravention of the First Conduct Rule, pursuant to a process analogous to the Carecraft procedure[1] used in director’s disqualification proceedings pursuant to the Securities and Futures Ordinance, Cap 571 and the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 622 to resolve applications, to which a respondent concedes.  In the Competition context it can conveniently be referred to as the Kam Kwong procedure.  That is how I shall refer to it in future.  The issue of penalties was adjourned.  The application came back on before me on 7 August 2020.  By that time an appeal had been issued in respect of the penalties imposed in CTEA 2/2017 by a judgment of G Lam J (as he then was) in those proceedings on 29 April 2020.  As the appeal concerned an issue, which was directly relevant to the penalties to be imposed in the present proceedings I awaited the handing down of the Court of Appeal’s judgment on 2 June 2022 before determining the penalties against the 1^st, 2^nd and 4^th Respondents.

2.  Subsequent to the 1^st, 2^nd and 4^th Respondents conceding that they had contravened the First Conduct Rule, the 3^rd and 5^th Respondents agreed to do so.  On 4 August 2020 I entered judgment granting declarations that the 3^rd Respondent had contravened the First Conduct Rule and that the 5^th Respondent was involved in the contravention of the First Conduct Rule.  This was made on the basis of a Statement of Agreed Facts dated 3 August 2020, which is appended to this Decision.  The penalty stage of the proceedings was adjourned and heard by me on 24 September 2020.  I also delayed determining the penalties against the 3^rd and 5^th Respondents until the Court of Appeal handed down the decision to which I have referred to in the previous paragraph.  The penalties decision in respect of the 1^st, 2^nd and 4^th Respondents has been handed down on the same day as this decision.  In order to fully understand this decision, my decision dated 17 July 2020 dealing with the Kam Kwong procedure in respect of the 1^st, 2^nd and 4^th Respondents, today’s penalty decision in respect of those Respondents (“1^st Penalties Decision”) and the Statement of Agreed Facts appended to this Decision should be read first as I have not repeated matters addressed in those two decisions or the Statement of Agreed Facts.  I use the definitions in this decision used in the earlier decisions.  A very brief summary of the case against the 3^rd and 5^th Respondents is as follows: the 3^rd and 5^th Respondents entered into an illicit arrangement, exploiting the 3^rd Respondent’s privileged position of access to King Tai Court as a HKHA designated DC, which enabled the 5^th Respondent as manager of the 3^rd Respondent’s contracted works within the estate to enter into a market allocation and price fixing agreement with the 1^st and 2^nd Respondents, with a view to sharing the profits from this anti-competitive arrangement between them.

Penalties sought by the Commission

3.  Having considered all the available materials, including evidence filed by the 3^rd and 5^th Respondents, the Commission proposes the following penalties and orders:

(1)     The 3^rd Respondent shall pay to the Government a pecuniary penalty of $1,579,000 within 28 days from the date of the order.

(2)     The 5^th Respondent shall pay to the Government a pecuniary penalty between $280,250 and $380,000 (precise figure to be decided by the Tribunal) within 28 days from the date of the order.

(3)     The 3^rd and 5^th Respondents be restrained from entering into any agreement or concerted practice involving any anti-competitive conduct or from being involved in any anti-competitive conduct in respect of any projects under the HKHA’s DCS.

(4)     The 3^rd and 5^th Respondents shall each pay 1/5 of the Commission’s costs of this action up to and including the hearing on 3 June 2020, 1/2 of the Commission’s costs of the present hearing, and 1/2 of the costs incurred for the preparation for the trial originally to commence on 15 September 2020 (with seven days reserved), to be taxed if not agreed, with certificate for two counsel for the 3 June hearing, the present hearing and the original trial.

4.  The Commission has calculated the pecuniary penalty it submits should be made against the 3^rd Respondent as follows:

	R3
Step 1: Base Amount	$1,330,199
Step 2: Adjustment for aggravation/mitigation	+25% =$1,662,748.8
Step 3: Statutory cap	$4,135,425.4
Step 4: Adjustment for cooperation/inability to pay	-5%
Resultant penalty (rounded down to the nearest $1000)	$1,579,000

Should the 3^rd and 5^th Respondents be held jointly liable for the penalty?

5.  The 3^rd and 5^th Respondents, who have the same legal representation, suggest an alternative approach to the penalties to be imposed on the 3^rd and 5^th Respondents, namely, that they be treated as one undertaking and argue that one penalty should be imposed for which they are jointly and severally liable.  This begs the question: why does the 5^th Respondent suggest this as it increases his liabilities.  The 5^th Respondent is a sole proprietor and personally liable for any penalty imposed on him.  This was not a question to which Mr Ngai, who acted for both the 3^rd and 5^th Respondents, could give a satisfactory answer other than that it might reflect an agreement between the 3^rd and 5^th Respondents and perhaps the 3^rd Respondent has agreed to pay the full amount, because the 5^th Respondent is in financial difficulties.  Given that it is the 3^rd Respondent’s case (described in more detail in [26]–[28]) that the contravention was entirely the 5^th Respondent’s doing and that he had been told in writing not to do the very thing that constitutes the contravention, it is unclear to me why the 3^rd Respondent would so agree.

