Source: http://www.ipsofactoj.com/DecidedCases/international/2011/part01/int2011(01)-008.htm
Timestamp: 2019-03-25 13:39:50
Document Index: 709920226

Matched Legal Cases: ['art 1', '§333', '§347', '§10', '§23', '§19', '§78']

HKSAR v W.Y. Chan [CFA]
Final App No 4 of 2009 (Crim)
ipsofactoJ.com: International Cases [2011] Part 1 Case 8 [CFA]
This appeal raises important questions concerning the conduct of auctions.
The essential facts fall within a narrow compass. They are as follows:
An auction of cooked food stalls at the new Tai Po Hui Market was held on 21 July 2004 by the Food and Environmental Hygiene Department (“the Department”) of the Hong Kong Government.
This was a restricted auction. The only persons allowed to bid were the stall-holders at the old Tai Po Market: They were, in effect, being re-located to the new market.
The Department had, some time before, notified the stall-holders of the reserve price for each stall, which the Department said had been fixed at 75% of the market price.
Before the auction the Department sent to the stall-holders the Rules for the restricted auction. More will be said about these Rules later.
Prior to the auction, thirty six of the stall-holders had met together and had drawn lots with regard to the stall he or she would bid for at the auction. It was agreed that no-one else would bid for the same stall. The Department was unaware of such an agreement prior to the auction.
The auction on 21 July 2004 was conducted by a Senior Health Inspector. Each stall was put up in turn. There was only one bid. The auctioneer announced the bid three times in the usual way. The stall was then knocked down to the bidder at the reserve price. This process was repeated a total of 40 times. No bids were offered for 4 of the stalls. 36 of them were knocked down at the reserve price. Each time to a sole bidder.
The bid price constituted the monthly rent for the stall, good for three years.
Some time later, the 36 stall-holders were asked by the Department to sign the tenancy agreements for the stalls, which they did. They have been in possession to this day.
Arising out of the facts as summarized above, nineteen of the stall-holders were charged with conspiracy to defraud, contrary to common law.
The matter went before Deputy Magistrate Mr Eric Cheung Kwan-ming. The trial lasted over 50 days. They were all convicted and sentenced to terms of imprisonment ranging from 9 to 12 months. They all appealed (except for one who testified for the prosecution) and their appeals were referred by the High Court Judge to the Court of Appeal. By the time the Court of Appeal heard their appeal one of the appellants had died. The appeals were allowed. Hence it is the government which appears as the appellant in this Court, with seventeen respondents before us.
The particulars of the charge of conspiracy to defraud are as follows:
.... between a date unknown in June 2004 and the 21st day of July 2004, in Hong Kong, conspired together with AU Wing and other persons unknown, to defraud the Food and Environmental Hygiene Department (‘the FEHD’), by dishonestly pre-allotting amongst themselves and their representatives the cooked food stalls at Tai Po Hui Market .... prior to the auction held by the FEHD on the 21st day of July 2004 (‘the Auction’) and agreeing amongst themselves and their representatives not to compete against one another in bidding the aforesaid cooked food stalls at the Auction, thereby deceiving the FEHD into believing that there was only one bid offered at the upset price for each of the aforesaid cooked food stalls and renting the aforesaid cooked food stalls at the upset prices to the aforesaid persons or their representatives.
As can be seen the dishonesty as averred was this: The Department was (a) deceived into believing “that there was only one bid offered at the upset price for each of the aforesaid cooked food stalls” and (b) deceived into “renting the aforesaid cooked food stalls at the upset prices to the aforesaid persons or their representatives”.
As to the alleged deceit (a) above, that was, by the nature of the prosecution case, an impossibility: The very core of the Department’s complaint was that there was no competitive bidding. Each stall in turn was knocked down to the sole bidder at the reserve price. The Department could not have been deceived as alleged.
As to the alleged deceit (b) above, the act of the Department in renting the stalls at the reserve price – that is to say, offering the tenancy agreements for signature to the respective bidders, with the rent set at the reserve price – simply flowed from the auction itself. Once the Department had accepted the bid, the “renting” was a simple administrative act. There could have been no intervening deceit which caused the Department to rent out the cooked food stall.
