COMPETITION COMMISSION v. FUNGS E&M ENGINEERING CO LTD

CTEA 1/2019

[2020] HKCT 4

IN THE COMPETITION TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COMPETITION TRIBUNAL ENFORCEMENT ACTION NO 1 OF 2019

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D E C I S I O N (NO. 2)

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Introduction

1.  The Commission took out the present enforcement proceedings against R1-R6 for contravention of the First Conduct Rule (allocation arrangement and price coordination in the provision of renovation services in a public housing estate); against R7 and R8 for their involvement in the alleged contravention and against R9 for a disqualification order with costs.

2.  The Commission’s case, amongst others, is that R7 was acting on behalf of R1 as a responsible person for the business activities of R1 at that public housing estate (“OTE”)

3.  R1’s defence is that it had an agreement with one Madam Pau Wai Lin (“Pau”) (“the Pau Agreement”) whereby:

(1)  Pau was to undertake the decoration works at Blocks 1 and 2 of OTE (“the Works”) in place of R1.  Pau agreed not to be engaged in any price fixing arrangement with other contractors in undertaking the Works using the name of R1.

(2)  Pau shall be fully liable for all matters in respect of using the name of R1. She shall be fully entitled to any financial gain but liable for any financial loss arising from the Works. 

(3)  She shall fully indemnify R1 for any loss and liability arising from the Works.

(4)  She shall not assume the role of a sub-contractor in undertaking the Works.

4.  R1 claims that it had not authorized, permitted or consented to R7 undertaking the Works using the name of R1.  The husband and wife relationship between R7 and Pau was not known to R1 before the present proceedings.  Pau was responsible for all profit and loss in respect of the Works.  R1 had not received any money in respect of the Works.

5.  Save for a minor aspect that Mr WC Wong of R1 had attended the briefing session organized by the Housing Authority, the Commission does not challenge the existence of the Pau Agreement.

6.  This is R1’s application for one of the following orders, according to its sequence of preference:

(1)  that Pau do substitute R1 as a party to these proceedings (“substitution application”); or

(2)  that Pau be joined as a respondent (“joinder application”);

(3)  that there be leave to issue a third party notice to Pau (“third party application”).

7.  R1 claims to have no knowledge of the matters in respect of the Works.  Pau should be brought in to ensure that all matters in dispute in the cause or matter be effectually and completed determined and adjudicated upon.  Further, R1 intends to seek contribution and/or indemnity.  Pau should be bound by the judgment of the Tribunal to avoid any multiplicity of proceedings thereafter.  Without these third party proceedings, R1 will be left without redress against Pau.

8.  The Commission opposes these applications.  In particular, the Commission submits that R1 would not be left without recourse because R1 can commence a common law action against Pau provided that breach of the First Conduct Rule is not pleaded as a cause of action.

Legal principles on substitution and joinder

9.  Rule 22 the Competition Tribunal Rules (“the Rules”) governs the addition and substitution of parties.  It appears in Part 2 of the Rules which govern all proceedings before the Tribunal.  This means addition or substitution of parties are, in principle, applicable to enforcement proceedings.

10.  Rule 22(1) of the Rules provides that the Tribunal may, on application, permit another person to be joined in the proceedings, in addition to, or in substitution of any party to the proceedings.  Subject to this, Order 15 of the Rules of the High Court (“RHC”) applies.

11.  Order 15, rule 4(1) of the RHC provides that 2 or more persons may be joined together in one action as defendants with the leave of the court where if separate actions were brought against each of them, some common question of law or fact would arise in all the actions and all rights to relief are in respect of or arise out of the same transaction.

12.  Order 15, rule 6(2) of the RHC provides that at any stage of the proceedings, the Court may on such terms as it thinks fit order any person who has been improperly or unnecessarily made a party or who has for any reason ceased to be a proper or necessary party, to cease to be a party.  The Court may order any of the following persons to be added as a party:

(i)   Any person who ought to have been joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute may be effectually and completely determined; or

(ii)  Any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed which it would be just and convenient to determine as between him and that party and between the parties to the cause or matter.

13.  Examples of substitution of parties under Order 15 of the RHC include substitution of personal representatives for a deceased person, Committee for a mentally incapacitated person and a person who has subrogated rights for a party.

14.  In Yip Ching Tsz v East Week Publishing Ltd & ors, HCA 2586/2004, 29 April 2005, §17, a defamation action, DHCJ Saunders (as he then was) allowed the de facto printer of the publication to be substituted for the registered printer.

15.  In a joinder application,

(1)  Order 15 rule 6 of the RHC should be construed liberally so as to ensure that, as far as possible, all matters in dispute between the parties are completely and finally determined, and all multiplicity of legal proceedings with respect to any of those matters is avoided.