6.  The 3^rd and 5^th Respondents’ submission gives rise to the question of whether the 3^rd and 5^th Respondents should be viewed for the purpose of sections 91 to 93 of the Competition Ordinance, Cap 619 (“Ordinance”) as one or two legal persons. Those sections are as follows:

“91. Persons involved in contravention of competition rule

A reference in this Part to a person being involved in a contravention of a competition rule means a person who—

(a) attempts to contravene the rule;

(b) aids, abets, counsels or procures any other person to contravene the rule;

(c) induces or attempts to induce any other person, whether by threats or promises or otherwise, to contravene the rule;

(d) is in any way, directly or indirectly, knowingly concerned in or a party to the contravention of the rule; or

(e) conspires with any other person to contravene the rule.”

93.     Tribunal may impose pecuniary penalty

(1)     If the Tribunal is satisfied, on application by the Commission under section 92, that a person has contravened or been involved in a contravention of a competition rule, it may order that person to pay to the Government a pecuniary penalty of any amount it considers appropriate.”

7.  The sections themselves refer to “a person”. They also clearly envisage cases in which the Commission proceeds on the basis, and the Tribunal finds, that one legal person has contravened a competition rule and another legal person has been involved in a contravention of a competition rule.  The result is that there may be individual findings against each person and individual penalties imposed on each person.

8.  The 3^rd and 5^th Respondents’ case is that the Ordinance in Hong Kong involves concepts of undertakings and economic entities that are not synonymous with legal persons. For example the term “undertaking” appears in section 2 (definitions) of the Ordinance and “means any entity, regardless of its legal status or the way in which it is financed, engaged in economic activity, and includes a natural person engaged in economic activity”.  The First Conduct Rule prohibits an undertaking engaging in the anti-competitive activities prohibited by sections 6 and 7 of the Ordinance not a person: broadly, agreements and practices that restrict or distort competition.  Similarly, the Second Conduct Rule also prohibits an undertaking not a person from engaging in the anti-competitive activities prohibited by sections 21 and 22 of the Ordinance: broadly, abuse of market position.

9.  Mr Ngai from this foundation argued, based on European jurisprudence, that it should be the relevant undertaking that is penalised and that in the present case the undertaking is the 3^rd and 5^th Respondents jointly.  I disagree.  Hong Kong has decided to take a different approach at the penalties stage to the European Union.  This is clear from sections 91 to 93.  They do not refer to undertakings.  The Hong Kong approach is to treat each legal person forming part of an undertaking found to have contravened a conduct rule individually, when it comes to the imposition of penalties.

10.  Mr Ngai’s argument also sits uncomfortably with the judgments which the 3^rd and 5^th Respondents agreed should be entered against them, namely, that the 3^rd Respondent contravened the First Conduct Rule (s92(1)(a)) and the 5^th Respondent was involved in the contravention of the First Conduct Rule (s92(1)(b)).  Given the materially different findings against them it is difficult to identify any grounds or principle, which justifies treating them as jointly liable for penalties imposed in respect of contraventions in which they were not involved.  This is very clear in the case of the 5^th Respondent, who has not been declared by the Tribunal to have breached the First Conduct Rule.

11.  I proceed on the basis that penalties should be imposed on the 3^rd and 5^th Respondents individually.  In [13]–[31] I deal with the penalty for the 3^rd Respondent.  In [32]–[33] I deal with the penalty for the 5^th Respondent.

Principles on the assessment of Penalties

12.  The principles applicable to the assessment of penalties for contravention of the First Conduct Rule (section 6) are uncontroversial and explained in [7]–[10] of the 1^st Penalties Decision.

Step 1

13.  The Commission and the 3^rd Respondent agree the following base amount under Step 1:

	R3
Value of Sales	$5,542,496[2]
Gravity Percentage	24%
Duration Multiplier	1
Base Amount	$1,330,199

14.  The value of sales is derived from the 3^rd Respondent’s own financial documents recording the value of the works the 3^rd Respondent treated itself as having undertaken.  The documents were obtained as the result of the execution of a search warrant on 7 November 2017.  According to the affidavit of Lee Hiu Leung, Head of Litigation at the Commission, filed on 11 September 2020, the 3^rd Respondent has been requested to provide additional financial documents, which assist in assessing the gross and net profit made by the 3^rd Respondent. It has not provided them.  The Commission has not sought an order for their disclosure.  This is not satisfactory for the reasons that I explain in the next two paragraphs.  Although as matter of expediency I will use in the present case the agreed value of sales in a similar case in the future I will expect the Commission to seek full discovery of a corporate respondent’s financial documents for the relevant period.

15.  The 3^rd Respondent is a limited company.  It is required by the Companies Ordinance, Cap 622 to keep the financial documents and prepare audited financial statements pursuant to sections 373 and 379 of the Companies Ordinance.  It is also required to submit a tax return to the Inland Revenue Department.  The 3^rd Respondent should, therefore, have had the documents requested by the Commission.