If there was no deceit involved in the respondents’ “plot”, that is to say, the “pre-allotting” amongst the stall-holders as averred in the charge, and in the subsequent bids made at the auction, that was the end of the prosecution case. There was no dishonesty in the transaction which might have caused economic loss to the Department. The pre-auction agreement between the stall-holders could not be a criminal conspiracy.
The Magistrate’s Approach
Unfortunately, that was not the way the magistrate approached the case. Between §333 and §347 of his Statement of Findings he gave a long recital of his understanding of the law on conspiracy, without once adverting to the charge which he had to try.
It is worth mentioning here this point: At the trial an Acting Chief Health Inspector was called as a prosecution witness (PW4). He produced a list of auctions of stalls by his Department at various locations which took place in the second half of 2004 (including the one held on 21 July, the subject of the charge). Over 320 stalls were involved: Virtually every one of them was knocked down at the reserve price. At the hearing before us Mr Zervos SC, counsel for the government, accepted that this must have been because, in each case, there was only one bidder. It is inconceivable that the Department was unaware of the fact that the bidders had agreed before hand that they would not bid against each other: And yet it went ahead and signed the tenancy agreements, giving possession of the stalls at the reserve price. The notion that the Department was deceived into renting the cooked food stalls to the various bidders at the reserve price is absurd.
The First Question of Law
The first point of law certified for our consideration is as follows:
Whether the formulation in Mo Yuk Ping v HKSAR (2007) 10 HKCFAR 386 is applicable to all forms of alleged conspiracy to defraud and ought also to be applied to a secret agreement not to compete at an auction as in any other cases or whether some aggravating feature as required in Norris v Government of the USA [2008] 1 AC 920 has to be present before such an agreement is indictable?
I would simply answer it in this way: In Mo Yuk Ping a fraudulent scheme to manipulate the stock market was charged and proved: It was to artificially prop up the share price of a publicly-quoted company. In pursuance of the scheme, fictitious accounts were opened with many firms; the bank which had lent money on the security of those shares, and the investing public at large, were massively deceived, as the conspirators had intended.
Where an agreement not to compete in an auction has no deceptive element in it, the fact that the agreement was made in secret does not by that fact alone render the agreement dishonest in the eyes of the law. Persons attending an auction owe no obligation to the vendor to compete with each other; nor are they required by law to so conduct themselves that the vendor achieves the highest possible price. As Atkin LJ said in Rawlings v General Trading Company [1921] 1 KB 635 at 648:
Why it should be illegal for two possible competitors to agree to a joint adventure in the purchase of an article offered for sale in any of the ways I have mentioned I cannot discern.
One of the ways mentioned by him, earlier in the same passage of that judgment, was for one of the parties to absent himself from the auction or, being there, to refrain from bidding, thereby leaving the other party as the sole bidder. Atkin LJ went on to say that if there was any combination to make misrepresentations with intent to deceive the seller, the agreement would be illegal.
Rawlings was a civil case where the defendant had reneged on a prior agreement not to compete at an auction of surplus stores held by the government. The question was whether it was against public policy that parties should combine in this way prior to a public auction. The majority in the Court of Appeal (Bankes and Atkin LJJ) held that it was not. A later attempt to challenge this proposition in Harrop v Thompson [1975] 1 WLR 545 failed. At 549B Templeman J said:
If two potential bidders have entered into some form of agreement which results in one of them keeping his mouth shut at the auction, there is no method open to me in the light of the authorities to distinguish a good agreement from a bad agreement.
Misrepresentation and fraudulent conduct calculated to deceive would, of course, be an “aggravating feature”, thus rendering an otherwise innocent agreement illegal.
In this regard, Mr Zervos SC counsel, for the appellant, relies on Rule 20 of the Rules of the auction which says:
Any person who defrauds the Department by dishonest means (such as conspiring to refrain from competitive bidding causing everyone to win the bid for their stalls at the upset price) in the auction shall be prosecuted.