(2)  The test to apply in a joinder application is whether there is a bona fide claim and a proper question to be tried as between the plaintiff and the intended defendant that is necessary or just and convenient for resolution between them as well as between the plaintiff and the defendant in the proceedings.  At this stage, there is no requirement for an applicant to show merits of his case.

(3)  Further, the Court’s attitude to join parties is permissive, and its power to do so is a generous one and widely exercised.

(4)  When issues on whether to join a party or not are one of fact, adopting the same approach in a striking out application, the disputed facts on joinder are to be taken in favour of the party sought to be joined.

Advanced Connection Limited v Able Technology (Hong Kong) Limited & ors [2018] HKCFI 2465, §§18-21, 24, P Ng J approved by the CA in CAMP 11/2019, [2019] HKCA 1092, §14.

16.  In respect of Order 15, rule 6(2)(b) of the RHC, it has been held that when two parties are in dispute in an action at law, and the determination of that dispute will directly affect a third person in his legal rights or in his pocket, in that he will be bound to foot the bill, then the court in its discretion may allow him to be added as a party on such terms as it thinks fit. By so doing, the court achieves the object of the rule in enabling all matters in dispute to “be effectually and completely determined and adjudicated upon” between all those directly concerned in the outcome.  See Wong Shan Shan & anor v Incorporated Owners of Yue Wah Mansion (unreported, HCA 1086/2013, 28 January 2015), §13, DHCJ Yee, following Gurtner v Circuit [1968] 2 QB 587, 595 D-F.

17.  Even though generally a plaintiff is entitled to pursue his remedy against a chosen defendant and cannot be compelled to sue others, a person may be added as defendant against the wishes of the plaintiff either on the application of the defendant or on his own intervention or, in rare cases, on the court’s own motion: Chan Kon Fung v Gallop Pioneer Limited & Another [2018] HKCFI 766 at §§88 & 89, DHCJ Marlene Ng (as she then was).

Substitution application

18.  I do not consider substitution to be the proper option.

19.  Firstly, these are enforcement proceedings instituted by the Commission, which should not be conflated with private litigation. The prosecutorial prerogative lies with the Commission and not anyone else.  The Tribunal should not usurp the Commission’s powers to decide who to sue.

20.  Secondly, even accepting the Pau Agreement to be valid, the Commission still has a prima facie case against R1.

21.  In Competition Commission v W Hing Construction Co Ltd [2019] 3 HKLRD 46, R1 and R9 claimed that they had sub-contracted the decorations works in a housing estate to others.  It was the sub-contractors who breached the First Conduct Rule (“the sub-contractor defence”).  This defence was rejected by G Lam J who held, at §§322-323:

“322. It would simply be wishful thinking for the respondent to assume, as submitted by counsel, that it dropped “completely out of the picture” upon admitting a subcontractor to “take over” the works. As far as the outside world was concerned, the sub‑contractor never came into the picture and the respondent never went out of it.

323. It has been submitted on behalf of W Hing (R1) and Wide Project (R9) that it would be open to the Commission to bring proceedings against the sub‑contractors instead of against them.  In my judgment, while the sub‑contractor may well be liable for the infringing conduct as another person comprised in the same undertaking, this does not preclude the Commission from proceeding against the respondent who, on the above analysis, must be regarded as a person comprised in the undertaking in question and therefore liable for the contraventions of the first conduct rule.”

22.  Applying W Hing, the fact that Pau was in breach of the First Conduct Rule would not preclude the Commission from pursuing R1.  The Pau Agreement, even if accepted to be a genuine agreement, was a private matter between R1 and Pau.  It could not alter the position as far as the outside world was concerned.

23.  The fact that Pau was not a sub-contractor and R1 had not received license fees from her for using R1’s name would not undermine the principle in W Hing.

24.  Thirdly, to say that Pau should be substituted for R1 is tantamount to dismissing summarily the Commission’s case against R1. This can only be done with the Commission’s consent or where the facts are plain and obvious, which is not the case here.

25.  For the reasons given, I dismiss the substitution application.

Joinder application

26.  There could be various reasons why the Commission decided not to sue Pau.  There may be lack of evidence or, in exchange for Pau’s cooperation in an investigation, the Commission decided to enter into a leniency agreement with her under section 80(1) of the Competition Ordinance, Cap 619 (“the Ordinance”).  Under section 80(2), the Commission must not, while a leniency agreement is in force, bring enforcement proceedings, otherwise it will undermine the effectiveness of a leniency agreement. 

27.  Although the Commission does not suggest that there is a leniency agreement with Pau, I still do not think that the Tribunal should decide for the Commission whom to sue.

28.  The case of Advanced Connection v Able Technology on joinder of defendants can be distinguished as it is not an enforcement case but private litigation.

29.  R1’s concern as to R7’s admission is unwarranted.  The Tribunal imposes sanction on a respondent based on the facts as found against that respondent.  R7’s admission (unless admitted by R1) will not bind R1. 

30.  Further, R1 is at liberty to bring in matters concerning a non-party which may be in favour of R1’s mitigation.  In W Hing No. 2[2020] HKCT 1, §103, G Lam J took into account, amongst others, the sub-contractor defence and lack of participation of the respondent contractor in the works, and applied a 1/3 discount to the Base Amount of the fine:

“Turning to the matters put forward as mitigating circumstances, the 1^st and 9^th respondents submit that they did not directly participate in the conduct impugned, but that each of them became liable only as a result of letting their “licence” to a “subcontractor” who was found to have engaged in the infringing conduct.  The details of their arrangements with their respective “sub‑contractors” have been described in section H of the Judgment, where it was held that each of these two respondents formed an undertaking with its subcontractor in relation to the contravening conduct.  While the Base Amount, as explained above, is assessed with reference to the undertaking, the fact that the penalty is sought only against the respondent is a factor that can, in my view, be taken into account in its assessment.  In the circumstances of the present case, the association of the respondent and the subcontractor was an ad hoc, temporary one; they were not companies in a group or individuals in partnership.  There may or may not be some private arrangement between the respondent and the subcontractor on the responsibility for the consequences of these proceedings, but the issue has not been inquired into, and I do not think that it would be right or safe to assume the respondent would be able to recoup what it has to pay from the subcontractor.  I consider that to reflect their role as part only of the undertaking in question, there should be a reduction of the Base Amount by one‑third for the 1^st and 9^th respondents.”  (underline added)

31.  For the reasons given, I do not consider joinder of Pau as a respondent to be appropriate.

Legal principles on third party proceedings

32.  Under rule 23 of the Rules, a third party notice may be issued by a defendant against a person who is not already a party to the action where he wishes to make a claim under Order 16, rule 1 of the RHC.

33.  Order 16 rule 1(1) refers to:

(a)  Claims against the third party for contribution or indemnity;

(b)  Claims against the third party for any relief or remedy relating to or connected with the original subject matter of the action and substantially the same as some relief or remedy claimed by the plaintiff; and

(c)  Any question or issue relating to or connected with the original subject matter of the action that should be determined not only as between the plaintiff and the defendant but also as between either or both of them and the third party.

34.  As rule 23 appears in Part 2 of the Rules, in principle, third party proceedings are applicable to enforcement proceedings.

35.  A third-party notice is usually the proper course if the plaintiff seeks no relief against a defendant to be added: Hong Kong Civil Procedure 2020, Vol 1, §15/6/6.

36.  The practice is that if a prima facie case is made out which would bring the matter within Order 16 rule 1(1) of the RHC, leave will be granted to issue the notice.  In granting leave, the Court will not consider the merits of the claim, but will leave these matters and objections by the plaintiff to be dealt with upon the application for directions under Order 16 rule 4 of the RHC.  See Hong Kong Civil Procedure 2020, Vol 1, §16/2/5.

37.  In Wing Mou Construction Co Ltd (in Liquidation) v Cosmic Insurance Corporation Ltd (unreported, HCCT 40/2001, 20 June 2002), a third party was added to the action as a counter-party to an indemnity agreement.  Ma J (as he then was) held that (at §15):

(a)  Under Order 16 rule 4(4), the court allows a person who is already a third party to participate in the main action between the plaintiff and defendant, “on terms as may be just” or “as may be just”.  In this latter regard, a third party may even be permitted to defend the action against the plaintiff either alone or jointly with any defendant.

(b)  All persons who have a legitimate legal or financial interest in the outcome of the matter in dispute are relevant parties.  Thus, where the proprietary or pecuniary rights of a person are affected, this is enough.  A person may be a relevant party even though the plaintiff has no cause of action against him.

(c)  The court still retains a residual discretion to decide whether or not the order sought should be made.

Third party application

38.  R1 claims to have no knowledge of the matters in respect of the Works.  There may be dire consequences if Pau is not a party. According to R1, if it is found liable, the Tribunal will be in a position possessed with no factual finding on a non-party to adjudicate sanction although it was that non-party who undertook the Works.  The matter will be complicated by R7’s admission at the first instance.  Further, as no private action is available to R1, R1 would be left with no recourse against Pau.

