Loyal Profit International Development Ltd v. Travel Industry Council of Hong Kong

HCMP 256/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 256 OF 2016

____________________

____________________

____________________

____________________

D E C I S I O N

____________________

The Application

1.The Plaintiff, (“Loyal Profit”) is a member of the Defendant, the Travel Industry Council of Hong Kong (“Company”). It has issued an originating summons seeking the following declarations and injunctions:

1.   A declaration that Directive No. 194 (which superseded Directive No. 162) and Directive No. 201 issued by the Defendant on 24 December 2010 (“Directives 194 & 201”) are in contravention of section 116 of the Companies Ordinance, Cap. 622, in that the powers which the Defendant purports to exercise under Directives 194 & 201 are:

(1) contrary to the object of the Defendant as stated in clause 3(21)(b) of the Defendant’s Memorandum of Association;

(2) expressly excluded by clause 3(21)(b) of the Defendant’s Memorandum of Association; and/or

(3) not authorized by the articles of the Defendant,

and therefore illegal and null and void;

2.   An injunction restraining the Defendant by itself, its directors, officers, employees or agents, or in any other way, from implementing Directives 194 & 201;

3.   A declaration that the Refund Protection Scheme (Registered Shops) for Inbound Tour Group Shoppers contained in Directive 225 issued by the Defendant on 20 November 2015 (which superseded Directive No. 184) (“the Scheme”) is in contravention of section 116 of the Companies Ordinance, Cap. 622, in that the Scheme is:

(1) contrary to the object of the Defendant as stated in clause 3(1)(e) of the Defendant’s Memorandum of Association;

(2) expressly excluded by clause 3(1)(e) of the Defendant’s Memorandum of Association; and/or

(3) contrary to section 6(1) of the Competition Ordinance, Cap. 619 and not authorized by the articles of the Defendant,

and therefore illegal and null and void;

4.   An injunction restraining the Defendant by itself, its directors, officers, employees or agents, or in any other way, from implementing the Scheme;

…

2.Loyal Profit was represented before me by Hectar Pun SC and Anson Wong and the Company by Victor Joffe and Eva Sit.  I shall divide these reasons into the following sections dealing with:

(1) the Company and its memorandum and articles of association (“M&A”);

(2) the substance of the complaints;

(3) Loyal Profit;

(4) the Directives, which are said to be unlawful;

(5) the Registered Shops Scheme;

(6) the construction of the relevant Articles; and

(7) the Competition Ordinance argument.

The Company and its M&A

3.The Travel Industry Council of Hong Kong was established as an unincorporated trade association for travel agents in 1978. On 30 July 1988 it was incorporated as a company limited by guarantee.  In 1985, the Travel Agents Ordinance, Cap 218 (“TAO”), was enacted to provide a statutory scheme for the Registrar of Travel Agents to regulate travel agents.  Section 9 of the TAO provides that no person shall carry on business as a travel agent without a licence, which is issued by the Registrar pursuant to s11. Section 11(1A) provides that any licence shall be subject to the condition that the applicant shall be and remain a member of an approved organisation during the period the licence is in force.  Section 2 defines “approved organisation” as any body specified in Part 1 of Schedule 1 to the TAO.  The Company is the only organisation that has been approved.

4.The Company is the authorised collector of levies for a statutory fund to protect outbound travellers by making ex gratia payments to them in the event of agent default from the levies it collects.  The Board of the Company is substantial.  It consists of 28 directors, 16 of whom are industry related; the remaining 12 are Government appointed independent directors. Although the Registrar of Travel Agents has the statutory duty to regulate travel agents in accordance with the TAO it seems to me clear that the Company is intended to complement that public function.  In addition to the matters I have mentioned in this paragraph the provision of the Articles, which I shall deal with in detail later in this decision, demonstrate this.

5.At the time of its incorporation the Company applied for and was granted a licence by the Registrar of Companies under s21 of the Companies Ordinance, Cap 32 (“Ordinance”), allowing it to dispense with the inclusion of “Limited” in its name.  The “Memorandum on Procedure for applying to Registrar of Companies for a Licence Under Section 21 of the Companies Ordinance (Cap.32)” in force at the time of the Defendant’s incorporation provides in paragraph 2:

“An association about to be formed as a limited company for the purpose of promoting commerce, art, science, religion, charity, or any other usefulobjects which intends to apply its profits or other income to promoting its objects and to prohibit the division of any such profit amongst its members may apply to the Registrar of Companies for a Licence under Section 21(1) of the Companies Ordinance (Cap.32) to be registered as a company with limited liability without the addition of the word ‘Limited’ to its name.”

6.As stated in the licence granted to the Defendant:

“… it has been proved to [the Registrar of Companies’] satisfaction that [TIC] which is about to be registered under the Companies Ordinance [Cap 32] as a company limited by guarantee, is formed for the purpose of promoting objects of the nature contemplated by Section 21 of the said Ordinance, and that it is the intention of TIC that the income and property of TIC, whencesoever derived, shall be applied solely towards the promotion of the objects of TIC, as set forth in its Memorandum of Association, and that no portion thereof shall be paid or transferred, directly or indirectly, by way of dividend or bonus or otherwise howsoever by way of profit, to the members of TIC.”

7.By virtue of paragraph 5 of Schedule 11, the licence “is to be regarded as a licence granted under section 103 for the purposes of this Ordinance”.  Section 104 of the Ordinance provides:

“(1) A licence under section 103 may be granted on any terms and conditions the Registrar thinks fit.

(2) The terms and conditions–

(a) are binding on the company; and

(b) are to be incorporated in the articles of the company if the Registrar so directs.”

8.The successful application for dispensation from including “Limited” in the Company’s name had consequences for the objects clause in the Company’s memorandum of association.  In 1988 when the the Company was incorporated, the prevailing law required a company which sought to dispense with the use of the word “Limited” in its name to state its objects in its memorandum of association.  This position was affected by the enactment of the Companies Ordinance, Cap 622 (“new Ordinance”), which abolished this requirement for memorandum of association.

9.Section 115(1) of the new Ordinance provides that all companies incorporated under the new Ordinance and all “existing companies” have the capacity, rights, powers and privileges of a natural person of full age.  In other words, there is no limit to the capacity of a company[1].  Pursuant to s98(1) if an “existing company” has an objects clause in its memorandum, the clause is to be treated as a provision of the company’s articles of association.

10.Section 116(1) provides that a company must not do any act that it is not authorized to do by the objects clause, which now forms part of its articles and is recognised as an aspect of “power”.  There is a distinction between capacity of a company (formerly defined by its objects and now by s115 of the new Ordinanceand the powers conferred on a company: see Rolled Steel Products (Holdings) Ltd v British Steel Corporation [2].  As a consequence of s116(5), acts done by the company outside the objects clause are no longer invalid.  They are now regarded as breaches of the articles under s116(1), which may be restrained in the circumstances set out in s116(3).

11.The Registrar of Companies also imposed certain standard clauses on a company seeking exemption from using “Limited” in its name.  These at the material time were contained in a memorandum produced by the Registrar of Companies entitled “Memorandum on Procedure for applying to Registrar of Companies for a Licence Under Section 21 of the Companies Ordinance (Cap.32) as amended (Revised August 1987)”.  These clauses included the following:

“3. The objects for which the Association is established are:

(3) To do all such other lawful things as are incidental or conducive to the attainment of the above objects.

Provided that: –

(i) In case the Association shall take or hold any property which may be subject to any trusts, the Association will only deal with or invest the same in such manner as allowed by law, having regard to such trusts.

(ii) The objects of the Association shall not extend to the regulation of relations between workers and employers or organisations of workers and organisations of employers.

(iii) The powers set forthin the Seventh Schedule of the Companies Ordinance (Cap.32) are hereby excluded.”