This appears under the heading “Prevention of Bribery”, in the context of s.7 of the Prevention of Bribery Ordinance, Cap. 201, which has no relevance to this case. But even assuming that this statement in Rule 20 was made in the context of the common law offence of conspiracy to defraud, it begs the very question: Is an agreement between the stall-holders “to refrain from competitive bidding causing everyone to win the bid for their stalls at the upset price”, without more, a crime? The answer must be No.
Dishonesty is an essential element in the common law offence: see Mo Yuk Ping at p. 408 F. None was present in this case.
The Second Question of Law
The second question certified for consideration by this Court is this:
Whether the holding of an auction in a commercial context would by its nature necessarily imply that only competitive and genuine bids are acceptable, such as to prohibit any price fixing conduct in respect of it, and to render such conduct dishonest and prima facie indictable?
The magistrate convicted the respondents on the basis of their statements to the police. In essence each of them said words to this effect:
They participated in the drawing of lots for the stalls.
The purpose was to avoid competing with each other to drive up the price.
The agreement would cause the Department to receive less rent for the stalls.
The Department might have suffered a loss as a result.
In some cases they agreed with the interviewer that the meaning of an auction was to have the item under the hammer to go to the highest bidder. This lies, in effect, at the heart of the case as presented to this Court by the appellant. Mr Zervos SC argues thus:
The deception on the Department was that this restrictive auction which the respondents attended was a genuine competitive auction without the bidders colluding among themselves.
Apart from the fact that the Department could not, by any stretch of the imagination, have been deceived (as to which see §10 and 11 above), it begs the question: How was the expectation that this would be a “competitive auction” aroused? What made the Department believe that the stall-holders would compete with each other, so that the Department would get a higher price? By the sole fact that this was an “auction”? Or a “restrictive auction”? Or that the respondents had attended the auction?
As Atkin LJ said in Rawlings v General Trading Company at p.648:
I see no principle upon which sales by auction differ from an offer of sale by tender or indeed by private treaty, except that at an auction without reserve the goods are offered to the purchaser who there and then offers the highest price.
An auction, just as a sale by private treaty, involves mutual dealings. The purchaser’s interest is to obtain the goods at the lowest price: Does the vendor owe a duty to the purchaser that he gets the goods at the lowest price? If not, why should the purchaser owe a duty to the vendor that he sells at the highest price? Plainly, no such duty exists.
A combination, as such, is not illegal. It is only where persons agree to do an unlawful act, or to do a lawful act by unlawful means, that it becomes a criminal conspiracy. As mentioned earlier, for potential purchasers to agree together, before an auction, that they would not compete with each other, is not per se unlawful. If the agreement involves no deception of any kind then they have not set out to do something lawful by unlawful means. This analysis of the law is, of course, made in the context of the charge in this case: The common law offence of conspiracy to defraud. It pays no regard to s.7 of the Prevention of Bribery Ordinance, Cap. 201[1]. It does not address the question whether X has offered an “advantage” (as defined in that Ordinance) to Y when he undertakes to Y not to bid against him when the item “pre-allotted” to Y comes under the hammer. Of course, the “advantage” is mutual, since Y has made an identical undertaking to X. The “advantages”, in a sense, cancel out each other.
Note also this: In a case like the present, where Rule 8 of the auction rules allows the auctioneer to refuse to accept any bid without explanation, the stall-holders could do no more than to hope that, by their arrangement, each would get the allotted stall at the reserve price. Their agreement went no further than to mutually agree not to bid against each other. Full stop. There was no way they could have been sure that the pre-allotted stalls would be knocked down to them at the reserve price. The surprising thing in this case is that the auctioneer continued the auction when it became blindingly obvious very early on in the proceedings that the stall-holders had agreed not to bid against each other, as each stall was knocked down to a sole bidder. And if, as the Department now alleges, the auction was vitiated by fraud, it could have avoided the contract and refused to sign the tenancy agreement.
Mr Zervos SC’s proposition (at §23 above) therefore boils down to this: By their bare conduct, that is to say, by attending the auction, nothing else, the respondents impliedly represented that they would make it “competitive”; that they would bid against each other; that they had formed no prior agreement to refrain from bidding against each other.