39.  I approach this matter from 2 angles: (i) whether the conditions for joining a third party under Order 16, rule 1 are met; and (ii) whether R1 has redress against Pau outside these enforcement proceedings.

40.  With regard to the first angle, the Tribunal will be able to sanction R1 in the absence of Pau, as did G Lam J in W Hing No. 2 when he sanctioned the contractor in the absence of the sub-contractor.  R7’s admission will not bind R1.  However, there is a common issue of fact and of law on the role of R1, R7 and Pau in respect of the Works and whether any or all of them had breached the First Conduct Rule. This is relevant to R1’s extent of liability and may affect the financial sanction that may be imposed on R1.

41.  On the question of indemnity or contribution from Pau. I have considered the following authorities provided by the Commission and R1:

(1)  Safeway Stores Limited & ors v Twigger & ors [2010] EWCA CIV 1472, §29, Longmore LJ, which held that a corporation could not recover a financial penalty for breach of a conduct rule from its employees.

(2)  Andrew Coulson v Newsgroup Newspapers Limited [2011] EWHC 3482, §§4, 46-47, Supperstone J, which held that an agreement for D to pay the legal costs incurred by the claimant in defending criminal allegations was valid.  The case left open the issue as to the legality of the agreement.

(3)  Jetivia SA & anor v Bilta (UK) Limited (in liquidation) & ors [2015] UKSC 23, §§156-162, Supreme Court of UK, which disagreed with Longmore LJ’s reasoning in Safeway.

(4)  Les Laboratoires Servier & another v Apotex Inc & ors [2015] AC 430, §§28-29, 34, which held that “turpitude” would depend on the legal character of the acts relied on.  There may be exceptional cases where even criminal and quasi-criminal acts would not constitute turpitude, eg where liability was strict and the claimant was not aware of the facts making his act unlawful.

42.  R1 does have an arguable contract claim for seeking indemnity against Pau.  Whether the Pau Agreement is against public policy insofar as R1 seeks indemnity for the financial sanction imposed by the Tribunal is open to argument: §47, Coulson. 

43.  It is not necessary to decide the merits here. The conditions in Order 16, rule 1(1)(a) and (c) are met.  Pau, being the person who is at risk of having ultimately to pay the financial sanction as damages to R1, appears to have legitimate legal or financial interest in the outcome of these enforcement proceedings.  Bringing in Pau will avoid duplicity of proceedings and the risk of inconsistent finding on whether there was breach of the First Conduct Rule and who caused the breach. 

44.  With regard to the second angle, R1 submits that no private action is available to it since follow-on action is only available to other persons who wish to claim against R1 but not where R1 wishes to sue Pau.  If Pau is not added as a party now, there will be no determination as to whether she has contravened the First Conduct Rule on which to base a follow-on action.

45.  The Commission disagrees:

(1)  Insofar as the application is seeking the Tribunal’s determination of R1’s rights and obligations under the Pau Agreement, it is in the nature of a private action, the availability of which is circumscribed by Part 7 of the Ordinance, in particular section 110.

(2)  R1 does have redress against Pau under a common law action.  To say that R1 would have no recourse against her is premised on an incorrect understanding of the effect of section 108.

46.  To resolve the issue, one has to look at Part 7 of the Ordinance, which is the only part that deals with and sets out all the provisions concerning litigants other than the Commission: Taching Petroleum Co Ltd v Meyer Aluminium Ltd [2020] HKCT 2, Au-Yeung J, at §§219(2)-(3).

47.  Under section 108, no person may bring any proceedings independently of this Ordinance in any court in Hong Kong, if the cause of action or any of the causes of action is the defendant’s contravention, or involvement in a contravention, of a conduct rule.

48.  Under section 109, no person may bring any proceedings in the Court of First Instance under this Part if the cause of action is the defendant’s contravention, or involvement in a contravention, of a conduct rule.

49.  Under section 110, which governs follow-on action:

“(1) A person who has suffered loss or damage as a result of any act that has been determined to be a contravention of a conduct rule has a right of action under this section against –

(a) any person who has contravened or is contravening the rule; and

(b) any person who is, or has been, involved in that contravention.

(2) Subject to section 113, a claim to which this section applies may only be made in proceedings brought in the Tribunal, whether or not the cause of action is solely the defendant’s contravention, or involvement in a contravention, of a conduct rule.

(3) For the purpose of subsection (1), an act is taken to have been determined to be a contravention of a conduct rule if –

(a) the Tribunal has made a decision that the act is a contravention of a conduct rule;

…”

50.  Under section 111, a follow-on action can be brought within 3 years of the decision of the Tribunal or disposal of an appeal or final appeal.

