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.

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