The statutory bodies' exemption under Hong Kong's competition ordinance

12 October 2012

One of the most controversial features of Hong Kong’s new Competition Ordinance is its blanket exemption for statutory bodies [1]. Unlike other exemptions in the Ordinance, which are designed to screen out market conduct that is unlikely to have a material adverse impact on competition or whose anticompetitive effects are outweighed by other important legal or policy considerations, the section 3 exemption for statutory bodies applies to everything they do with no questions asked, no matter how harmful it may be to competition.

According to the Government, there are over 160 statutory bodies in Hong Kong that engage in significant commercial activity. Some, like the Airport Authority, the Hong Kong Housing Authority, the Hospital Authority and the Hong Kong Trade Development Council, have significant market power and may feel duty bound to use it to get the best deal for themselves or their customers. 

The fact that statutory bodies are subject to statutory duties offers no assurance they will not restrict or distort competition. In Matteograssi SpA v Airport Authority [1998] 2 HKLRD 213, the Court of Appeal declined to consider whether the Airport Authority had breached its statutory duties in conducting a competitive tender on the grounds that it was acting in a private, commercial capacity and not as a statutory body. Once the Ordinance takes effect [2], section 3 would seem to leave statutory bodies in the unique position of not having to pay any attention to the economic consequences of their market conduct. 

The conduct rules

The Ordinance’s conduct rules prohibit two different kinds of conduct. The first rule prohibits agreements, concerted practices or decisions among undertakings (especially competing undertakings) that have as their object or effect the prevention, restriction or distortion of competition in Hong Kong. The second rule prohibits unilateral action that has the same object or effect if the undertaking concerned has a significant degree of market power.

Businesses that deal with statutory bodies should bear in mind that the section 3 exemption shields only the statutory body from scrutiny by the Competition Commission and the Competition Tribunal; it does not shield ordinary business undertakings if they enter into or give effect to an agreement [3] with, or acquiesce in a decision of, a statutory body that violates the conduct rules. These undertakings need to consider whether their own conduct in dealing with a statutory body will violate the conduct rules and, if it does, to work out a strategy for protecting themselves against the risk of being held liable for breaching the Ordinance.

There is no defence of economic duress in the Ordinance. Non-statutory bodies that are coerced into joining an anticompetitive scheme by the market power of a statutory body may still be fined and held liable for damages to those who suffer financial loss as a result of the scheme.
 
The Government evidently believes that statutory bodies are less likely than other undertakings to engage in anti-competitive behaviour except in narrowly defined circumstances.  Only if a statutory body meets all four conditions specified in section 5(2) [4] may the Chief Executive in Council withdraw its exemption under section 3, either completely or in part.  Following a review, the Government found that only five statutory bodies met all four conditions and it signalled its intention to withdraw the section 3 exemption from them as soon as the Ordinance takes effect.

Because of the stringent preconditions that must be met before the section 3 exemption may be withdrawn, statutory bodies have little incentive to consider the effect of their commercial behaviour on competition.  Even if a statutory body’s activities are clearly harming competition in a market, no action can be taken against it under the Ordinance if the statutory body does not compete directly in that market or its activities relate directly to the provision of an essential public service or the implementation of public policy.  Some statutory bodies such as the Airport Authority have a monopoly over the supply of essential public services but choose to contract them out to competing suppliers. It is not clear why they should not be held accountable under the Ordinance if they seek to impose agreements or decisions on their service providers that prevent, restrict or distort competition among the suppliers [5].

Can statutory bodies enforce anticompetitive agreements and decisions?

The blanket exemption for statutory bodies leaves the legal status of any anticompetitive agreements or decisions of a statutory body in limbo. Unlike EU or UK law, which forthrightly declares anticompetitive agreements and decisions void [6], the Competition Tribunal has discretion under the Competition Ordinance to decide whether agreements the making or giving effect to which contravenes the conduct rules should be declared void or voidable and, if so, to what extent [7]. Even if the Tribunal were minded to declare an agreement to which a statutory body is a party to be void or voidable, its legal authority to do so is open to doubt since section 3 of the Ordinance exempts statutory bodies from the Tribunal’s jurisdiction.

At common law, which continues to apply in Hong Kong by virtue of Article 8 of the Basic Law, a contract in restraint of trade is void and unenforceable unless the party seeking to enforce it can demonstrate that the restraint is commercially reasonable and not contrary to public policy. Of course, the common law can be displaced by legislation but it is a matter of statutory construction whether the section 3 exemption was intended to change the common law position that the courts should never enforce unjustified restraints on trade.

Nothing in the legislative history of the Competition Ordinance suggests that the Government intended to allow statutory bodies to enforce anticompetitive agreements or decisions – the Government assured legislators before the Ordinance was enacted that it would take steps to try to prevent statutory bodies from violating the conduct rules – so it would be a travesty for the Ordinance to be interpreted as allowing statutory bodies to enforce a prohibited agreement whilst penalising the other parties for entering into and giving effect to it.

