Understanding the nature of your agency agreement is very important to ensuring compliance with the Hong Kong Competition Ordinance (Ordinance). This alert takes a look at agency agreements and when the various competition rules will apply.
What is an agency agreement?
Under an agency agreement, a principal appoints an agent and grants the agent the power and authority to enter into contractual dealings on the principal's behalf.
Agency agreements are commonly used by suppliers to appoint another party to negotiate or conclude contracts on the supplier's behalf for the distribution of its products and services. Agency agreements are distinct from distribution agreements, in which the supplier appoints an independent party to distribute its products or services in that party's own right (and not on the supplier's behalf).
The distinction is important as the First Conduct Rule (FCR) (which concerns cartel conduct and anticompetitive agreements) will not apply to restrictions imposed on the distributor if it is a true agent.
What is a true agency agreement?
Whether a third party is an independent distributor or a true agent depends on whether the third party is authorised to act on behalf of the supplier (an agent) or is authorised to act on its own behalf. It does not depend on merely labelling the distributor an 'agent' or an agreement an 'agency agreement'.
A true agency agreement occurs where the party is standing in the shoes of the supplier. Commonly this occurs where the risk remains with the supplier and the party bears no or no significant risk in relation to the contracts it concludes on behalf of the supplier. For example, this occurs where:
- Title, or a licence, to the product is not first transferred to the distributor, such that it does not 'own' the product; and
- the distributor bears no risk in relation to costs for matters such as distribution, maintenance of stock, product warranties, customer non-performance (eg late payments), advertising or sales promotion, investments or training of personnel.
First Conduct Rule
For the purposes of the Ordinance, the selling functions of a true distribution agent are considered to be outside the scope of the FCR as the supplier and agent are considered to be part of the same undertaking.
This means that the supplier can impose restrictions on the agent in relation to those products and services that will not breach the Ordinance. For example, the supplier can:
- limit the customers to whom the agent can supply the products or services;
- limited the territories where the agent can sell the products or services; or
- set the price or the conditions on which the agent sells the products or services.
However, the FCR will still apply to the relationship between the principal and the agent which do not specifically relate to the products and services in question, such as any exclusivity granted to the agent.
When restrictions may breach the Ordinance
An 'agency agreement' that requires the 'agent' to bear a number of risks in relation to selling the products and services (such as costs relating to advertising, delivery and installation services, product warranty and unsold stock) is likely to be considered a separate undertaking to the supplier. If your agency agreement includes restrictions similar to those listed above, your agreement should be reviewed for compliance with the Ordinance.
In particular, any agency agreements that transfer risk onto the distributor should be reviewed for Resale Price Maintenance (RPM). RPM is a common form of price control used in distribution agreements and is considered to be serious anti-competitive conduct (see our earlier alert here).
Enforcement and penalties for breaching the FCR
There are two possible enforcement approaches the Competition Commission can take depending on the seriousness of the alleged offence:
- issue a warning notice, providing an opportunity to cease or alter the offending conduct; or
- institute proceedings in the Competition Tribunal without first issuing a warning (eg cartel conduct or RPM).
If the Competition Tribunal finds an offence has been committed, it can issue a fine of up to 10 per cent of its group turnover in Hong Kong for duration of the infringement (with a three-year cap) for each offence.