12.The Hong Kong standard clauses were based on and adapted from the standard forms used in the United Kingdom.  This is apparent from comparing Form 77 in Palmer’s Company Precedents (17^th ed, 1956) with the draft form of memorandum of association attached to the memorandum I have referred to in the previous paragraph.  However, rather than the language used in clause 3(3) proviso (ii) the English precedent used the following language:

“Provided that the Association shall not support with its funds any object or endeavour to impose on or procure to be observed by its members or others any regulation restriction or condition which if an object of the Association would make it a Trade Union.”

Mr Joffe submitted that just as this language is included in the English precedent to make clear that the company was not a trade union, which were regulated by different legislation, the proviso required by Hong Kong Registrar of Companies serves the same purpose. His argument for so concluding is as follows.

13.In Hong Kong, s2 of the Trade Union Ordinance, Cap 332 defines a trade union as:

“any combination the principal objects of which are under its constitution the regulating of relations between employees and employers, or between employees and employees, or between employers and employers…”

This definition dovetails with the wording used in the standard form which became proviso (b).  The proviso, argued Mr Joffe, in clause 3 was intended, like its equivalent in the English precedent, to make it clear that the Company’s objects did not bring it within the definition of a trade union in s2.  This I accept.  This is relevant, said Mr Joffe, to construction of clause 3(21)(b) of the M&A, which I address in [36-40].

14.There are two clauses of the M&A, which are directly in issue.  The first is the clause to which I have just referred: clause 3(21)(b).  The second is clause 3(1)(e).  A number of other clauses were referred to in argument.  The relevant clauses read as follows:

“The objects for which TIC is established are:-

(1) …

(c) To promote and develop the general interests of all Members of TIC in their relations with one another and with others in the travel industry.

(d) To establish and maintain Codes of Conduct between Members themselves, between Members and TIC and between Members and the general public, with the object that Membership of TIC shall be recognised as an indication of integrity, competence and a high standard of service.

(e) To discourage unfair competition without however interfering in any way with initiative and enterprise based on fair trading.

(f) To promote friendly relations with others in the travel industry and to provide means for negotiations and liaison with other bodies concerned with the development of travel both in Hong Kong and abroad.

(g) To take all such action as may be deemed necessary or expedient to inform the public of the advantages of making their travel arrangements through Members of TIC.

(h) To do all such things as may be deemed necessary or expedient to raise the prestige and status of Members of TIC.

(i) To promote and advance the cultural and educational aspects of travel and the education and instruction of persons concerned or intending to be concerned with travel, travel agency and tour operating and tourism and (without prejudice to the generality of the foregoing) for this purpose to promote international exchange of cultural activities, to provide for the delivery and holding of lectures, exhibitions, public meetings, classes to support schools and colleges, to establish and run courses and examinations, to award diplomas and to publish any matter in any manner that may be considered desirable.

(j) (i) To carry out its rights and obligations under or pursuant to the Travel Agents Ordinance, including acting as authorized collector of The Fund Levy (referred to in Section 32H of the Travel Agents Ordinance) and to collect the Council Levy referred to in Section 32I of the Travel Agents Ordinance.

…

(m) To maintain liaison with principals in order to achieve harmony in the relations between individual principals and their individual agents.

…

(15) To make, amend and repeal rules, by-laws and Directives affecting the membership, management and control of TIC and the conduct of its Members.

…

(21) The objects specified in each of the paragraphs of this clause shall be regarded as independent objects, and accordingly shall in no wise be limited or restricted (except where otherwise expressed in such paragraph) by reference to or inference from the terms of any other paragraph, but may be carried out in as full and ample a manner and construed in as wide a sense as if each of the said paragraphs defined the objects of a separate and distinct company.

Provided that:-

…

(b) The objects of TIC shall not extend to the regulation of relations between workers and employers or organisations of workers and organisations of employers.

…”

15.For reasons explained in [10] acts done by the Company outside these objects are no longer void.  They will be breaches of the articles, which may be restrained pursuant to s116(3) of the new Ordinance.

16.Section 116 of the new Ordinance provides:

“(1) If the objects of a company are stated in its articles, the company must not do any act that it is not authorized to do by its articles.

…

(3) A member of a company may bring proceedings to restrain the company from doing any act in contravention of subsection (1) or (2).

…

(5) An act by a company (including a transfer of property to or by the company) is not invalid only because the company does the act in contravention of subsection (1) or (2).”

Sub-section (3) is consistent with the analysis in [10], that an act in contravention of an objects clause is no longer void, although a member may take action to restrain the breach.

The Substance of the Complaints

17.Directives 194 & 201 and the Scheme were introduced by the Company in order to protect members of inbound tour groups being taken by tour guides to shops, who commonly provided the guides with their only source of income, namely, commission paid by the shops, and becoming subject to malpractices, which were not only objectionable in themselves, but were in the view of the Company damaging the reputation of Hong Kong’s tourist industry and the interests of its members.  This is explained in the evidence filed by the Company in opposition to the application.  Loyal Profit has filed no evidence to dispute that this was the reason the Directives 194 & 201 or the Scheme were introduced.  Neither has Loyal Profit disputed that following the introduction of Directive 194 there was a very significant reduction in the number of complaints filed by Mainland group visitors.

18.I also note that Loyal Profit has not filed any evidence to suggest that other members of the Company or shops affected indirectly by Directives 194 & 201 or the Scheme are concerned about them and consider that they have a detrimental effect on the business of tourist agents that outweighs any benefit that they have.  Loyal Profit’s complaints are, therefore, not directed to the merit of Directives 194 & 201 and the Scheme viewed from the perspective of the travel industry.   The complaints are technical in nature and concern alleged breaches of the M&A along with what I consider to be a spurious argument that they are anti-competitive.  The Complaints can be divided into the following parts:

(1) Directives 194 & 201 were in breach of clause 3(21)(b) of the M&A because they purported to regulate the relationship between travel agents and travel guides, which the clause expressly prohibits.

(2) The Scheme, which is established by Directive 225 is in breach of clause 3(1)(e) of the M&A because it restricts competition between travel agents and also restricts competition between shops.

(3) The Scheme is also as a consequence of its anti-competitive character contrary to section 6(1) of the Competition Ordinance, Cap 619 (“Competition Ordinance”).

Loyal Profit

19.The evidence on behalf of Loyal Profit is given by Mr Lam Siu Lun, who is described as a consultant.  He is neither a director nor a shareholder of the Company.  His affirmation contains no details of what he does for Loyal Profit, how long he has worked for it or the extent of his knowledge of its business or financial affairs.  Loyal Profit has produced its annual return, dated 25 January 2016, which shows that it has an issued and paid up share capital of HK$2,000,000 held by its sole director, Au Kit Fong, whose residential address is Yau Lai Estate. 

20.Although, Mr Lam’s affirmations commence with the normal recitation that “Unless otherwise stated, all matters deposed to herein are within my personal knowledge and/or gleaned from documents in my possession, custody or power and are true to the best of my knowledge, information and belief” Mr Lam fails, as Order 41, rule 5(2) of the Rules of the High Court, Cap 4A requires, when he deposes to matters such as the reason why some shops have declined to agree the refund policy, to state the sources and grounds of his belief.  Much of his evidence consists of submissions and arguments rather than evidence.

21.Although Mr Lam says that Loyal Profit carries on business of, amongst other things, operating Mainland inbound tours visiting Hong Kong, no information at all is provided about the extent of this activity in terms of frequency, size of groups, activities arranged for the groups, revenue, profit and, most strikingly, no information at all about the impact, if any, of Directives 194 & 201 or the Scheme on Loyal Profit’s business.  Neither is there any evidence of the basis on which Loyal Profit engaged tourist guides to receive inbound tours from the Mainland.