16.  On 27 August 2020 the sole director and shareholder of the 3^rd Respondent, Chan Hong Wing, filed an affirmation containing evidence said by the 3^rd Respondent to be relevant to the determination of penalties.  Mr Chan says that the 5^th Respondent was to carry out works at King Tai Court in the name of the 3^rd Respondent. The 3^rd Respondent had no involvement or knowledge at all of the work undertaken by the 5^th Respondent pursuant to this arrangement. The 5^th Respondent was, however, to receive 70% of the profit made on the works, but would not be responsible for any loss; self-evidently a highly beneficial arrangement for the 3^rd Respondent, although Mr Chan says that the 3^rd Respondent never received anything from the 5^th Respondent and, as he had no knowledge of what the 5^th Respondent was making, the profit split was academic.  Mr Chan hints, but does not actually say, that the 3^rd Respondent had not anticipated receiving anything, which seems to me unconvincing as he gives no reason for entering into the arrangement other than in anticipation of receiving what amounted to a fee for lending the 3^rd Respondent’s licence to the 5^th Respondent.  What is clear, but is not commented on by Mr Lee (who had Mr Chan’s affirmation when preparing his affidavit) is that the documents obtained in November 2017 are, if Mr Chan’s evidence is correct, which seems likely, bogus.  The 3^rd Respondent had no turnover generated by contracts for building works.  The agreement entered into with the 5^th Respondent was for the payment of a licence fee, the amount of which would be dependent on the profit made by the 5^th Respondent. It was the 5^th Respondent that carried out the works and generated the associated turnover.  This ramifications of this kind of arrangement for the calculation of the value of sales needs to be given more thought in future cases.  The Commission also needs to be alert to obtaining documents and information that suggest that offences other than contravention of the Ordinance may have taken place.  It would appear on Mr Chan’s own case that he caused false accounting documents to be produced and, presumably, this led to false and misleading statements being made to the auditors, the preparation of false and misleading audited financial statements and their submission to the Inland Revenue.

17.  As can be seen the Commission and the 3^rd Respondent agree a 25% uplift for the gravity of the contravention is appropriate.  This is consistent with W Hing 3 and 1^st Penalties Decision.  I accept that it is appropriate to use the same percentage in respect of the 3^rd Respondent.

Step 2—Uplift for aggravating circumstances

18.  The Commission seeks an uplift because, it contends, the contravention is part of a long standing and wide-spread industry practice.  I dealt with the same argument and rejected it in respect of the 1^st, 2^nd and 4^th Respondents: see [20]–[21] of the 1^st Penalty Decision. I will do the same in respect of the 3^rd and 5^th Respondents; although it is necessary to say more about it given what in my view is the unsatisfactory way in which the Commission had attempted to deal with this matter in respect of the 3^rd and 5^th Respondents.

19.  The judgment of 4 August 2020 contained conventional directions for the penalty stage of the proceedings.  This included directions giving the 3^rd and 5^th Respondents’ leave to file further evidence relevant to the penalties no later than 27 August 2020 and the Commission leave to file evidence in reply by 11 September 2020.

20.  On 20 August 2020 the Commission filed without leave an affirmation from Chan Wai Ching the Head (Intelligence, Forensics and Leniency) in the Operations Division of the Commission dealing exclusively with whether or not there was a wide-spread practice of contractors acting as a cartel and contravening the First Conduct Rule in the manner that has occurred in the present case.  Mr Chan makes substantial reference to the evidence in Competition Commission v W Hing Construction Co Ltd (No 2) [3](“W Hing 2”), which concerned the same kind of conduct.  The 3^rd and 5^th Respondents did not respond to this evidence in their affirmations filed on 27 August 2020 and, understandably, objected to its admission at the hearing.

21.  I agree that the new evidence should not be admitted. I would have thought it self-evident that it cannot be correct for the Tribunal to be put in the position of having to determine this issue on the basis of different evidence in the case of (A) the 1^st, 2^nd and 4^th Respondents and (B) the 3^rd and 5^th Respondents.  It is also not satisfactory that the 3^rd and 5^th Respondents were put in the position at short notice of having to consider how to respond to this argument, which was made all the more challenging as such evidence as had been filed by the Commission on 20 August 2020 to a considerable extent relied on the Commission’s familiarity with W Hing 2 and its access to the evidence that had been advanced in those proceedings.  If the Commission wished to seek an uplift based on a pervasive and wide-spread practice it should have thought through with considerably more care well in advance of the August penalty hearing in respect of the 1^st, 2^nd and 4^th Respondents, what evidence was required.

Step 2—mitigating factors

22.  The Commission argues that there are no mitigating factors in the present case.  The 3^rd and 5^th Respondents suggest there are two.  First, their consent to Statement of Agreed Facts, which justifies a 5% reduction.  Secondly, the uncertainty as to the state of the law, which they also suggest justifies a further 5% reduction. The Commission accepts that conceding contravention is a mitigating matter.  It contends that it should be taken into account at stage 4: see [28]–[37] of the 1^st Penalty Decision.

23.  The argument that a discount for admitting the facts that constitute the alleged contravention should result in a reduction under Step 2, necessarily involves the assumption that a reduction for cooperation under Step 4 does not include an element for admitting the facts. It seems to me that this is obviously wrong and I note that the 1^st, 2^nd and 4^th Respondents’ counsel did not suggest that a separate deduction for agreeing the Statement of Facts should be made under Step 2.  In making a deduction for cooperation after proceedings are commenced the Tribunal is taking into account the saving of time and costs that results from a respondent’s concession that it has contravened the Ordinance. Necessarily in a case such as the present in which the Kam Kwong Procedure is adopted the deduction takes into account agreeing a Statement of Agreed Facts.  The suggestion, inherent in the 3^rd and 5^th Respondents’ Counsel’s submission, that the deduction given to the 1^st, 2^nd and 4^th Respondents did not take into account their agreement to the Statement of Fact is unsustainable.

24.  The 3^rd and 5^th Respondents’ argument is based on an obtuse readings of [14.053] of European Union Law of Competition, 8^th ed., ed David Bellamy and [64] of Kier Group Plc v Office of Fair Trading[4].  The passage in European Union Law of Competition suggests that the Commission may reduce a fine where the undertaking acknowledges the facts and the infringement.  This tells us nothing about the stage of the penalty assessment with which I am concerned, at which the reduction is to be made.  Paragraph 64 of Kier says this:

“Separately, in response to the Statement of Objections, the OFT received new admissions from a number of undertakings that had not applied for leniency and that had not accepted the FTO in respect of one or more of their alleged infringements. Although those admissions were made at a very late stage of the investigation, the OFT decided to reduce the fine imposed at Step 4, albeit the discount was smaller than the one given to companies which had accepted the FTO. The following discounts were granted in these circumstances:

(a) where a company made a clear admission of the facts, or alternatively a clear positive statement that it did not dispute or contest the facts, it was given a 10% discount;

(b) where, in addition to the above, a company had clearly admitted that its conduct constituted an infringement of the 1998 Act, the OFT made a 15% reduction in the fine instead of the discount noted in the previous subparagraph. (Decision, VI.323-8)”

25.  A fair reading of this paragraph is that (A) the discount for admitting the facts was taken into account at Step 4 and (B) it was subsumed into a 15% reduction for ultimately admitting not only the facts, but the contravention itself.  In other words it is inconsistent with the 3^rd and 5^th Respondents’ argument, which I reject.

26.  The second matter is what is said to be the uncertainty in the state of the law.  There is nothing in the evidence filed by either the 3^rd or the 5^th Respondent, which suggests that they misunderstood the law and that this in some way contributed to the contravention.  I have already referred to the affirmation of Mr Chan Hon Wing.  Mr Chan describes the arrangement that he entered into with the 5^th Respondent as “licence borrowing” in [25] of his affirmation and he suggests it is common industry practice, although he does not make clear whether he is referring to the construction industry generally or HKHA’s DCS in particular.  Mr Chan does not address clause 16 of the undertaking he signed with the HKHA when the 3^rd Respondent was admitted to the HKHA’s list of approved decoration contractors, which expressly prohibits sub-letting work; although it is implicit in some of what he says that because of the way in which the contractors worked, including using a site office provided by the HKHA, that the HKHA’s staff must have known that licence borrowing was taking place.  In [40]–[41] Mr Chan says this:

“40. Apart from a simple PowerPoint slide on no pie-sharing used by the HA, there is no other notice or warning, whether from the estate management, the HA, the Commission or any other authority, informing the designated contractors that their conducts could amount to a breach of the new competition laws in Hong Kong Futther, to my understanding, there was not a single act taken against any of the designated contractors in relation to any anti-competition conduct prior to the involvement of the Commission.

41. Indeed, during the relevant period of carrying out the Works at the Estate, there was uncertainty as to the lawfulness of the conducts in question. In any event, the 3^rd Respondent is now willing to concede on its liability.”

27.  Mr Chan does not explain what “uncertainty” he is referring to, how he suggests it was caused or what difference it made. Mr Chan exhibits to his affirmation an email to the 5^th Respondent (who is a sole proprietor) dated 5 January 2017 which says (in translation from Chinese):

“In relation to the decoration project for Hong Kong Authority’s Home Ownership Scheme flats in King Tai Court, San Po Kong, please do not engage in price fixing and / or conduct of ‘pie sharing’ with other contractors, and all decoration work shall fulfill the requirements under Hong Kong legislations and of the HA.”

28.  The 5^th Respondent confirms the arrangements described in Mr Chan’s affirmation to be correct in the evidence he also filed on 27 August 2020.  I can see no sensible reason for concluding that either the 3^rd or 5^th Respondent were confused about the state of the law and this contributed in any shape or form to their contravention of the Ordinance.  No reduction in the penalty should be made on this ground.

29.  Mr Ngai argued that if reject, as I do, his argument that the 3^rd and 5^th Respondents should be treated as one entity for the purpose of imposing a penalty there are other mitigating matters specific to the 3^rd Respondent’s position.  They are that the 3^rd Respondent was not directly involved in the contravention and the fact that it did not make a profit out of it.  I do not consider these justify any reduction in the penalty.  The 3^rd Respondent’s readiness to breach its undertaking to the HKHA not to sub-licence the work and its failure to provide any supervision at all in my view cannot sensibly be viewed as ameliorating the contravention.  As I explain in [20] of the 1^st Penalty Decision, properly understood it is the converse of the matters relied on by the 3^rd Respondent, knowing of a pie-sharing arrangement and making a profit out of it, which might be viewed as aggravating factors.  The absence of them does not in my view mitigate responsibility for the contravention.

Step 3

30.  Step 3 is the statutory cap.  The 3^rd Respondent relying on its now audited turnover for the relevant period, HK$44,584,104, submits that the cap is HK$4,458,410.40, representing 10% of the undertakings total turnover for each year in which the contravention occurred (s93(3)(a)) which is more than the HK$4,135,425.40 penalty proposed by the Commission. Nothing turns on this other than, as I have already explained, it appears inconsistent with Mr Chan’s explanation of his agreement with the 5^th Respondent.

Step 4

31.  The 3^rd and 5^th Respondents seek a 10% discount for conceding contraventions of the Ordinance.  I have dealt with the approach to the assessment of a reduction to reflect cooperation and admission of liability in the 1^st Penalty Decision. In that case I made a reduction of 12% for the reasons explained in the 1^st Penalty Decision.  The concessions were made later in the present case.  This has made disposing of the proceedings more time consuming and complicated.  It seems clear that the 3^rd and 5^th Respondents had no defence to the complaint and no reason has been advanced for them not conceding earlier.  There is a limited amount of science that can be applied to the calculation of a reduction.  Over time a rough scale will probably emerge as more cases are determined.  In the present case I will made a reduction of 9%.

