Home System concept The Liability Ends Here – Contractors Held Fully Liable for Hong Kong Cartel’s Subcontractors | Hogan Lovells

The Liability Ends Here – Contractors Held Fully Liable for Hong Kong Cartel’s Subcontractors | Hogan Lovells

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This decision 1 sends a clear message to companies that the scope of the order could be much broader than some might think, and that companies will be jointly and severally liable with their subcontractors forming the same company (i.e. say the economic unit) which has infringed competition law. This alert discusses court rulings, court reasoning on appeal, and practical steps companies can take to minimize the order due to the conduct of their business partners.

Competition Tribunal Decisions and HKCC Appeal

The first decision appealed was the landmark decision on sanctions in the W Hing Case. 2 In this decision, the court for the first time established the four-step approach to determining financial penalties under the order (see our alert here). Among other things, the Court granted a reduction of one-third of the base amount (i.e. a base amount linked to the volume of trade affected by the violation of the competition rule) to three defendants.

For two of the respondents, the Tribunal granted the reduction on the grounds that they had not directly participated in the anticompetitive behavior, but had become liable by leasing their license to a subcontractor who had engaged in the unlawful behavior . For the other respondent, the Tribunal granted the reduction on the basis that the renovations had in fact been carried out by another on behalf of this respondent. In granting the reduction, the Court took into account various factors such as the ad hoc and temporary association of the contractors and the subcontractors, the inability of the respondents to recover part or all of the pecuniary penalties from the subcontractors , and the roles of the Respondents only within the framework of the overall “enterprise”.

The second decision appealed was the Mushrooms Case 3 which also followed the same four-step approach and reduced the base amount for two sponsors for similar reasons. The main difference between the two cases is that the subcontractors or agents involved in the Mushrooms cases have been made a respondent while the respective contractors or representatives have not been a respondent in the W Hing Case.

On appeal, the HKCC sought to reverse the one-third reduction and increase the penalties for these respondents. The HKCC argued that the court acted on the wrong principle and considered irrelevant factors or failed to consider relevant factors.

Court of Appeal – reduction of basic amount not justified

The Court allowed the HKCC’s appeal in the two cases concerning the reduction of the base amount for the following reasons:

Ground 1: joint and several liability

Despite the defendants’ assertions that the determination of pecuniary sanctions was a “localized matter” and that EU case law should not be applied, the Court held that the notion of commitment, derived from EU case law EU, “is at the heart” of the Hong Kong decision. Kong’s competition law regime. Similar to EU law, persons forming a business are jointly and severally liable for the business’ breach of competition rules as well as for financial penalties imposed on the business.

The Court held that each of the respondents on appeal formed a single economic unit or company with its respective subcontractor and should be liable for the full monetary penalty. The court said it would be wrong in principle to reduce financial penalties by a percentage to reflect a defendant’s role that he was just part of a business. The allocation of responsibilities between entities under a business for the payment of penalties was not an issue for the HKCC to get involved in.

Reason 2: public order or illegality

The HKCC argued that the defendants should not be allowed to cite their own unlawful conduct (i.e. contracting out work in violation of Hong Kong’s subcontracting system and license terms Housing Authority which restricted outsourcing) as a mitigating circumstance. The Court agreed with the HKCC that the Respondents’ subcontracting arrangements violated the terms of the license and were contrary to the public interest and public order. Therefore, it was wrong in principle to recognize outsourcing as a mitigating circumstance. The fact that the respondents had no knowledge of the anti-competitive behavior was also irrelevant.

Reason 3: inability to recover from subcontractors or representatives

Finally, the court agreed with the HKCC that the HKCC did not have the burden of disproving the alleged inability of the respondents to recover all or part of the penalties from the subcontractors or representatives. As the Respondents provided no evidence regarding the alleged inability to recover, it was inappropriate for the court to consider or give the discount to reflect the alleged inability. If there were legal reasons for the incapacity, the Court suggested that this matter be decided in a subsequent procedure for contribution or compensation.