22.This lack of evidence issue is not of itself relevant to the construction of the M&A, although it does call into question the true motives behind the application, but as I shall explain later in this decision, it is relevant to a number of the issues in particular the alleged contravention of the Competition Ordinance.

The Directives which are said to be Unlawful

23.Directives 194 & 201 are in similar terms[3].  Both provide that:

“Any service provided by members for mainland China’s inbound visitors is considered an inbound tour organised in mainland China if it contains either of the following items: (1) the sightseeing at, or visiting, touring or roaming of any tourist attractions or any other locations in Hong Kong; or (2) shopping at shops regulated by the Refund Protection Scheme (Registered Shops) for Inbound Tour Group Shoppers.”

24.Directive 194 implemented the decision made by the Defendant’s Board of Directors (“Board”) at its meeting held on 19 November 2010:

“Members which assign tourist guides to receive inbound tours organised in mainland China shall make payment of service remunerations (including a basic remuneration/salary, a tour-guiding fee, etc) to the tourist guides concerned to prevent them from relying on shopping commission as their major source of income.”

25.Directive 194 superseded Directive 162 issued on 11 May 2007, which implemented an earlier decision made by the Board at its meeting held on 8 May 2007:

“Members shall make payment of remuneration and/or a tour-guiding fee to tourist guides receiving mainland China’s inbound tour groups to prevent them from relying on a high rate of shopping commission as their major source of income, unless there is an employer-employee relationship between the members and the tourist guides.”

26.Directive 201 implemented the decision made by the Board at its meeting held on 19 November 2010:

“1. Before assigning tourist guides to receive inbound tours organised in mainland China, members shall signwith them the ‘Service Agreement between Hong Kong Receiving Agent and Tourist Guide for Mainland Tours’ (see the attachment) designated by the TIC.

2. Members and tourist guides shall comply with all the clauses of the above service agreement.”

27.The “Service Agreement between Hong Kong Receiving Agent and Tourist Guide for Mainland Tours” attached to Directive 201 (“Service Agreement”) is a standard agreement consisting of terms and conditions regulating relations between a travel agent and a tourist guide receiving inbound tours organised in mainland China. 

28.The Service Remunerations Directives are mandatory in the sense that violation of them “will be subject to penalties laid down in Articles [sic] 11 of the TIC’s Articles of Association”.

The Registered Shops Scheme

29.Under Article 10 of the Defendant’s M&A, members of the Defendant are bound by the Codes of Conduct promulgated by the Board.  Section 3(7)(b) of the “Code of Business Practice on Inbound Travel Service” (being one of the Codes of Conduct promulgated under Article 10 of the M&A) provides:

“Members shall only take inbound visitors to patronise those shops already registered with the TIC.”

30.On 20 November 2015, the Defendant issued Directive 225 (which superseded Directive 184), which took effect from 1 January 2016.  Directive 225 implemented the Registered Shops Scheme, which consists of:

(1) the Refund Protection Scheme (Registered Shops) for Mainland China’s Inbound Tour Group Shoppers: Appendix 1 to Directive 225; and

(2) the Refund Protection Scheme (Registered Shops) for Overseas Inbound Tour Group Shoppers: Appendix 2 to Directive 225.

31.The Mainland Shoppers Scheme and the Overseas Shoppers Scheme are save for the refund period almost identical, with the former applicable to Mainland inbound group visitors and the latter applicable to overseas inbound group visitors.