Pecuniary Penalty for 5^th Respondent

32.  As I have explained, the 3^rd and 5^th Respondents’ principle argument is that there should be one penalty imposed for which both the 3^rd and 5^th Respondents are jointly liable.  I have rejected that argument.  Submissions have not been advanced by the 5^th Respondent, which address an assessment of a penalty on the 5^th Respondent pursuant to sections 91 to 93.  Although, I do not consider the absence of any financial information provided by the 5^th Respondent to be satisfactory, in the absence of an objection to the Commission’s assessment of the works or the profit margin I find the value of the sales to be HK$528,754.

33.  I accept the Commission’s submission that the value of sales should be the starting point in assessing the penalty.  The Commission does not suggest that the amount should be increased by virtue of aggravating factors.  It is implicit in the Commission’s proposal that the penalty should be between HK$280,250 and HK$380,000, that unless I differ from the Commission’s view, the penalty will be favourable to the 5^th Respondent in that it will be less than the value of sales.  I will order that the 5^th Respondent pay a penalty of HK$280,000.

Injunctive Relief

34.  The Commission seeks injunctions (as it did against the 1^st and 4^th Respondents) restraining the 3^rd and 5^th Respondents from future contraventions of the First Conduct Rule.  The 3^rd and 5^th Respondents offer undertakings instead.  These I am willing to accept, although their precise language has not been provided to the Tribunal.  The Commission and the 3^rd and 5^th Respondents should endeavour to agree the terms of the undertakings and send them to my Clerk.

Costs

35.  The Commission seeks the following costs order against the 3^rd and 5^th Respondents:

(1)     The 3^rd and 5^th Respondents shall each pay 1/5 of the Commission’s costs of this action up to and including the hearing on 3 June 2020.

(2)     The 3^rd and 5^th Respondents shall each pay 1/2 of the Commission’s costs of the present hearing, including the costs incurred for the preparation of the trial originally to commence on 15 September 2020 (with 7 days reserved).

(3)     There be certificate for two counsel for the hearing on 3 June 2020, the present hearing and the original trial.

(4)     All costs are to be taxed if not agreed.

36.  The 3^rd and 5^th Respondents accept that they should be liable for 1/5 of the Commission’s costs reduced by 30% to reflect two matters.  First, that the costs order the Commission seeks would result in the 3^rd and 5^th Respondents having to pay for costs of preparation for trial that have not been incurred. This is not correct.  The Commission can only recover on taxation what it has actually incurred.  Secondly, that a discount of 20% on costs was given in W Hing 3, it being one of the first cases before the Tribunal.  I can see no basis for making such a reduction in the present case. The matter was not complicated and the 3^rd and 5^th Respondents clearly contravened the First Conduct Rule.  If they gave accurate instructions to their lawyers and were given sensible advice they should have conceded their contravention at a much earlier stage.  I will make a costs order in the terms sought by the Commission.

Disposition

37.  I will make an order in the terms of [3] subject to the changes in respect of the following matter:

(1)     A reduction of 9% to reflect the 3^rd Respondent’s cooperation.

(2)     The 5^th Respondent’s pecuniary penalty is HK$280,000.

(3)     The Undertakings to be given by the 3^rd and 5^th Respondents instead of injunctions, if the language of the Undertakings can be agreed.

 Appendix

STATEMENT OF AGREED FACTS (“STATEMENT”) BETWEEN THE
COMPETITION COMMISSION (“COMMISSION”) AND THE 3^rd RESPONDENT AND THE 5^th RESPONDENT

(For the purposes of a settlement pursuant to Rule 39 of the Competition Tribunal Rules, Cap.619D (“CTR”) and Paragraph 72 of the Competition Tribunal Practice Direction 1 (“CTPD1”))

PART A — INTRODUCTION

1.     On 6 September 2018, the Commission issued these proceedings pursuant to ss.92, 94, 96, 101 and 102 of the Competition Ordinance (Cap. 619) (“Ordinance”) against, inter alia, the 3^rd and 5^th Respondents, seeking an order for, amongst other things:

(a)     A declaration that the 3^rd Respondent has contravened the First Conduct Rule pursuant to s.6 of the Ordinance;

(b)     A declaration that the 5^th Respondent has been involved in a contravention of the First Conduct Rule, within the meaning of s.91 of the Ordinance;

(c)     A pecuniary penalty to be assessed;

(d)     An order that the 3^rd and 5^th Respondents shall cease entering into any agreement or concerted practice involving any anti-competitive conduct, or aiding, abetting, counselling or procuring, and/or being knowingly concerned in any anti-competitive conduct, in respect of any projects under the Housing Authority’s Decoration Contractor System (“DC System”);

(e)     An order that the 3^rd and 5^th Respondents pay the Government an amount equal to the amount of the costs of and incidental to any investigation into the conduct or affairs of the 3^rd and 5^th Respondent, that has been reasonably incurred by the Commission in connection with these proceedings;

(f)     Costs of the proceedings; and

(g)     Such further and/or other relief as the Competition Tribunal (“Tribunal”) may consider appropriate.

2.     Subject to the approval of the Tribunal, the Commission and the 3^rd and 5^th Respondents agree to enter judgment on liability by way of the summary procedure as provided for in Rule 39 CTR and paragraph 72 CTPD1 and applied by the Honourable Mr Justice Harris in his Reasons for Decision dated 17 July 2020 in these proceedings ([2020] HKCT 3).

3.     This Statement is intended to be submitted pursuant to Rule 39 of the CTR and paragraph 72 of the CTPD1 for the purpose of settling the factual basis upon which the Tribunal is asked to make the orders sought.