Appeal from HKCC on charges

In the Case, the Court granted the HKCC a certificate of costs for two lawyers, instead of the three lawyers actually hired by the HKCC. Despite the Tribunal’s acknowledgment of the efforts made by three lawyers to deal with multiple respondents, the Tribunal found that this was not an exceptional case warranting a certificate for all three lawyers. The HKCC appealed on this point. The Court dismissed the HKCC’s appeal because the costs were within the Tribunal’s discretion and the Court was not convinced that the Tribunal was wrong in principle or demonstrably wrong.

Key points to remember

This decision reminds companies that they cannot escape their liability under the Order by engaging subcontractors or relying on limited participation to seek a reduction in penalties on the grounds that they are their subcontractors. contractors who directly participated in the offending conduct. Even if the HKCC chooses to prosecute a single entity in a business in court, that entity can be made to respond to the entire infringement by the business.

The position taken in this decision is largely in line with EU case law which recognizes the joint and several liability of all entities within a company involved in anti-competitive conduct. In fact, the term and concept of “undertaking” is an invention of EU law, intended primarily to reflect both the commercial reality that several entities within the same corporate group may jointly infringe competition, as well as addressing the EU-specific problem that EU Member States’ laws have very different company law regimes.

However, the impact in Hong Kong following the Court’s ruling is arguably greater than in the EU. In most EU judgments shaping the concept of an enterprise, the entities constituting the enterprise were affiliated companies within the same corporate group. On the other hand, in the W Hing and Mushrooms cases, the companies were found to consist of the Respondents and their unaffiliated contractors or representatives. The Court pointed out that knowledge of the contravention was not required, which leaves the possibility that the respondents were held liable for acts of third parties without their knowledge. Moreover, in Hong Kong, the Ordinance goes even further by establishing an ancillary liability regime. This means that not only can the company that actually infringes the Ordinance be held liable, but that the Court can also impose financial penalties on those “involved” in infringements of the competition rules. This concept casts a wide net over acts such as attempt, aid, abet, counsel, pimp, incite, attempt to incite, and conspiracy.

The practical effect of the Court’s judgment may be to cause companies to intensify competition law compliance among all their employees and business partners such as contractors. While that case considered contractors and subcontractors to constitute the same business, parent companies and subsidiaries, suppliers and distributors, and licensors and licensees could also be treated the same way in the cases. future. Therefore, and in light of the broad scope of the order, it is crucial for companies to ensure that all of their employees – and business partners – comply with the order.

Competitive Compliance Strategy

Competition law compliance efforts may need to become broader and more proactive (also towards third parties) than in the past, where companies focused primarily on their own employees, and primarily those at the center of operations. In this way, competition law compliance can begin to resemble compliance efforts in other areas such as anti-corruption and fraud.

The competition compliance strategy to adopt may differ from one company to another, depending on the size of the company, the risks to which the company is exposed and the likelihood of these risks occurring. In general, practical steps companies can take to ensure compliance include:

  • conduct regular competition audits to identify areas of business that pose competition law risks (such as pricing and rebate agreements, distribution agreements, and commitments to trade associations or industry bodies);
  • implement group competition compliance policies;
  • appoint a compliance officer;
  • organize regular competition law training for relevant employees (such as marketing employees and sales and internal legal counsel) and potentially for business partners;
  • set up a system where all contacts with competitors are recorded;
  • implementing an organizational whistleblower system for employees and business partners to report potential issues;
  • require trade partners that they approve of the codes of conduct of partners requiring compliance with competition law; and
  • Include competition clauses in agreements with business partners.

1 in CACV 143/2020, CACV 46/2021 and CACV 157/2021.

2 Competition Commission v W. Hing Construction Company Limited and others [2020] 2 HKLRD 1229.

3 Competition Commission v Fungs E&M Engineering Company Limited and others [2020] HKCT 9.