15 December, 2015
Overview
Hong Kong’s Competition Ordinance comes into force on 14 December 2015 and will have a significant impact on the construction sector. The Ordinance will prohibit certain anti-competitive practices of construction companies operating in Hong Kong, and of their suppliers.
Construction companies and their suppliers will need to ensure they have clear policies and procedures regulating how they interact with competitors. In particular, the Ordinance will require construction companies to exercise care when preparing and submitting tenders, deciding whether and how to engage in joint-ventures with competitors on individual projects, and when participating in industry and trade association meetings.
Construction companies will also need to be careful when deciding whether to enter pre-bid agreements with subcontractors, especially where a subcontractor is a technical specialist operating in a niche market.
The Competition Commission’s Four Don’ts
The Hong Kong Competition Commission (HKCC) has clearly identified as serious anti-competitive behaviour four types of arrangements, if engaged in between competitors. The HKCC’s so-called ‘Four Don’ts’ are:
- don’t fix prices with competitors
- don’t restrict output of goods or services with competitors
- don’t share markets, territories or customers with competitors • don’t rig bids with competitors.
There are however other types of behaviour which would represent anti-competitive behaviour of a type that would likely be challenged by the HKCC, and which could give rise to material legal and financial exposures for construction companies, and their suppliers. Some of these are discussed below.
Preparing and submitting tenders
The starting point for any competition law assessment is that a construction company should ordinarily prepare and submit any tender independently of its competitors. Therefore, if competitors collaborate when responding to a tender invitation, they will need to be able to demonstrate that there was a reasonable and pro- competitive reason for them to do so; for example, because the size or nature of the project required them to share financial risks or capabilities. A further important consideration, from a competition perspective, is whether the customer was aware of the discussions or collaboration between the competitors.
For example, the HKCC has indicated that it considers cover pricing to be anti-competitive. This is where a firm wishing to be seen to be tendering for a project does not want to win the tender, and so asks a competitor – without the customer’s knowledge or consent – to provide it with a price that will not be competitive in order to avoid having to prepare and cost its own tender.
A more extreme competition problem is that of bid-rigging. This is where competitors invited to respond to a tender decide between themselves – without the customer’s knowledge or consent – which of them will win that tender, and the other companies intentionally submit higher bids that will not be successful. This is often complemented by an arrangement by which the winning bidder makes compensatory payments to the unsuccessful bidders.
The HKCC has indicated that it considers cover pricing to infringe the Ordinance. Bid-rigging is a more serious infringement, one of the HKCC’s so-called ‘Four Don’ts’ (see above). The competition issue in each case is that the customer is misled as to the number of competitive tenders it believes it is receiving, as a result of the covert discussions between the competitors. And with bid rigging there is also a significant possibility that even the lowest price submitted will be artificially inflated.
Joint bidding with competitors on individual projects
Within the construction sector, there is frequently joint tendering between competitors, sometimes involving corporate joint ventures, for a particular project. The Ordinance does not prescribe a single fixed test for distinguishing between competitive and anti- competitive collaboration or joint tendering between competitors. The following factors will however all likely be taken into account by the HKCC when considering whether cooperation is permissible or anti-competitive:
- the cooperation is more likely to be justifiable if it is limited to fulfilling a specific individual project, rather than being permanent or across the board
- the market shares of the competitors involved will be relevant, and the risk of competition concerns will increase in proportion with the competitors’ combined market share
- the cooperation is more likely to be acceptable if the parties can demonstrate objectively that the size or nature of the project meant that they needed to share financial risks, resources or capabilities, and that neither party would individually have been able to undertake the project
- what the competitors’ internal and other contemporaneous documents, including emails, say about their rationales for cooperating will be relevant; if the documents indicate that the companies only cooperated in order to reduce the number of independent tenderers then that will make it harder for them to demonstrate that the cooperation is pro-competitive
- if the customer is aware of, and does not object to, the competitors’ cooperation at or before receiving the tender responses then it may well reduce the risk of the cooperation being considered as anti- competitive – the competition risk would however be likely to materially reduce if the customer consented before the competitors began cooperating or exchanging competitively sensitive information
- potential competition law risks will reduce if the competitors promptly implement procedures to ensure that any cooperation and discussions between them are limited to what is necessary in order to fulfil a particular project, and that there is no ‘spill-over’ into projects where the companies continue to compete.
Such considerations will play an important role in influencing how the HKCC interprets any collaboration or joint tendering between competitors. These considerations will apply regardless of whether the cooperation takes the form of a contractual arrangement or a corporate joint venture.
General dealings with competitors
Unless there are compelling pro-competitive reasons for doing so, it is likely to be considered anti-competitive if competitively sensitive information or documents are disclosed by one competitor to another:
- in such a scenario, the ‘disclosing party’ could be considered to have infringed the Ordinance
- equally, the ‘receiving party’ could be considered to have infringed the Ordinance, because it would be presumed to have taken that information into account when determining its own commercial decisions. To avoid such a conclusion, the receiving party must be able to show that it promptly made clear and unambiguous efforts to seek to prevent and/or to actively distance itself from the disclosures.
Disclosures of competitively sensitive information or documents between competitors might occur directly between them, or indirectly via a third party such as a sub-contractor or trade association. In practice, if the parties involved expected or intended that the disclosures would be acted on by the recipient, and if the recipient did act or intended to act on the information, then such disclosures could well be considered as anti-competitive.
Information is likely to be considered as competitively sensitive if it concerns a business’s future pricing levels, marketing or strategic plans, or future capacity and output. The more frequent such disclosures by or exchanges between competitors, and the more competitors who are involved, the more likely it is that the behaviour will be considered anti-competitive. Construction companies competing for a particular project therefore need to reflect carefully on the competition risks involved in discussing immediately post-tender the prices they have each submitted to a customer, especially where it has not yet made a final decision on which company to appoint.
Participating in industry and trade association meetings
The activities of trade and industry associations involving competitors are an especially high competition risk. There is nothing intrinsically anti-competitive about competing construction companies belonging to the same trade or industry association. It should not be problematic, for example, if an association’s activities are limited to raising the industry’s profile, or discussing and presenting a common industry view on matters that are not competitively sensitive. Potentially acceptable initiatives would include highlighting the need to recruit more apprentices into the industry, or supporting the importance of health and safety policies and procedures across the sector.
However, if a trade or industry association’s activities or discussions did touch matters that could be considered as competitively sensitive (and see above for examples), then the association’s members and the individuals engaged in those activities or discussions could infringe the Ordinance.
To minimise the risk of an industry or trade association becoming involved in a breach of the Ordinance, it would be prudent for individuals attending any meeting of the association at which competitors will be present to ensure that:
- a clear agenda is circulated before the meeting, to ensure that potentially problematic issues will not be covered
- minutes are promptly produced and circulated after each such meeting, noting clearly what was discussed
- the association has a clear written policy on competition law compliance, and that attendees are reminded at the outset of each meeting of the importance of complying with the policy.
If an individual attending a meeting (whether in person or by a conference call) of a trade or industry association is concerned that the meeting may be about to discuss a topic, or engage in an activity, which could be considered as competitively sensitive or anti-competitive then they should immediately object and seek to stop it. If their objections are ignored, then the individual should immediately leave the meeting and ensure that their objection to the association’s activity, and their departure from the meeting, are both noted clearly in the meeting minutes.
If the individual does not immediately leave the meeting or subsequently actively distance itself from the events, it (and the company it represents) may well be considered to be part of the anti- competitive arrangement or discussion. From a competition perspective, it is high-risk for the individual to remain silent but continue to attend the meeting.
Pre-bid agreements with subcontractors
A tender for construction works in Hong Kong may well require the provision of specialist subcontract services, but there may be a limited number of niche subcontractors. In that scenario, a main contractor replying to the tender may well wish to enter a pre-bid agreement with one or more specialist subcontractors to ensure that, if its tender is successful, it will be able to undertake all of the necessary works and that it has upfront certainty around the subcontractor’s likely costs.
In deciding whether such a pre-bid agreement might infringe the Ordinance, the following considerations will be of particular importance:
- whether the pre-bid agreement prevents a subcontractor from working for other tenderers
- if there is any such exclusivity, what is its duration and scope; such a restriction is less likely to be permissible if it is not limited to the specific project covered by the tender
- the subcontractor’s market share and whether it might be considered to have substantial market power (SMP); there is no fixed market share figure establishing substantial market power but during the legislative process leading up to the Ordinance the Government indicated a safe harbour of 25%, and the HKCC has not explicitly ruled out the possibility of SMP arising with a 25% market share
- the number and relative competitive strength of other subcontractors able to provide the niche service
- the market share of the main contractor.
Dealings with suppliers
Construction companies should be alert to the possibility that their suppliers might be engaged in anti-competitive practices, and the Ordinance offers a route by which contractors and end-customers could seek to have suspected breaches investigated by the HKCC, potentially leading to the award of damages to compensate them for any financial loss they have incurred.
If a contractor has a dispute with one of its suppliers, it should take care to avoid trying to organise joint action involving third parties against that supplier, in case it might be considered an anti- competitive collective boycott.
Finally, if a main contractor has an open-book policy with its end- customer it needs to be careful about how it selects subcontractors and especially if the contractor receives a commission from the appointed subcontractor which is not declared to the end-customer.
Conclusions:
The Ordinance’s entry into force on 14 December 2015 will prohibit numerous commercial practices that have been widespread within Hong Kong’s construction industry, and amongst the suppliers to the industry. To avoid infringing the Ordinance, care is needed to identify commercial risks, change behaviours where necessary, and to put in place adequate competition law compliance training and procedures to ensure that anti-competitive ‘old habits’ are not continued.
For further information, please contact:
Peter Clayton, Partner, Pinsent Masons
peter.clayton@pinsentmasons.com