32.Under the Registered Shops Scheme:

(1) if members intend to arrange for Mainland or overseas inbound group visitors to patronise any designated shops, they shall register with the Company information concerning those shops at least seven working days in advance: para 1, Section II;

(2) members shall use the “Registration Form for Shops” (prescribed in Attachment 1) provided by the Company for registration: para 2, Section II;

(3) members shall return the completed Registration Form, together with:

(a) the “Undertaking for Registered Shops” (prescribed in Attachment 2) signed by each shop;

(b) a copy of the Business Registration Certificate for each shop; and

(c) an administration fee of HK$500 for registration of each shop,

to the Comapny for registration: para 3, Section II;

(4) in signing the “Undertaking for Registered Shops”, each shop has to give a total of 20 undertakings and to accept, inter alia, that:

(a) if it breaches any one or more of the undertakings, the Company may penalise it by issuing an advice letter to it, giving demerits to it, or suspending or revoking its registration;

(b) it agrees to hold harmless the Company against any and all losses that it may suffer or incur as a result of its being recognised or no longer recognised by the Company as a registered shop; and

(c) it undertakes not to commence any proceedings against the Company that are related to its being recognised or no longer recognised by the Company  as a registered shop;

(5) a total of 15 “Terms and conditions” under Section III are imposed on members and registered shops, including the following:

(a) registered shops under the Mainland Shoppers Scheme shall offer a six-month, full refund protection to mainland China’s inbound group visitors: para 5, Section III;

(b) registered shops under the Overseas Shoppers Scheme shall offer a 14-day, full refund protection to overseas inbound group visitors: para 5, Section III;

(c) members shall assist inbound visitors or their representatives in seeking refunds, otherwise they will be subject to penalties: para 9, Section III;

(6) registered shops are subject to the prescribed procedures for handling their suspected breach of an undertaking: Section IV;

(7) penalties may be imposed on registered shops found to have breached any one or more of their undertakings: Section VI;

(8) registered shops may be given demerits and subject to suspension or revocation of registration: Section VII;

(9) if a registered shop is penalised by being given demerits or suspension or revocation of registration, its name and address and the reason for and date of the penalty will be posted on the TIC website: para 7, Section III and Section X.

33.Directive 225, and consequently the Registered Shops Scheme, is mandatory in the sense that violation of it “will be subject to penalties laid down in Article 11 of the TIC’s Articles of Association”.

The Construction of the Articles

34.The principles that apply to the proper construction of articles of association are the same as those that apply to construction of a contract.  The court adopts the test in Investors Compensation Scheme Ltd v West Bromwich Building Society [4]and asks what is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed at the time the contract was entered into: per Lord Hoffmann at paragraph 16 of AG of Belize v Belize Telecom Ltd [5].

35.The relevant factual matrix would include, inter alia, the industry in which the company operates, the purpose or objectives of the company’s incorporation and the provisions of the memorandum as well as the articles other than those.  I have set out the relevant clauses of the M&A in [11].

36.As I have already explained two particular clauses are in issue: 3(21)(b) and 3(1)(e).  I shall consider first clause 3(21)(b) that reads “The objects of TIC shall not extend to the regulation of relations between workers and employers or organisations of workers and organisations of employers.”  The issue of construction is whether “workers’ in this clause include employees only or employees and independent contractors.  Mr Pun argued that the word “workers” encompassed both employees and workers and thus covered the regulation of all tour guides regardless of whether they are employed or self-employed.  I disagree.

37.In my view the language of clause 3(21)(b) read in isolation suggests that it is only intended to extend to employees.  My reasons for reaching this conclusion are as follows.  First, if it had been intended to cover self-employed persons I would have expected the drafter to use language, which suggested as much.  Second, the word “employer” generally refers to a legal person, who has engaged another under a contract of employment not a contract for services.  Third, the reference to “organisations of workers and organisations of employers” is more apposite in the context of employment than self-employment.

38.The clause is also unusual.  It is not commonly found in my experience in object clauses, which tend to be wide, enabling provisions rather than proscriptive.  The clause was not included by the original drafters of the M&A.  It was included at the direction of the Registrar of Companies as I have explained in [11].  The reason why it was included was to include restrictions, which were considered desirable at the time in England as demonstrated by the precedent in Palmer’s Company Precedents. I agree with Mr Joffe that this particular proviso was intended to make it clear that the Company was not a trade union and trade unions are concerned with the relationships between employees and employers; not companies and independent contractors retained under service contracts.

