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Thoughts from the Legal Front
Bid-rigging: The Need for Legal Clarity
Illustration of underhand tactics

Bribery

Recent calls have been made for bid-rigging in the building maintenance sector to be criminalised under the Building Maintenance Ordinance. 

Bid-rigging in any sector (or at least some forms of it) is already treated as “serious anti-competitive conduct” under the Competition Ordinance. This means that the Commission can bring proceedings directly before the Tribunal, without giving the parties any warning notice. It may also ask the Tribunal to impose severe penalties. 

With these high stakes, businesses need to be clear about what they can and can’t do. Can they be clear though? Although it may be obvious what constitutes as bid-rigging in some cases, in other cases it may be less clear. We believe that the Commission needs to give further guidance on this issue, as a matter of some urgency.

Take, for example, a situation where a business (say an SME), does not have sufficient scale to bid for a large project, so it agrees with a number of other SMEs that they will pool their resources to submit a joint bid. Would this be considered as bid-rigging, or otherwise contravene the Ordinance? 

The Commission Guidelines seem to make this depend on whether the businesses are “cooperating openly” and the arrangement is “known” to the procuring organization, but this is not entirely clear. Moreover, businesses may wish to keep the details of their arrangements confidential.

To take another example, what if one competitor unilaterally decides not to bid (with the risk of not winning that bidding involves), but to have the certainty of entering into a supply arrangement with another competitor to enable the latter to bid? Again, the answer is not clear from the Commission’s guidelines. 

Another complication is that, even if there is sufficient openness and knowledge about the arrangements for them to escape being classified as “serious anti-competitive conduct,” the Commission’s guidelines state that they may still constitute bid-rigging in contravention of the Ordinance “if they have the object or effect of harming competition.” 

So even if a business, or its legal advisers, are able to take the view that this vague “object or effect” test is satisfied (a matter of great difficulty in itself), it is still only a “may” as to whether the arrangements would be illegal. 

Recently, the waters have been muddied further by a recommendation contained in a User Guide for procuring organizations (i.e. organisations inviting tenders) that the Commission issued last December. The recommendation is that procuring organisations consider using certain “model non-collusion clauses” and a “non-collusive tendering certificate” which the Commission has drafted and are contained in the User Guide. While the intention of these documents is to assist in deterring bid-rigging, the drafting appears to be overly broad, and could prevent or deter many legitimate bidding arrangements. For example: 

  • One of the clauses would rule out, in principle, contacts between a bidder and its suppliers, or any other contractors with which the bidder is cooperating to enable it to bid. However, these contacts are essential for many (perhaps even most) bids to take place. 
  • While one of the exceptions is for contacts with a joint venture partner, the term “joint venture” – in a competition law context – normally denotes a jointly-owned corporate entity.  However, two or more parties may submit a joint bid as a consortium, without necessarily forming a joint venture company. Moreover, there is no exception for contacts with a supplier. 

The model clauses and certificate are not legally binding, and procuring organisations are free not to adopt them, or to adopt alternative wording.  However, in the absence of further guidance or reassurance by the Commission, there is a concern that procuring organisations might regard the Commission’s suggested drafting as representing the safest “default” position.  

Deterring (or placing obstacles in the way of) consortium bids is a particularly serious matter for Hong Kong, where over 98% of businesses are SMEs. By definition, SMEs often lack the scale to bid for major projects, and joining up with other businesses in a consortium is the only way they can compete for them. To deter SMEs from competing is not only bad for SMEs, it is also against the public’s interest. It prevents procuring organisations from benefitting from the fullest competition in public bids, resulting in less competitive and innovative goods and services.   

These concerns have been explicitly recognised by Ireland’s competition authority, the Competition and Consumer Protection Commission (CCPC):

“Excluding efficient SMEs from public procurement could potentially have a detrimental impact on competition. For example, it may have the effect of excluding smaller firms or new entrants with innovative solutions, thereby reducing the value for money that the state can achieve...Consortium bidding offers an opportunity for SMEs to pool their knowledge and submit joint bids that offer higher quality products and more innovative solutions to the purchasing body‭.‬” 

This statement is from a guide that the CCPC issued for SMEs on how to engage in consortiums while complying with the competition rules.

To alleviate the concerns regarding legal certainty, we believe that the Commission needs to give further guidance to businesses clarifying the distinction between legitimate bidding arrangements and illegitimate bid-rigging arrangements. Perhaps the Irish guidance could be a useful reference point for this purpose.

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