Note this: There is no suggestion in Mr Zervos SC’s proposition that the pre-allotment arrangement was aimed at harming the economic interests of the Department. The stall-holders were looking to their own economic interests: If each stall was knocked down to them at the reserve price, so much the better for them (and, it might be added, for the consumers who frequented their stalls).
Plainly, no such implication as proposed by the appellant can arise: neither by law, nor from the facts of the case. Serious criminal offences like conspiracy to defraud cannot crystallize from such shadowy propositions. The answer to the second question must necessarily be No.
The Third Question of Law
Whether the incorporation of an express condition in the auction rules to the effect that only competitive and genuine bids are acceptable would prohibit any price fixing conduct in respect of it, and render such conduct dishonest and prima facie indictable?
For the appellant, this question fails in limine upon the facts of this case. Clause 20 of the Rules (referred to in §19 above) in no way amounted to a representation by the stall-holders of any kind. It was simply a warning by the Department. As Tang VP said (§78 of his judgment) the Department could have required a written warranty from each potential bidder. The warranty could have been to this effect: that, in making a bid, the bidder warranted that he/she had not entered into any prior arrangement to refrain from competitive bidding; each bid would then be accepted on that basis. In no way can Rule 20 be construed to operate in this way.
These are my reasons for agreeing that this appeal should be dismissed.
Nineteen defendants were charged with a single count of common law conspiracy to defraud, punishable under s.159C(6) of the Crimes Ordinance, Cap. 200. The particulars of the offence charged were as follows:
.... between a date unknown in June 2004 and the 21st day of July 2004, in Hong Kong, conspired together with AU Wing and other persons unknown, to defraud the Food and Environmental Hygiene Department (‘the FEHD’), by dishonestly pre-allotting amongst themselves and their representatives the cooked food stalls at Tai Po Hui Market at No.8 Heung Sze Wui Street, Tai Po prior to the auction held by the FEHD on the 21st day of July 2004 (‘the Auction’) and agreeing amongst themselves and their representatives not to compete against one another in bidding the aforesaid cooked food stalls at the Auction, thereby deceiving the FEHD into believing that there was only one bid offered at the upset price for each of the aforesaid cooked food stalls and renting the aforesaid cooked food stalls at the upset prices to the aforesaid persons or their representatives.
As will appear, the way in which the conspiracy is formulated is of critical importance in this appeal.
The defendants other than the 1st defendant, who pleaded guilty, pleaded not guilty but were convicted by the Deputy Magistrate (as he then was) and sentenced to imprisonment ranging from 9 to 12 months. Their appeals against conviction and sentence were transferred to the Court of Appeal pursuant to s.118(1)(d) of the Magistrates Ordinance, Cap. 227. The appeal by the 19th defendant, who died in the meantime, was abated on 2 March 2010.
On 15 March 2010 the Court of Appeal allowed the appeal by the other defendants who pleaded not guilty (the respondents in this Court) and quashed the convictions. On 1 April 2010 the Court published its reasons for allowing the appeal. The principal judgment was delivered by Tang VP, with Yeung JA and D Pang J agreeing. On 9 July 2010, the Appeal Committee extended the time for applying for leave to appeal and granted the prosecution leave to appeal out of time under s.32(2) of the Hong Kong Court of Final Appeal Ordinance, Cap. 484, on the ground that points of law of great and general importance were involved. The prosecutor’s appeal to this Court is brought pursuant to that grant of leave.
The three points of law on which the Appeal Committee granted leave to appeal are:
Whether the formulation in Mo Yuk Ping v HKSAR (2007) 10 HKCFAR 386 is applicable to all forms of alleged conspiracy to defraud and ought also to be applied to a secret agreement not to compete at an auction as in any other cases or whether some aggravating feature as required in Norris v Government of the USA [2008] 1 AC 920 has to be present before such an agreement is indictable.
Whether the holding of an auction in a commercial context would by its nature necessarily imply that only competitive and genuine bids are acceptable, such as to prohibit any price fixing conduct in respect of it, and to render such conduct dishonest and prima facie indictable.