39.It follows that clause 3(21)(b) does not restrict the Company issuing directives intended to regulate the relations between its members and tour guides who are self-employed.

40.As I understand Loyal Profit’s case, it argues that even if clause 3(21)(b) does not prohibit the Company regulating the relationship between its members and self-employed tour guides Directives 194 & 201 are still in contravention of the clause insofar as they relate to employees.  I disagree. As I understand the argument it is suggested that the Directives 194 & 201 require members who employ tourists guides to pay them a salary and this is inconsistent with clause 3(21)(b). Clause 3(21)(b) states the objects of the Company does not extend to regulating the relationship between employers and employees.  However, a number of the sub-clauses that I have quoted in [14] make it clear that the Company’s objects extend to promoting the interests of its members: see clauses 1(c), (h) and (m).  Maintaining acceptable business practices and protecting the reputation of its members and the industry in which they operate clearly comes within these objects.  Directives 194 and 201 are directed to these objects. The fact that a component of the Directives impacts on the terms of employment entered into between members and their employees does not alter the substance of the purpose of Directives 194 & 201, namely, preventing malpractices.  In my view, the fact that in so doing the Directives may impact on the terms of employment of some employees does not render them out with the objects of the Company.

41.The object in clause 3(1)(e) is worded as follows: “To discourage unfair competition without however interfering in any way with initiative and enterprise based on fair trading”.  Mr Pun submitted that any directive issued by the Company that caused unfair competition whether as between members or as between non-members such as shops contravened this clause.  The requirement to only introduce tour groups to shops who joined the Registered Shops Scheme infringed this object, because it interfered with competition between shops.

42.The objects clause is directed to the activities and purpose of the Company, which as sub-clauses (b) and (c) make clear is to represent travel agents and tour operators and promote their interests.  The language of clause 3(1)(e) does not compel the clause as being read as Mr Pun suggests, and I can see no sensible reason for reading it as having any application if what is under consideration is the impact of the Directives on competition between shops.

43.I accept that clause 3(1)(e) may be engaged if the Company takes action that rather than discourage unfair competition between members does the opposite; although as the proviso in the second part of the clause makes clear if competition is in some way restricted as a consequence of an initiative introduced by particular members, and encouraged by the Company, which is so successful that it gives those members a competitive advantage, that would not necessarily contravene the clause.  One has to have regard to whether what is done is (a) a consequence of the Company encouraging or supporting initiative and enterprise by its members and/or (b) unfair.

44.The former is not relevant in the present context; the latter is.  I now turn to consider the directives and such evidence as there is of their impact on travel agencies.

The Impact of Directives 194 & 201 and the Scheme

45.Mr Pun argued that even if I took the view that clause 3(1)(e) was irrelevant to the impact of the Scheme on shops, Directives 194 & 201 and the Scheme were, in any event, inconsistent with clause 3(1)(e) because they promoted unfair competition, as not all members are in a position to operate as Directives 194 & 201 and the Scheme require.  The short answer to this complaint is that the evidence filed by Loyal Profit does not come remotely close to demonstrating what the impact on Loyal Profit’s business has been let alone any other member.  The import of Loyal Profit’s argument is that it should be free to engage tourist guides who only earn commission and allow them to take groups to any shops they want regardless of whether in practice this involves tour groups being exploited.  As I have noted there is no evidence filed by Loyal Profit to suggest that the Board of the TIC’s view that the practices of some members were damaging the interests of members and the reputation of the industry is flawed or that it is not genuinely held.  I can see no basis for finding that Directives 194 & 201 and the Scheme infringe clause 3(1)(e).

The Competition Ordinance

46.Section 6 of the Competition Ordinance provides:

“(1) An undertaking must not—

(a) make or give effect to an agreement;

(b) engage in a concerted practice; or

(c) as a member of an association of undertakings, make or give effect to a decision of the association,

if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong.

