Hong Kong: Bid-rigging And Joint Tendering – When Are They Prohibited Under Hong Kong's Competition Ordinance?

Last Updated: 16 October 2018
Article by John M. Hickin and Hannah C. L. Ha
Most Read Contributor in Hong Kong, August 2019

Since the Hong Kong Competition Ordinance (CO) came into force in December 2015, there has been a significant focus on bid-rigging conduct. The first case brought before the Competition Tribunal involved bid-rigging; the first market study commissioned by the Hong Kong Competition Commission (HKCC) identified bid-manipulation practices in the residential building renovation and maintenance market; and the HKCC has published various guidance on tendering, bid-rigging and model non-collusion clauses.

What has been less discussed is the legality of joint tendering. Joint tendering is commonplace in real estate development, construction and many other industries in Hong Kong, and it is critical for businesses to understand how such practices sit with the CO. Common questions that are asked about joint tendering include: 'can joint tendering ever be bid-rigging?' and 'would joint tendering be acceptable as long as the person calling the tender knows about the co-operation?'

What is bid-rigging?

Bid-rigging generally occurs when various parties come together to agree that they will not compete with each other for tendered projects. It can take many forms. Certain parties could, for example, agree not to submit a bid or withdraw a previously submitted bid. Alternatively, parties could agree amongst themselves to take turns at winning tenders, or to submit unattractive cover bids at high prices to allow another party to win the tender. In essence, any conduct that reduces the competitive tension in the bidding process could constitute bid-rigging. The HKCC considers bid-rigging to be inherently anti-competitive, and a contravention of the CO's prohibition against anti-competitive agreements that restrict competition in Hong Kong (the First Conduct Rule).

It is to be noted, however, that the CO carves out a subset of bid-rigging conduct by providing a definition of bid-rigging under S2(2) CO that amounts to serious anti-competitive conduct (Serious Bid-rigging). This is distinct from bid-rigging that does not amount to a serious anti-competitive conduct (Non-serious Bid-rigging), a key difference between the two being that Serious Bid-rigging can only arise when the person calling the tender does not know of the coordination between the bidding parties; there being no such statutory requirement to establish a case of Non-serious Bid-rigging.

It is important to differentiate between Serious Bid-rigging and Non-serious Bid-rigging because small and medium-sized enterprises (SMEs) are only prohibited from engaging in Serious Bid-rigging and other serious anti-competitive conduct. Other than that, SMEs are exempted from the First Conduct Rule where the combined turnover of the parties engaged in the relevant conduct or agreement for the turnover period does not exceed HK$200 million (SME Exemption).

Other parties that do not fall within the SME Exemption would be prohibited from all types of bid-rigging – both serious and non-serious.

Is bid-rigging different from joint tendering?

The HKCC's First Conduct Rule Guidelines (Guidelines) appear to distinguish between joint tendering and bid-rigging by explaining that:

6.101 [j]oint tendering generally involves undertakings cooperating openly with a view to making a joint bid. Such conduct can be contrasted with bid-rigging which more often involves collusion by competing bidders which nonetheless submit separate bids.

(emphasis added)

However, a closer reading suggests the distinction based on whether a joint or separate bid is submitted may not be determinative of whether given conduct is bid-rigging or joint tendering. In particular, given the Guidelines use the term "generally" and "more often", there is room to argue other types of conduct may be classified as bid-rigging, even if only one joint bid is submitted.

Other parts of the Guidelines appear to support a broader interpretation of what is meant by bid-rigging that could include joint tendering, for example in referring to bid-rigging as conduct where "undertakings agree...that certain parties will not submit a bid...". The statutory definition of bid-rigging under s2(2) CO also gives space for joint tendering to constitute bid-rigging by defining bid-rigging as "an agreement [between undertakings] whereby one or more of those undertakings agree...not to submit a bid". Accordingly, where joint tendering involves an express or implied agreement for the parties not to put in separate independent bids, such an arrangement could fall within the above definition/explanation of bid-rigging.