4.     For the purpose of resolving these proceedings summarily, by reference to the facts as set out in Part B below, the Commission contends and the 3^rd and 5^th Respondents accept that between 16 June and 7 November 2017 (“Relevant Period”):

(a)     The 3^rd Respondent had contravened the First Conduct Rule by having made and given effect to a market allocation and price-fixing agreement with Kam Kwong Engineering Company Limited (“1^st Respondent”) and Goldfield N & W Construction Company Limited (“2^nd Respondent”) (“Contravention”);

(b)     The 3^rd Respondent had permitted the 5^th Respondent to manage all renovation works to be carried out in the name of the 3^rd Respondent at King Tai Court, San Po Kong, Kowloon, Hong Kong (“Estate”); and

(c)     By his conduct, the 5^th Respondent was involved in the Contravention within the meaning of s.91 of the Ordinance.

5.     The Commission, and the 3^rd and 5^th Respondents accept and acknowledge that none of the admissions made by the 3^rd and 5^th Respondents in this Statement shall be binding against any other Respondent in these proceedings.

6.     In the event that the Tribunal does make the proposed orders set out in Part C below, the Commission reserves the right to refer to this signed Statement for all purposes connected with or ancillary to these proceedings.

PART B – UNDISPUTED FACTS

B1.     The Estate

7.      The Estate was, at all material times, a housing estate consisting of one domestic block developed by the Housing Authority (“HKHA”) under the Green Form Subsidized Home Ownership Pilot Scheme (“GSH”).

8.     The Estate was completed in 2017, and the new owners began collecting the keys to their respective units on 20 June 2017.

9.     The Estate consists of 857 units spread over 32 floors.

B2.     The HKHA and the DC System

10.     HKHA is a statutory body which seeks to provide affordable rental housing to low-income families with housing needs, and help low-income to middle-income families to gain access to subsidised home ownership. The Estate is one of such initiatives by the HKHA.

11.     At all material times, the HKHA has operated the DC System for newly completed public rental housing estates as well as newly completed buildings for one of the HKHA’s ownership scheme, including the buildings under the GSH such as the Estate. The aim of the DC System was to protect tenants of public rental housing estates or owners of the buildings under the ownership schemes by preventing infiltration of illegal elements so that decoration works in new estates and courts can be carried out in an orderly manner.

12.     Under the DC System:

(a)     The HKHA maintains a “Reference List of Decoration Contractors” (“Reference List”). Anyone may apply to be put on the Reference List but, to be successful, a contractor has to meet the eligibility criteria set by HKHA and will be checked by the police for triad connections;

(b)     When a new building is about to be ready for owners to move in, the HKHA will grant licences to a number of contractors on the Reference List for undertaking decoration works for the tenants (“Licence”). The number of contractors thus appointed (“Designated DCs”) is based on the ratio of one contractor to every 250 flats;

(c)     Contractors are selected for appointment from a ballot‑generated priority list of all those on the Reference List.  When offered an appointment, a contractor is obliged to take it up, although if there are unforeseen circumstances or valid reasons, it may decline the opportunity once during its registration on the Reference List;

(d)     Before obtaining the Licence, a contractor has to provide to HKHA (i) a valid business registration certificate, (ii) documents to prove it meets the eligibility criteria in respect of cash at bank or unutilised overdraft facility, and (iii) a surety bond;

(e)     The Designated DCs will be invited to attend a briefing session which includes a presentation about HKHA’s relevant regulations with one of the regulations being that the Appointed DCs should not agree among themselves to allocate flats to a certain contractor (referred to as “pie-sharing” in the HKHA’s briefing), but should allow tenants to choose freely which contractors they want to engage;

(f)     The tenants/owners are free to decide whether they wish to have their units decorated and, if they do, whether to engage a Designated DC or any other contractor or to decorate it themselves or by their friends or relatives;

(g)     The scope and price of any decoration works undertaken by the Designated DC for a tenant/owner is a matter between the tenant/owner and the Designated DC to negotiate; and

(h)     Designated DCs are not agents or representatives of the HKHA and any dispute or claim for loss or damage arising from the decorative works is to be dealt with and resolved between the Designated DC and the tenant/owner concerned.

13.     Each Designated DC has to enter into the Licence which is an agreement by deed with HKHA, with the title “Licence for Tenants’ Decoration Works”.  By this, HKHA grants to the Designated DC the right to enter the estate and carry out decoration works on behalf of tenants.

B3.     The Contravention

B3a.     Appointment as a Designated DC for the Estate

14.     The 3^rd Respondent is a limited liability company with a single director and shareholder. The 3^rd Respondent has been on the HKHA’s Reference List since 2016.

15.     By letter dated 14 November 2016, HKHA invited the 3^rd Respondent to be a Designated DC at the Estate.

16.     On 16 November 2016, the 3^rd Respondent, by its authorized person, Chan Hon Wing, accepted HKHA’s invitation to be a Designated DC at the Estate.

17.     In early 2017, the 3^rd Respondent asked and the 5^th Respondent agreed, that the 5^th Respondent would be responsible for managing the works on behalf of the 3^rd Respondent at the Estate, and would also be responsible for recruiting onsite personnel for and on behalf of the 3^rd Respondent.  It was agreed that the profits would be shared by the ratio of 70% for the 3^rd Respondent and 30% for the 5^th Respondent, if any.