51.  Under section 119(2), an earlier decision of the Tribunal that the act in question is a contravention or involvement in a contravention of the conduct rule is binding on the Court of First Instance or the Tribunal (as the case may be) in the follow-on action.

52.  Under section 142:

“(1) The Tribunal has jurisdiction to hear and determine—

(a) applications made by the Commission with regard to alleged contraventions, or alleged involvements in contraventions, of the competition rules;

(b) applications for the review of reviewable determinations;

(c) private actions in respect of contraventions, or involvements in contraventions, of the conduct rules;

(d) allegations of contraventions, or involvements in contraventions, of the conduct rules raised as a defence;

(e) applications for the disposal of property;

(f) applications for the enforcement of commitments; and

(g) any matter related to a matter referred to in paragraph (a), (b), (c), (d), (e) or (f) if the matters arise out of the same or substantially the same facts.

(underline added)

(2)  In the exercise of its jurisdiction, the Tribunal has the same jurisdiction to grant remedies and reliefs, equitable or legal, as the Court of First Instance.”

53.  Mr Jonathan Wong, counsel for the Commission, submits that R1 can invoke section 108, which does not restrict the bringing of a common law claim where contravention of a conduct rule under the Ordinance is not pleaded as a cause of action.  This is so “even if the facts of the claim may support a finding of contravention of a conduct rule, as long as the contravention of a conduct rule is not pleaded as a cause of action in such claim” See Butterworths Note 108.02 citing Report of the Bills Committee on Competition Bill of 23 May 2012 §§154 and 155.

54.  By way of example, R1 can have a contract claim based on Pau’s breach of the Pau Agreement and seek a declaration that the Pau Agreement is in existence and that Pau is entitled to be indemnified by R1.  If Pau raises a defence that involves competition issues, the defence can be transferred to the Tribunal and adjudicated under section 113 of the Ordinance.

55.  With respect, I doubt the utility of a general declaration of indemnity (as opposed to an order to indemnify for a sum certain) to R1.

56.  The phrase “cause of action” denotes every material fact which R1 must prove to obtain from the Tribunal a remedy against another person: Hong Kong Civil Procedure 2020, Vol 1, §15/1/2, citing Read v Brown (1888) 22 QBD 128, Lord Esher MR, at 131; Letang v Cooper [1965] 1 QB 232, at 242, Diplock LJ.  To allege breach of the Pau Agreement, arguably a material fact that R1 may have to plead is Pau’s contravention of the First Conduct Rule which gave rise to damage to R1.  Pau may raise a defence involving competition law.  Chances are that a substantial part of R1’s (and probably R7’s) breach of the First Conduct Rule will have to be proved.  Duplication of proceedings is a risk in R1’s potential contract claim.

57.  Accordingly, the effects of sections 108-111, 119(2) and 142, as applied to the present proceedings are, arguably, that:

(1)  Before judgment in the present enforcement proceedings, a major part of “damages” suffered by R1 (in the form of financial sanction) is unknown.  R1 does not have a cause of action for breach of the Pau Agreement at common law unless he pleads breach of the First Conduct Rule.  That will be in the nature of a private action involving competition issues, which is not permitted by section 108 of the Ordinance. 

(2)  Even after the Tribunal has given final judgment in these enforcement proceedings, R1 cannot bring a follow-on action against Pau because there will be no finding of contravention of the First Conduct Rule against Pau or any finding that will bind her. 

58.  The situation is more in line with paragraph 35 above where R1 seeks no relief independent of the enforcement action.  It is best to give leave to join Pau as a third party so that findings of the Tribunal in this case will bind her.  This will also avoid R1 being left without redress against her.

59.  If Pau becomes a third party, the Tribunal does have jurisdiction to hear the matter under section 142(1)(g) of the Ordinance, it being a matter related to the enforcement action described in section 142(1)(a).

Conclusion

60.  The substitution of Pau for R1 is unwarranted as impinging on the prosecutorial prerogative of the Commission and involving summary dismissal of the Commission’s case against R1.  Addition of Pau as a party likewise impinges on the prosecutorial prerogative of the Commission.  It is arguable that there is no avenue for R1 to seek redress against Pau at common law both before and after judgment in these enforcement proceedings as there will be no finding of contravention of breach of the First Conduct Rule against her.  Third party proceedings are best for R1 to seek indemnity and contribution from Pau.

61.  I therefore dismiss the application for substitution and addition of parties but give leave to issue third party proceedings as per paragraph 2 of the summons dated 20 February 2020.

62.  I order costs of this application to be reserved.

63.  I thank counsel for their assistance.