Navigating Hong Kong's Competition Law – Statutory Bodies Exclusion

12 October 2012

Richard Keady, Kathryn Edghill, Cicely Sylow

One of the most controversial features of the Competition Ordinance is the blanket exclusion afforded to certain statutory bodies. The exclusion means that statutory bodies are not subjected to the Competition Rules or the enforcement provisions of the Ordinance. Unlike other exemptions and exclusions 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 exemption for statutory bodies applies to everything they do, no matter the harm to competition.

Statutory bodies in Hong Kong – only six statutory bodies are subject to the Ordinance

There are 575 statutory bodies in Hong Kong. Of these, 160 engage in significant commercial activity and the other 415 statutory bodies are considered non-economic and regulatory in nature or involve the provision of essential public services.

The Chief Executive in Council can, by regulation, withdraw the statutory exclusion either completely or in part. Presently, the following six statutory bodies have been identified in a regulation and do not benefit from the exclusion: Ocean Park Corporation, Matilda and War Memorial Hospital, Kadoorie Farm and Botanic Garden Corporation, The Helena May, Federation of Hong Kong Industries and the general committee of the Federation of Hong Kong Industries.

Because of the stringent preconditions that must be met before the exclusion may be withdrawn, statutory bodies have little incentive to consider the effect of their commercial behaviour on competition.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.

Statutory bodies engaging in commercial activities may engage in conduct that restricts and distorts competition

The statutory bodies that do engage in significant commercial activity, 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. The Statutory Body Exclusion appears to leave statutory bodies in the unique position of not having to pay attention to the economic consequences of their market conduct.

What the exclusion covers

The Ordinance’s conduct rules – the First Conduct Rule (FCR) and Second Conduct Rule (SCR) – prohibit two different kinds of conduct. The FCR 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 SCR prohibits unilateral action that has the same object or effect if the undertaking concerned has a significant degree of market power. The exclusion also extends to the enforcement provisions in the Ordinance so shields the statutory body from scrutiny by the Competition Commission and the Competition Tribunal.

Businesses engaging with the statutory body are not similarly protected by the exclusion

Businesses that deal with statutory bodies should bear in mind that the statutory bodies exclusion shields only the statutory body from scrutiny by the Competition Commission and the Competition Tribunal; it does not shield ordinary businesses if they enter into or give effect to an agreement with, or acquiesce in a decision of, a statutory body that violates the conduct rules. These businesses 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 anti-competitive 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.

Can statutory bodies enforce anti-competitive agreements and decisions?

The blanket exemption for statutory bodies leaves the legal status of any anti-competitive agreements or decisions of a statutory body in limbo. Unlike EU or UK law, which forthrightly declares anti-competitive agreements and decisions void, 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. 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 the exclusion 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 statutory body exclusion was intended to change the common law position that the courts should never enforce unjustified restraints on trade.

The legislative history of the Competition Ordinance does not suggest that the Government intended to allow statutory bodies to enforce anti-competitive 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 anti-competitive agreement has the right to apply to the Commission under the Ordinance for a ruling on whether the agreement should be excluded from the conduct rules by virtue of the statutory body exclusion. 

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 the statutory body exclusion 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.

Interested in other aspects of Hong Kong's Competition Law?

You may be interested in reading other related fact sheets in this series, such as those that cover the First Conduct Rule and Second Conduct Rule, both of which are mentioned in this fact sheet.

Authors

Kathryn Edghill

Partner
Australia

Call me on: +61 2 9226 9888
Cicely Sylow

Cicely Sylow

Associate
Australia

Call me on: +61 2 9226 9888
Keady-Richard

Richard Keady

Partner
China and Hong Kong

Call me on: +852 2248 6000