(2) Unless the context otherwise requires, a provision of this Ordinance which is expressed to apply to, or in relation to, an agreement is to be read as applying equally to, or in relation to, a concerted practice and a decision by an association of undertakings (but with any necessary modifications).

(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ‘first conduct rule’.”

47.Loyal Profit does not suggest that the alleged infringement of s6 gives it a cause of action.  This is because the competition law enforcement model that Hong Kong has adopted and entrenched in the Competition Ordinance is for the Competition Commission (not private parties) to bring a complaint of infringement of competition rules to the Competition Tribunal for adjudication.  As Mr Joffre submitted this begs the question, on what basis is the Plaintiff asking this Court to consider the s6(1) issue?  Mr Poon’s argument seems to be as follows: an act that infringes s6 must be in breach of clause 3(1)(e) and Loyal Profit is entitled to ask the Court to determine whether there has been an infringement of s6 in this context.  It seems to me that this is self‑evidently wrong.  It is for the Competition Tribunal to determine any infringement of s6.  The scheme of the Competition Ordinance cannot be subverted by relying on an act said to infringe s6 to make good a cause of action for breach of an agreement and requiring the Court to embark on the exercise reserved by the Competition Ordinance to the Competition Tribunal.  This is enough to dispose of this point.

48.However, if this were wrong it would be necessary for Loyal Profit to formulate and present the case in much the same way as would the Competition Commission.  It is not necessary to deal with this at length.  I agree with Mr Joffre that this would have at least the following features.

49.When “effect” is in issue, as I understand Loyal Profit’s case it is, a number of different matters are relevant.  First, the meaning of “effect”.  “Effect” is not confined to actual, concrete effects, but may be demonstrated by the conduct having the potential or capability to restrict competition.  Second, how to demonstrate “effect”.  The assessment must take into account the actual context in which the undertaking is situated, in particular the economic and legal context in which the undertakings concerned operate, the nature of the goods or services affected, as well as the real conditions of the functioning and the structure of the market or markets in question: see Television Broadcasts Ltd v Communications Authority[6]; Ordem dos Tecnicos Oficiais de Contas v Autoridade da Concorrencia[7]. In the context of a private action (as opposed to enforcement action by the competition authority), the correct analytical approach is as follows:

(a) Having identified the relevant agreement or provision said to constitute a restriction on competition, it is necessary to identify the market in which the effect of that agreement or provision is to be gauged.

(b) Once that has been done, a theory of harm must be articulated. 

(c) The allegedly harmful effect is then assessed by reference to what the position would have been in the absence of the allegedly infringing agreement or provision. This “counterfactual hypothesis” imagines what the market would have been like absent the infringing agreement or provision. 

In this way, it can be determined whether the provision or agreement is indeed restrictive of competition: see Sainsbury’s Supermarkets Ltd v Mastercard Inc [8]. That there is a need to build a counterfactual to assess effect is also recognized in Television Broadcasts Ltd v Communications Authority [9].

50.The case presented by Loyal Profit does not even attempt to present such a case.

51.Mr Pun invited me, if I was of the view, as I am, that I should not determine whether there had been an infringement of s6, to refer the matter to the Competition Tribunal under s113 of the Competition Ordinance.  This I will not do.  On the basis of the evidence before me I am unable to form the necessary view that there is a matter to be investigated by the Competition Tribunal.

Conclusion

52.I dismiss the originating summons.  I will make a costs order nisi that the Plaintiff pays the Defendant’s costs with a certificate for 2 counsel.  In respect of the costs of dealing with the Competition Ordinance point I order that the costs are assessed on an indemnity basis as I consider that that part of the Loyal Profit’s case should not have been advanced.  The other costs are to be assessed on a party-and-party basis.

Mr Hectar Pun SC and Mr Anson Wong Yu Yat, instructed by K C Ho & Fong, for the plaintiff

Mr Victor Joffe and Ms Eva Sit, instructed by Paul Hastings, for the defendant