The Hong Kong Competition Ordinance (Cap. 619) (“Ordinance”) was gazetted on 14 June 2012 and will commence on 14 December 2015. The Hong Kong Competition Commission (“Commission”) published the Revised Draft Guidelines (“Guidelines”) to the Ordinance in July 2015. We summarise below the rules of the Ordinance and then consider their potential impact on the shipping sector.
The Competition Rules
The Ordinance comprises only three rules:-
- the First Conduct Rule (“FCR”);
- the Second Conduct Rule (“SCR”); and
- the Merger Rule.
At present, the Merger Rule presently only applies to the telecommunications sector and will not be considered in this article.
The First Conduct Rule
The FCR prohibits undertakings (any entity regardless of legal status that is engaged in economic activity including a natural person) from making or effectuating an agreement (whether written, expressed or implied) or engaging in a concerted practice, with the object or effect of preventing, restricting, or distorting competition in the relevant market. It applies both to horizontal (i.e agreements between competitors) and vertical agreements (i.e. agreements with suppliers and purchasers) and also to decisions of an association of undertakings (e.g. a trade association). Unlike some other jurisdictions, the Ordinance does not create automatic or per se contraventions of the FCR. It will have to be established that the agreement has an anti-competitive object or effect (whether actual or inferred). However, once the anti-competitive object or effect is established, the question of whether the conduct amounts to serious anti-competitive conduct arises. Activity amounting to serious anti-competitive conduct (e.g. cartel arrangements) will attract more serious penalties.
The Ordinance does not provide an exhaustive list of agreements which are presumed to have an anti-competitive object or effect. Each agreement must be considered objectively in its specific circumstances. This involves an objective assessment of its aims, content, implementation, and its economic and legal context. Whether an agreement has an anti-competitive effect depends on whether it is likely to have an adverse impact on one or more of the parameters of competition (e.g. price and output) and also the extent of the relevant undertakings’ market power in a relevant market. The Guidelines provide examples of horizontal and vertical agreements that may contravene the FCR:-
- market allocation agreements;
- output limitation agreements;
- joint purchasing agreements facilitating downstream collusion or oligopsony effects (i.e. where there are more sellers than buyers) in upstream markets;
- information exchanges (in particular commercially sensitive information);
- group boycotts; and
- resale price maintenance agreements.
The Second Conduct Rule
The SCR targets undertakings with a substantial degree of market power. It prohibits relevant undertakings from abusing power by engaging in conduct with the object or effect of preventing, restricting, or distorting competition. It is generally accepted that market power is a matter of degree. High market share is likely to determine whether an undertaking has a substantial degree of market power. Other relevant factors include the ability to profitably charge prices above competitive levels over a sustained period, and the barriers to market entry for prospective competitors.
Unlike other jurisdictions (e.g. Singapore presumes 60% market share to amount to “dominance”; the EU presumes that 40% equates to “dominance”), the Commission has rejected calls to announce any market share-based threshold. This creates difficulties in defining the relevant market and what constitutes a “substantial degree” of market power. Previous statements by the HK Government have suggested a threshold as low as 25% may suffice to trigger the application of the SCR).
The Guidelines suggest that the following conduct may constitute an abuse of market power:-
- predatory behaviour towards competitors;
- tying customers and bundling;
- limiting production, markets or technical development to the prejudice of consumers;
- margin squeezing by vertically integrated undertakings; and/or
- refusals to deal and exclusive arrangements.
Exclusions and Exemptions
Exclusions and exemptions are available in limited circumstances. A distinction is drawn between general and specific exclusions and exemptions. These are summarised as follows:
- both Rules: compliance with legal requirements; services of general economic interest; mergers; public policy exemptions; international obligations; statutory body and specified person or activities exclusions;
- FCR only: agreements enhancing overall economic efficiency; agreements of lesser significance; block exemption orders; and
- SCR only: conduct of lesser significance.
It is up to an undertaking to self-assess whether it complies with the Ordinance. No obligation exists to first obtain a decision or block exemption order before relying on an exclusion or exemption. If an undertaking requires greater legal certainty, it can apply to the Commission for a decision or block exemption order. However, references to the Commission should not be made lightly. If the information provided suggests that the agreement/conduct concerned is anti-competitive, the Commission has the power to investigate in the first instance and subsequently prosecute the relevant undertakings if a breach is established.
Considerations for the shipping industry
The shipping industry is no stranger to anti-competition legislation. The container liner trade has obtained block exemptions in most jurisdictions. The EU Consortia Block Exemption prohibits price-fixing arrangements but allows liner shipping consortia to operate joint services, take joint capacity decisions in response to fluctuations of demand and supply, pursue pooling arrangements, jointly operate and use port terminals, co-ordinate timetables and ports of call and cross-charter slots. This is subject to the consortia’s market share not exceeding 30%. Singapore permits co-operation on price, remuneration and technical operations, and commercial arrangements, subject to market share not exceeding 50%. South Korea and Taiwan exempt all types of co-operative carrier agreements. These are Conferences which allows members to set common tariffs, not Consortia.
However, the Ordinance applies to all undertakings, not merely the container trade and liner arrangements. Maritime operators in all segments including tankers, dry bulk carriers and tramping must abide by the conduct rules. In October 2006, the EU lifted exclusions for tramp shipping, sparking speculation that shipping pools breach competition law. EU law now recognises that pools, whilst not being Consortia, can be compliant co-operative joint ventures provided they satisfy EU exemption criteria (i.e. they guarantee efficiency gains and consumer benefits). It is unclear if this has been considered in Hong Kong.
It is commonly argued that co-operative arrangements (whether by way of pooling or liner services), which have been an integral part of the transportation industry for centuries, are necessary in order to maintain economic efficiencies and service levels for consumers. The question is whether the Commission will accept such arguments. Although the Ordinance fuses principles derived from EU, Australian, UK and Singapore competition law, the Commission has been reticent on the applicability of precedents from these jurisdictions in Hong Kong. This results in a lack of legal certainty on key issues – e.g. market definition, market power thresholds and sector-specific block exemptions, pending development of local case law. The complexity of self-assessment is exacerbated by this lack of legal certainty.
The introduction of the Ordinance will significantly impact the transportation industry, especially when businesses are looking to consolidate or pool their assets together in response to tough market conditions. Given the significant penalties that can be imposed in the event of non-compliance, the importance of compliance should not be underestimated. Risk can be minimised by implementing effective compliance procedures and training programmes.