It is important to ascertain whether joint tendering may be assessed as a form of bid-rigging because there are differences to how the conduct would be assessed, depending on whether it is Serious Bid-rigging, Non-serious Bid-rigging or joint tendering. For example, if the conduct is seen as bid-rigging, the HKCC will assess it as an object restriction (i.e. it does not have to demonstrate that the conduct had anti-competitive effects to find an infringement). If it were only assessed as joint tendering conduct, the HKCC would adopt an effects analysis and examine the actual or likely effects of the conduct on competition, which would be more difficult to prove. There are also differences in relation to whether the SME Exemption applies, and whether the HKCC would need to give warning before commencing proceedings. These are set out in the table below.

Assessed by object or effect?

SME Exemption applies?

Does HKCC need to give warning before commencing proceedings?

Serious Bid-rigging

Object

No

No

Non-serious Bid-rigging

Object

Yes

Yes

Joint tendering

Effect

Yes

Yes

It is not uncommon for a strict approach to be taken to joint tendering in other jurisdictions. In the EU, there is a recognition that certain types of joint tendering could restrict competition by object; for example, if it actually amounts to a form of joint selling that has the object of coordinating pricing policy of competing bidders, with no real pooling of resources or joint production involved.

In sum, it remains to be seen how the HKCC would assess joint tenders. While the Guidelines appear to suggest that joint tenders are distinct from bid-rigging, the possibility remains that they could nonetheless fall within the definition of bid-rigging, which is broadly defined. This can have significant consequences on how the conduct is treated by the HKCC.

How can I ensure that my joint tender complies with the CO?

Regardless of whether joint tendering is assessed as a form of bid-rigging, there are several key questions that parties should consider before entering into a joint tender, to ensure compliance with the CO:

  1. Are the joint bidders able to put in their own independent bids absent the joint tender? If not, the parties are unlikely to be actual or potential competitors, and any joint tender between them would unlikely raise competition issues.

  2. For it to be pro-competitive, the joint tendering minimally has to be carried out in the open and the arrangement has to be known to the tender organiser. If the joint tender is carried out in secret, it would unlikely be pro-competitive. Such transparency would also avoid the conduct being construed as Serious Bid-rigging.

    Note, however, that arranging a joint tender in the open may not of itself avoid a finding of infringement. There have been cases in the EU where an openly conducted joint tender was nonetheless considered to restrict competition by object.

  3. The form of cooperation envisaged under the joint tender is important to determining whether the joint tender is anti-competitive. If the joint tender involves pooling of parties' assets and joint production, it is more likely to be pro-competitive. For example, if the joint bidders have complementary skills or different specialties (e.g. access to different/complementary technology, access to raw materials, access to specialised workforce) cooperation between the parties is likely to be more pro-competitive.

    Conversely, if there is little actual pooling of resources or joint production, and the collaboration is closer to a means for the parties to sell jointly in order to eliminate competition, the joint tender is more likely to be anti-competitive. As in the EU, it is possible for the HKCC to adopt a strict 'object restriction' approach and consider this latter situation to be a form of bid-rigging.

  4. Even if the joint tender is not anti-competitive, parties have to consider if the various restrictions imposed as part of the joint tender are directly related to, proportionate to, and necessary for the implementation of the joint tender project, i.e. they are ancillary restraints.

    For example, if parties intend to include an express non-compete clause that prevents them from independently submitting competing bids, they need to be able to justify that this restriction is directly related to, proportionate, and necessary for the joint tender. Otherwise, this restriction may be construed as an agreement between competitors not to submit bids, which could fall within the definition of bid-rigging.

  5. If the SME Exemption applies to the joint tendering conduct, the First Conduct Rule would not apply. Qualifying SMEs can therefore put in joint tenders without fear of infringing the CO, as long as their joint tenders are known to the person calling the tender.

Once parties have agreed to put in a joint tender and cooperation on a joint project, they should also be careful that any competitively sensitive information that is shared in submitting the bid and in carrying out the cooperation is used strictly for the purposes of the joint project. The joint project should not be used as a vehicle for exchanging competitively sensitive information on parties' usual prices and costs unrelated to the cooperation. Otherwise, such an exchange of competitively sensitive information may also constitute a separate infringement under the First Conduct Rule.

There are many legitimate and pro-competitive reasons why parties may want to enter into joint tenders. There are also important red-lines and pitfalls that parties need to be aware of, and there is a need to proceed with care when entering into joint tenders.

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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

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