Whether the incorporation of an express condition in the auction rules to the effect that only competitive and genuine bids are acceptable would prohibit any price fixing conduct in respect of it, and render such conduct dishonest and prima facie indictable.
The facts of the case are uncontested. I take them from the judgment of Tang VP where they are summarised succinctly. The respondents were the tenants or assistants to the tenants of cooked food stalls at the former Tai Po Temporary Market (“the Old Market”). In 2004, the respondents and other tenants were required by the Food and Environmental Hygiene Department (“FEHD”) to move from the Old Market to the newly built Tai Po Hui Market (“the New Market”). They were given priority to bid for stalls at the New Market in a restricted auction ("圍內競投") which was held exclusively for them. The bid price would become the rent to be paid. The upset prices for these stalls were fixed at 75% of the market rent as assessed by the Rating and Valuation Department. These upset reserved prices were made known by letters sent by FEHD to the potential bidders including the respondents in early June 2004.
The prosecution’s case is that before attending the restricted auction, the respondents had attended a pre-allotment exercise held among themselves and other tenants of the Old Market. The exercise was conducted by way of the drawing of lots. The numbers drawn in the first round would determine the sequence of the draw in the second round. A number drawn in the second round would be the number of the stall in the New Market allotted to the drawer of that number. The participants also agreed amongst themselves that each would only bid for the stall which had been allotted to him/her in this manner.
The restricted auction was held on the 21 July 2004 and was attended by 36 eligible bidders, including the respondents. 40 cooked food stalls were put up for auction. There was no competitive bidding during the auction and the stalls were knocked down to all the 36 bidders at the upset prices. Lack of competitive bidding was by no means confined to the auctions in question. From materials in evidence it seems to have been a fairly common feature of auctions conducted by the FEHD at this time, involving a single bid with lots sold at the upset price.
Included in the documents sent to each of the stallholders who were potential bidders were the rules of the auction. Rule 4 provided that the basic principle of an auction was that the stalls would be knocked down to the highest bidder. Rule 8 provided that the participants of the auction “shall not in any way influence another person in bidding for a stall …”. Rule 20, which appears under the heading “Prevention of Bribery”, stated the effect of s.7 of the Prevention of Bribery Ordinance, Cap. 201 (“the PBO”), without identifying the section or the Ordinance. The Rule then provided:
Any person who defrauds the Department by dishonest means (such as conspiring to refrain from competitive bidding causing everyone to win the bid for their stalls at the upset prices) in the auction shall be prosecuted.
This warning was directed to conspiracy to defraud rather than a breach of s.7.
The Senior Health Inspector, KWAN Chi-hung (PW4), who conducted the auction, agreed in cross-examination, however, that he had not mentioned the auction rules before conducting the restricted auction. Nonetheless the stallholders who were potential bidders were notified of the rules and they formed part of the terms and conditions of the auction. I shall refer to r.20 later in these reasons. It is nevertheless clear that, at no stage of the proceedings, did the prosecutor rely on s.7 of the PBO.
In the Court of Appeal, the prosecution (the appellant in this Court) relied on the pre-allotment and the agreement not to compete as the constituent elements of the common law offence of conspiracy to defraud. The prosecution, as at trial, did not rely on any additional element such as fraud, misrepresentation, violence, intimidation or inducement of breach of contract. Instead, the foundation of the prosecution case was Viscount Dilhorne’s statement in Scott v Metropolitan Police Commissioner [1975] AC 819 at 840 that the law is:
that an agreement by two or more by dishonesty to deprive a person of something which is his or to which he is or would be or might be entitled and an agreement by two or more by dishonesty to injure some proprietary right of his, suffices to constitute the offence of conspiracy to defraud.
In addition to this proposition, Mr Terence Wai, who appeared for the prosecution in the courts below, submitted that FEHD suffered economic loss as a result of the respondents’ conduct.