An undertaking that feels it is being coerced by a statutory body to enter into or give effect to a potentially anticompetitive agreement has the right to apply to the Commission under section 9(1)(d) of the Ordinance for a ruling on whether the agreement should be excluded from the conduct rules by virtue of the section 3 exemption. At first sight, it seems odd that section 9 speaks of agreements being exempted “by virtue of section 3” since the section 3 exemption applies to statutory bodies, not agreements.  The wording is appropriate, however, since undertakings require some mechanism for determining legality of a suspect agreement with a statutory body so that they can know whether they can enforce the contract and, equally importantly, whether they have a defence of illegality in the event the statutory body tries to enforce the contract against them.

A ruling by the Competition Tribunal that an agreement with a statutory body is prohibited by the conduct rules might also provide the non-statutory parties with protection in the event that the statutory body has to use extra-judicial means (such as by threatening to sever business relations) to enforce the agreement.  Intimidation by a statutory body with market power that is intended to force others to breach a statutory obligation (the duty to comply with the first conduct rule) could constitute the tort of intentionally causing economic loss by unlawful means. While section 3 of the Ordinance gives statutory bodies immunity from liability for preventing, restricting or distorting competition in a market, it is more doubtful whether it affords them immunity from liability for wrongful acts that are intended to harm specific companies.

Why exempt statutory bodies?

The section 9(1)(d) procedure, cumbersome as it is, seems to be the only way that non-statutory bodies can determine whether entering into an agreement with or giving effect to a decision by a statutory body will give rise to a breach of the conduct rules. For small and medium enterprises (SMEs), this seems like a violation of one of the Government’s most important principles in formulating the Ordinance, to avoid imposing unnecessary bureaucratic burdens on SMEs. Because of the complete exemption afforded to statutory bodies, which removes any incentive for them to examine their own commercial conduct, the burden of ensuring compliance with the conduct rules will fall on those they do business with, including SMEs.

It is difficult to see why statutory bodies that engage in economic activity should be exempted from complying with the Ordinance’s conduct rules. The conduct rules apply to “undertakings”, which are defined in section 2 as “any entity, regardless of its legal status or the way in which it is financed, engaged in economic activity, and includes a natural person engaged in economic activity.” [italics supplied] In some business sectors, such as public transport, it is often simply a historical accident whether the key players are statutory bodies or not.

The Hong Kong SAR Government made a concerted effort to model its Competition Ordinance on best international practice but the curious and unexplained exemption for statutory bodies has created a serious fault line within Hong Kong’s system of market regulation. Section 3 creates a class of market operators that, despite the important role some of them play in the economy, are not subject to any legal controls over their market conduct.  Statutory bodies are effectively given a licence to prevent, restrict and distort competition. Anyone doing business with them who does not enjoy the same licence does so at its peril. While the section 9 application procedure provides non-statutory bodies with a means of determining whether entering into an agreement with or giving effect to a decision of a statutory body would violate the conduct rules, it is cumbersome and likely to give rise to significant legal costs. Hong Kong’s new Administration should take another look at the statutory bodies’ exemption and, unless it can come up with a better justification, it should amend the Ordinance to remove it.

If you would like to know what the Competition Ordinance will mean for your business, you can reach David Renton at +852 2248 6023 or by email at david.renton@twobirds.com.

[1] A statutory body is a body of persons other than a company registered under the Companies Ordinance, a trust company, a registered society or cooperative or a registered trade union, established or constituted by or under an Ordinance or appointed under an Ordinance. 

[2] This will have to wait until the Competition Commission and the Competition Tribunal are set up.

[3] The term “agreement” is broadly defined in the Ordinance to include “any agreement, arrangement, understanding, promise or undertaking, whether express or impled, written or oral, and whether or not enforceable or intended to be enforceable by legal proceedings.”  It has the same broad meaning when used in this note.

[4] The conditions are that:

(a)    the statutory body is engaging in an economic activity in direct competition with another undertaking;

(b)    the economic activity of the statutory body is affecting the economic efficiency of a specific market;

(c)    the economic activity of the statutory body is not directly related to the provision of an essential public service or the implementation of public policy; and

(d)    there are no other exceptional or compelling reasons of public policy against making such a regulation; Competition Ordinance s.5(2).

[5]  Section 3 of Schedule 1 of the Competition Ordinance exempts any undertaking entrusted by the Government with the operation of services of a general economic interest from the application of the first and second conduct rules “in so far as the conduct rule would obstruct the performance, in law and fact, of the particular tasks assigned to it”. If the undertaking is a statutory body, it is exempted from the conduct rules whether or not it could have performed the tasks assigned to it by the Government in compliance with them.

[6] Treaty on European Union, Article 101(2); Competition Act 1998 s. 2(4)

[7] Competition Ordinance, Schedule 3, s. 1(i).