18.     At all material times (including during the Relevant Period):

(a)     The 3^rd Respondent was the Designated DC of the Estate having been duly appointed pursuant to the DC System described above;

(b)     The 5^th Respondent acted for and on behalf of the 3^rd Respondent at the Estate, recruited all on-site personnel to work for and on behalf of the 3^rd Respondent, and gave instructions to those personnel.

19.     The 3^rd Respondent accepts that for the purpose of the Ordinance, the acts / omissions of all of its employees, agents, and representatives including but not limited to, the 5^th Respondent are attributable to the 3^rd Respondent such that it is liable for any contraventions of the First Conduct Rule that were carried out in the name of the 3^rd Respondent by any of its employees, agents and/or representatives.

B3b.    Market Allocation

20.     In order to ensure that the 1^st, 2^nd and 3^rd Respondents would not actively compete with each other for the decoration works at the Estate, the 5^th Respondent, on behalf of the 3^rd Respondent, entered into an allocation arrangement (“Allocation Arrangement”) with the 1^st and 2^nd Respondents whereby they agreed to allocate potential customers from the Estate between themselves with reference to the owners’ unit and floor number. Specifically, the agreed allocation between the 1^st, 2^nd and 3^rd Respondents was as follows:

 

	Units on 1st and 2nd Floors	Floors
1st Respondent	101-104, 221-226	5,8,9,12,15,18,21,24,27,30
2nd Respondent	105-108, 207-220	4,7,10,13,16,19,22,25,28,31
3rd Respondent	109-110, 201-206, 227-228	3,6,11,14,17,20,23,26,29,32

(“Agreed Allocation”).

21.     The Allocation Arrangement was entered into in on or around June 2017 after the site office was erected at the Estate.

22.     During the Relevant Period, the 1^st, 2^nd, and 3^rd Respondents carried out the decoration works in accordance with the Allocation Arrangement.

Particulars

(a)     In order to facilitate the performance of the Allocation Arrangement, persons acting for and on behalf of the 3^rd Respondent (including the 5^th Respondent) had in their possession notebooks which recorded the units and floors assigned to the 3^rd Respondent under the Agreed Allocation (“Notebooks”).  As the person responsible for the works on behalf of the 3^rd Respondent, the 5^th Respondent instructed persons acting for and on behalf of the 3^rd Respondent to only solicit business from persons living in units/floors assigned to the 3^rd Respondent.

(b)     The Notebooks were used by the 5^th Respondent and persons acting on behalf of the 3^rd Respondent as a point of reference during the course of business in particular, to identify owners from whom to solicit (and/or not solicit) business at the Estate. Persons acting on behalf of the 3^rd Respondent were asked to distribute business cards at the floors allocated to the 3^rd Respondent;

(c)     Whenever a person acting for and on behalf of the 3^rd Respondent:

(1)     was approached by a unit owner in the Estate; or

(2)     wished to solicit a person who appeared to be a unit owner in the Estate,

(d)     If the owner’s unit or floor was allocated to either the 1^st or 2^nd Respondent, persons acting on behalf of the 3^rd Respondent (including the 5^th Respondent) would decline to accept the business and/or direct the owner to the relevant Respondent which had been allocated with such unit or floor; and

(e)     As a result of the Allocation Arrangement, the 5^th Respondent on behalf of the 3^rd Respondent performed decoration works exclusively on Units and floors allocated to it, namely on the 3^rd, 6^th, 11^th, 14^th, 17^th, 20^th, 23^rd, 26^th, 29^th and 32^nd floor as well as units on the 1^st and 2^nd floor. In total, the 3^rd Respondent performed decoration works in at least 63 units.

23.     At all material times, the 5^th Respondent:

(a)     Had recruited all on-site personnel to work for, and on behalf of, the 3^rd Respondent;

(b)     On behalf of the 3^rd Respondent agreed to the Agreed Allocation;

(c)     Had actively dealt with potential customers in accordance with the Allocation Arrangement and the particulars as set out at paragraph 22 above; and

(d)     Had directed the agents, and/or representatives of the 3^rd Respondent to give effect to the Allocation Arrangement by only soliciting business from the units/floors allocated to the 3^rd Respondent in accordance with the Agreed Allocation in accordance with the particulars as set out at paragraph 22 above.

24.     In the premises:

(a)     By virtue of the matters stated at paragraphs 20 to 22 above, the Allocation Arrangement was a market and/or customer allocation agreement which allocated the owners (i.e. actual or potential customers) between the 1^st, 2^nd, and 3^rd Respondents.  The object of the Allocation Arrangement was to prevent, or restrict, or distort competition in relation to the provision of decoration works for the Estate;

(b)     The 1^st, 2^nd, and 3^rd Respondents had accordingly made and gave effect to an agreement/concerted practice with the object of preventing, or restricting, or distorting competition in Hong Kong, in contravention of the First Conduct Rule; and

(c)     Such conduct constitutes ‘serious anti-competitive conduct’ within the meaning of s. 2(1) of the Ordinance.

25.     Also, with regards to the Allocation Arrangement, the 5^th Respondent was a person involved (within the meaning of s.91 of the Ordinance) in a contravention of the First Conduct Rule as the 5^th Respondent had:

(a)     On behalf of the 3^rd Respondent entered into the Allocation Arrangement with the 1^st and 2^nd Respondents;

(b)     Been knowingly concerned in the entering of the Allocation Arrangement as per paragraph 23 above; and

(c)     Aided, abetted, counseled, and/or procured, the giving effect of the Allocation Arrangement by the 3^rd Respondent as per paragraph 23 above.

