Hong Kong: Paint It Black - Bleak Picture For Hong Kong Decorators Slammed For Market Sharing And Price Fixing

Last Updated: 17 June 2019
Article by Godfrey Yuen and Nigel Sharman

In one of its first major rulings, Hong Kong's Competition Tribunal (the "Tribunal") has ruled against 10 decorating contractors for serious anti-competitive conduct as set out in the Competition Ordinance (the "Ordinance") by allocating refurbishment work amongst themselves on a public sector housing estate and for price-fixing.

In Competition Commission v W. Hing Construction Company Limited & Ors [2019] HKCT 3, Mr Justice Godfrey Lam, the President of the Competition Tribunal, found the contractors had made an agreement amongst themselves whereby they would each take four floors in each of three buildings in the estate and would agree not to actively seek business on floors allocated to the others, the so-called 'Floor Allocation Arrangement'.

They also came to an arrangement about the prices they would charge, the 'Package Price Arrangement', whereby they agreed on the prices of the refurbishment packages to be printed on a joint flyer that was distributed to tenants. The prices on the flyer served as a starting point for negotiations with many customers who wished to order the package items.

The Tribunal heavily criticised the inconsistent evidence given by the contractors, who on the one hand claimed there were no such market sharing agreements in existence yet on the other, claimed the agreements were necessary to promote efficiencies for the benefit of the tenants.

The legal foundation

The 'first conduct rule', found in section 6 of the Ordinance, provides that "an undertaking must not make or give effect to an agreement...if the object or effect of the agreement... is to prevent, restrict or distort competition in Hong Kong". The Competition Commission's case was that the agreements had the object of preventing, restricting or distorting competition in Hong Kong. The conduct rules do not apply where they are excluded by the provisions of Schedule 1, notably in the case of agreements that contribute to the improvement of production or distribution or the promotion of technical or economic progress, the 'efficiency defence'.

Divide and conquer

The 10 contractors had been appointed under the Hong Kong Housing Authority's ("HKHA") Decoration Contractor System, under which the HKHA would grant licences to a number of contractors on its reference list for undertaking decoration works for tenants. On 3 August 2015, HKHA sent a letter to each of the contractors advising them they had been selected to be appointed Decoration Contractors for a public rental housing estate in Kwun Tong.

The Tribunal noted a "strikingly regular" pattern of which contractors worked on which floors. Each contractor worked on four and only four floors in each of the three buildings. The four floors worked on by each contractor were each 10 floors apart. The contractors had drawn lots amongst themselves to determine which contractor would get which floor. The Tribunal found the contractors' conduct consisted of the allocation of market for the supply of services and hence constituted 'serious anti-competitive conduct' within the meaning of section 2(1) of the Ordinance. But could the contractors establish the efficiency defence?

Not so efficient

The main plank of the contractors' case was that the Floor Allocation Agreement enabled them to concentrate work at any one time on flats located on the same floor. Significant efficiencies arose from being able to perform work in multiple numbers of flats on the same floor, on account of the time it took to move tools and equipment from one floor to another, especially given long waiting times for the lifts they claimed could be up to two hours. Without mutual coordination, they argued, the contractors would each be working on 24 to 28 floors in each of the three buildings.

The Tribunal lambasted this as an extreme and unjustified assumption. A truly competitive market would allow the contractors to adopt pricing and discount strategies to try to win three or four flats on a floor, bringing benefits to the tenants since the contractors would have to show they were competitive on price.

In contrast, a market sharing arrangement cosseted the contractors since they knew their closest competitors would not be competing with them for business on "their" floors. The difficulties caused by having to travel between floors had been wildly exaggerated. The Estate Manager had never received any complaints from tenants or contractors about excessive lift-waiting times. The amount of time it took to pack and unpack tools had also been exaggerated.

There was no credible evidence that the agreements were entered into in order to pursue the supposed efficiencies. Had the contractors allocated floors with the object of achieving efficiencies, consecutive floors within a single building should have been allocated as far as possible. The actual pattern of allocation revealed that the contractors' concern was equality and fairness among themselves rather than efficiencies.

The price isn't right

The Tribunal also found the Package Price Arrangement to constitute serious anti-competitive conduct. The prices on the flyer distributed to the tenants were fixed by agreement between the contractors and the flyers themselves were printed by agreement of all of them, and were distributed and used by them for promotional purposes. The prices served as a starting point or reference point for negotiations with many if not all customers. Whilst a small discount of 2 percent would sometimes be given where a tenant requested it, the prices in the flyers were mainly adopted as the final prices.

The Tribunal ruled that both the Floor Allocation Agreement and the Package Price Agreement had the object of preventing, restricting, or distorting competition in Hong Kong. Whilst the contractors were entitled to the presumption of innocence, the burden of establishing the efficiency defence (on the balance of probabilities) lay on the respondents.

A new dawn?

The ruling was published on the same day as another significant judgment by the Tribunal. In the first case brought by the Competition Commission, Competition Commission v Nutanix Hong Kong Limited and Ors [2019] HKCT 2, the Commission brought proceedings against five information technology companies in relation to a tender for the installation of server equipment by the Hong Kong Young Women's Christian Association (YWCA) in July 2016. The Tribunal found that four of the five companies had contravened the first conduct rule of the Competition Ordinance, which prohibits agreements or concerted practices between undertakings which have the object or effect of preventing, restricting or distorting competition in Hong Kong.

Taken together, the two judgments demonstrate the need for members of the construction industry to review traditional practices and to adapt to a new environment. Hogan Lovells has extensive experience of advising clients in the construction industry and would be pleased to assist clients in reviewing current practices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions