14 May 2020

First judgment in Hong Kong to provide guidance on cartel fines

This article was written by Edmund Wan and Stephanie Hung.

This article discusses the first ever Hong Kong judgment on pecuniary penalties for contravention of a competition rule. On 29 April 2020, the Hong Kong Competition Tribunal (“Tribunal”) handed down its judgment on penalties for cartel conduct in Competition Commission v W. Hing Construction Company Limited and Others [CTEA 2/2017][1]. This follows the Tribunal’s judgment on 17 May 2019 where each of the ten respondents were found to have contravened the first conduct rule in their market sharing and price fixing arrangements while providing decoration services to tenants at a public housing estate. The new judgment has laid down a structured methodological approach on finding the amount of penalties imposed on undertakings engaging in anti-competitive conduct.  As can be seen from the new judgment, the consequences of such cartel behaviour are severe as most respondents have been fined significantly relative to revenue and ordered to pay costs of the Competition Commission (“Commission”).

Methodology on cartel fine calculation

The Tribunal recognised the need to lay down a structured approach to provide for greater transparency and predictability in the assessment of the pecuniary penalty in order to serve the object of deterrence. The approach is largely similar to the one advocated by the Commission. The four main steps include: (1) determining the base amount, (2) making adjustments for aggravating, mitigating and other factors, (3) applying the statutory cap and (4) applying cooperation reduction and considering plea of inability to pay (if any).

Step one: Determining the base amount

The base amount reflects the nature and extent of the conduct constituting the contravention. As a starting point, the “value of sales”, being the value of an undertaking’s respective sales directly or indirectly related to the contravention within Hong Kong in the financial year in question, is identified as a metric that captures a sense of the scale of infringement, which is relevant to the potential impact of the conduct on the public weal.

The “gravity percentage” is then identified to reflect the seriousness of the conduct in question, this is applied to the “value of sales”. The Tribunal adopted the Commission’s suggestion of a range of 15% to 30% applicable to serious anti-competitive conduct. In this case, the Tribunal adopted a gravity percentage of 24% at the higher end of the spectrum as the breaches in question represent the most serious kind of collusive conduct and the respondents were primary contraveners.

The amount is then multiplied by the number of years of the undertaking’s participation in the contravention. The Tribunal agreed with the Commission’s submission to apply a multiplier of 1 although the contravention period lasted for 5 months as the value of sales is already limited to the contravention period.

Step two: Making adjustments for aggravating, mitigating and other factors

Section 93(2) of the Hong Kong Competition Ordinance (Cap. 619) (“Ordinance”) provides for mandatory considerations by the Tribunal, including aggravating circumstances, mitigating circumstances, loss or damage caused by the conduct (if any) and whether the person in question has previously been found to have contravened the Ordinance.

The Commission had submitted that aggravating circumstances may include where an undertaking acts as a leader in the contravention, where directors or senior management are involved in the contravention and where the conduct reflects the widespread industry practice such that there is a need for general deterrence. However, in this case the Tribunal did not discuss how these aggravating circumstances would affect the calculation of penalties because the Commission did not contend for any increase on account of such circumstances.  

The Commission had suggested that mitigating circumstances might include where there was genuine uncertainty as to the lawfulness of the conduct in question, where the undertaking’s participation in a contravention is limited and where an undertaking has taken steps to ensure genuine compliance with the Ordinance. In respect of three of the respondents, the Tribunal reduced the base amount by one-third to reflect their role as part only of the undertaking in question as they had wholly subcontracted the works to subcontractors. Other respondents had put forward various other mitigating circumstances but they were ultimately not given much weight by the Tribunal.

Further, specific loss or damage caused by the conduct and previous contraventions of the Ordinance (having regard to the number of previous contraventions, the nature of the previous contraventions, the time lag between the contraventions and whether any of the individuals involved in the previous contraventions are connected with the current contravention) may justify an uplift to the base amount.

Lastly, the Tribunal considered proportionality to be relevant as an overall sense check and that the amount arrived at should be a just and proportionate penalty for the contravention by the undertaking in the circumstances.

Step three: Applying the statutory cap

Section 93(3) of the Ordinance provides a cap for pecuniary penalties: 10% of the turnover of the undertaking concerned for each year in which the contravention occurred, and if the contravention occurred in more than 3 years, 10% of the turnover of the undertaking concerned for the 3 years in which the contravention occurred that saw the highest, second highest and third highest turnover.

Since there is no intrinsic relationship between the cap and the scale or impact of the infringement, the cap is applied only towards the end of the process of assessment to ensure that the maximum is not exceeded instead of treating it as a “maximum sentence” as argued by some of the respondents.  In this regard, the Tribunal considered that the statutory cap is more akin to a jurisdictional limit and different in nature from provisions stipulating a maximum period of imprisonment or a maximum fine in fixed monetary terms for criminal offences.

Step four: Applying cooperation reduction and considering plea of inability to pay

The final step involves the application of reduction to reflect cooperation with the Commission and the undertaking’s inability to pay the fine.

The issue of cooperation reduction is not addressed by the Tribunal in depth as none of the respondents in this case had a claim for such reduction. However, the Tribunal recognised that an incentive in the form of a possible reduction in the amount of pecuniary penalty to facilitate cooperation with the Commission is in the public interest. It is likely that the Tribunal will follow the Commission’s recommendations to apply discounts determined by the Commission’s Cooperation and Settlement Policy in future decisions.  

It is only in exceptional circumstances where a case for reduction by reason of financial hardship can be made. The Tribunal held that it is necessary for the respondent in question to produce clear and comprehensive evidence of its financial position, whilst audited financial statements may not be sufficient.

Costs of proceedings awarded against the respondents

Some of the respondents had submitted that this enforcement action should be treated in the same way as classic criminal cases, with the consequence that costs should not be ordered against the respondents unless their conduct during investigation or at trial is unreasonable or improper resulting in the Commission having to incur extra or additional expenses.  In this regard, the Tribunal ruled that, while this enforcement action involved the determination of a criminal charge for the purposes of the Bill of Rights and the infringement had to be proven beyond reasonable doubt, it does not mean that the action has to be treated in every respect as a trial for a criminal offence. Various other factors, including the structure of the Ordinance, the constitution of the Tribunal by a judge without a jury, the adoption of the practice and procedure of the Court of First Instance in its civil jurisdiction, the specific reference to costs in Section 144(1) of the Ordinance and the provisions for appeals both interlocutory and final, all point to the intention that competition law proceedings are dealt with as civil proceedings.  Accordingly, the Tribunal considered that the civil approach on costs should be applied and ordered the respondents to pay the Commission’s costs of the enforcement action.

[1] King & Wood Mallesons acted for the Competition Commission.

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”.

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