B3b.    Price Coordination Arrangement

26.     On 16 June 2017, the 1^st, 2^nd, and 3^rd Respondents had also engaged in the concerted practice of exchanging and coordinating the content and price of the standard decoration packages on offer to the owners of the units in the Estate (“Price Coordination Arrangement”).

27.     As respects the Price Coordination Arrangement, the 5^th Respondent, on behalf of the 3^rd Respondent, agreed with representatives of the 1^st and 2^nd Respondents that the 4^th Respondent would procure and produce in Chinese text leaflets for use to promote certain standard packages for decoration services.

28.     In accordance with this agreement, sometime before 16^th July 2017, the 5^th Respondent liaised with the 4^th Respondent to determine the 3^rd Respondent’s proposed prices to various standardised decoration packages.

29.     The 4^th Respondent subsequently produced one set of leaflets for each of the 1^st, 2^nd, and 3^rd Respondents (“Leaflets”, attached herein together with the agreed English translations, as Annex A). The Leaflets for each of these contained substantially identical features:

(a)     The 3 sets of Leaflets adopted the same layout and design;

(b)     The 3 sets of Leaflets listed the same 10 items of decoration works; and

(c)     Save for the smallest Unit, there were two packages labelled “Package A”, which included items 1 to 4, and “Package B”, which included items 1 to 10, on offer, respectively.

30.     Persons acting on behalf of the 3^rd Respondent (including the 5^th Respondent) used the Leaflets in the course of business at the Estate.

31.     The Leaflets also stated a package price for each of the basic packages on offer in respect of each of the Units (“Package Prices”) which only differed marginally:

32.     In the premises, it is the Commission’s case (which is not disputed by the 3^rd and 5^th Respondents) that:

(a)     By virtue of the matters stated in paragraphs 26 to 31 above, the Price Coordination Arrangement was an agreement/concerted practice entered into by the 5^th Respondent on behalf of the 3^rd Respondent with the 1^st and 2^nd Respondents to facilitate the Allocation Arrangement by reducing the incentive of potential customers to seek out other Respondents once the said potential customers had been approached by the Respondent which had been allocated such particular units or floors;

(b)     Together, the Allocation Arrangement and the Price Coordination Arrangement were part of a single overall agreement/concerted practice, with each instance of customer allocation and price coordination under the respective agreements/concerted practices being in pursuit of a common objective of giving effect to the single overall agreement/concerted practice with the object of such agreement being to prevent, or restrict, or distort competition in Hong Kong in contravention of the First Conduct Rule; and

(c)     Such conduct constitutes ‘serious anti-competitive conduct’ within the meaning of s. 2(1) of the Ordinance.

33.     Also, with regards to the Price Coordination Arrangement, the 5^th Respondent was a person involved (within in the meaning of s.91 of the Ordinance) in a contravention of the First Conduct Rule as the 5^th Respondent:

(a)     Had actual knowledge of the Price Coordination Arrangement between the 1^st, 2^nd, and 3^rd Respondent;

(b)     Had agreed to the Price Coordination Arrangement by liaising the 4^th Respondent on the 3^rd Respondent’s proposed Package Prices;

(c)     In his capacity as the person responsible for the works on behalf of the 3^rd Respondent at the Estate, had directed the agents, and/or representatives of the 3^rd Respondent to give effect to the Price Coordination Arrangement by using the Leaflets printed by the 4^th Respondent when marketing the services of the 3^rd Respondent to potential customers; and

(d)     Had, himself, given effect to the Price Coordination Arrangement by using the Leaflets and the Package Prices therein in the course of soliciting business from potential customers, and had used the Package Prices as an anchoring reference point from which to begin negotiations.

PART C – PROPOSED ORDERS

34.     On the basis of the facts not in dispute as set out in Part B above, the Commission and the 3^rd and 5^th Respondents agree that judgment should be entered against the 3^rd and 5^th Respondents.  There shall be a declaration that the 3^rd Respondent has contravened the First Conduct Rule and that the 5^th Respondent was a person involved (within the meaning of s.91 of the Ordinance) in the contravention of the First Conduct Rule.

35.     As for the further reliefs that are sought by the Commission, the Commission and the 3^rd and 5^th Respondents agree that a separate hearing should be held for the determination of the appropriate reliefs to be imposed by the Tribunal.

36.     If, pursuant to this Statement, the Tribunal disposes of these proceedings summarily, 3^rd and 5^th Respondents agree that there should be an order that they do pay the Commission’s costs of these proceedings.

PART D – AGREED MITIGATING FACTOR

37.      In agreeing to deal with the present proceedings in accordance with Rule 39 CTR and Section 72 CTPD1, the 3^rd and 5^th Respondents have adopted a reasonable cause of action which has saved time and costs of the Commission and that of the Tribunal.

38.     Further, the 3^rd Respondent had no actual knowledge of the anti-competition conduct of the 5^th Respondent acting in its name at the Estate. It admits liability on the basis that under the Ordinance, the 3^rd Respondent and those acting on behalf of the 3^rd Respondent at the Estate constitute a single undertaking.

39.     As of the date of this Statement, the 3^rd Respondent has not received any payment from the 5^th Respondent.

40.     The Commission will recommend to the Tribunal that the above factors be taken into account (subject to the Commission’s submissions on weight) should the Tribunal decide that an order for pecuniary penalty against the 3^rd and 5^th Respondents be appropriate.

Dated this the 3^rd day of August 2020.

King & Wood Mallesons For and on behalf of the Commission

Dundons Solicitors Solicitors for the 3rd and 5th Respondents