The respondents submitted that an agreement by which the parties agreed not to bid against each other at an auction has always been held to be valid and enforceable under English law and has never been held to be criminal. The Court of Appeal upheld this submission and rejected the argument of the prosecution. In doing so, the Court of Appeal relied on a long and consistent line of English authority, beginning with the judgment of Knight Bruce V-C in Galton v Emuss [1844] 1 Coll. 243 at 246 and culminating in the decisions of the House of Lords in Norris v Government of the United States of America [2008] 1 AC 920 at 936 B-E and R v Goldshield Group plc [2009] 1 WLR 458. The Court of Appeal saw no inconsistency between Norris and the decision of this Court in Mo Yuk Ping v HKSAR.
The appellant submits that Mo Yuk Ping authoritatively states the constituent elements of the offence of conspiracy to defraud in Hong Kong and that the offence is not limited to cases involving “the aggravating features” identified in Norris. The appellant then submits that the essence of the restrictive auction was that it was a genuine competitive auction which would not involve any collusion by the bidders themselves. Yet there was collusion which resulted in deception and therefore dishonesty, falling within the Mo Yuk Ping formulation, so that it was not a case of mere price fixing, as the Court of Appeal found.
The case for the respondents as argued in the Court of Appeal is that an agreement not to bid at an auction, without any of “the aggravating features” identified in Norris, is neither criminal nor dishonest and therefore falls outside the scope of the offence of conspiracy as formulated in Mo Yuk Ping. In any event, the respondents submit that an agreement not to bid at an auction is not, and never has been held to be dishonest or criminal at common law.
Before considering the arguments presented in this appeal, it is necessary to turn to the way in which the charge of conspiracy against the respondents was formulated and the consequences this may have for the disposition of the appeal. In the courts below no attention was given to the terms of the charge. In this Court, however, when Mr Kevin Zervos SC for the appellant was asked in argument how he formulated the elements of the alleged conspiracy, attention was directed to the terms of the charge. It alleged that the defendants conspired to defraud the FEHD by dishonestly pre-allotting among themselves the relevant food stalls so as not to bid against each other, thus (as it is particularised in the charge)
deceiving the FEHD into believing that there was only one bid offered at the upset price for each of the aforesaid cooked food stalls and renting the aforesaid cooked food stalls at the upset prices to the aforesaid persons or their representatives.
The case averred by the prosecution was therefore one of deception, namely that the pre-allotment and the agreement not to compete deceived the FEHD into believing that there was only one bid for each stall at the auction. There are three problems with the case as so pleaded. First, the FEHD was not aware of the pre-allotment and the agreement not to compete until some time after the auction. Secondly, there is no evidence that the pre-allotment on the agreement not to compete induced or deceived the FEHD into believing anything. Thirdly, no doubt the FEHD did believe that only one bid was offered at the upset price for each stall but that belief was founded on the FEHD’s knowledge of what in fact happened at the auction. The deception alleged simply cannot be substantiated.
Mr Zervos SC frankly admitted that the charge was defective and put his case on two different bases. The first was that the pre-allotment and, in particular, the agreement not to compete amounted to a collusive arrangement intended to deprive the FEHD by dishonest means of a higher price, thereby causing economic loss. The second was that, by participating in the auction on the basis on which they did, the defendants made a false representation to the FEHD causing it loss.
The problem with proceeding with the appeal is that we could not allow an appeal and convict the respondents on a charge of conspiracy which cannot be made out. Nor can we convict them of an offence of conspiracy to defraud which has never been charged. It follows that the appeal could not succeed. The Court made an order dismissing the appeal with costs at the end of the oral argument, stating that reasons would be handed down later. This judgment sets out my reasons for dismissing the appeal.
As the principal issue argued in the appeal is of some importance, I shall deal with it on the two bases argued by the appellant.
In Mo Yuk Ping, this Court held that the essence of the offence of conspiracy to defraud was becoming a party to an agreement with another or others to use dishonest means
with the purpose of causing economic loss to, or putting at risk the economic interests of another; or
with the realisation that the use of those means might cause such loss or put such interests at risk.
In stating the elements of conspiracy to defraud in this way, this Court adopted earlier formulations of the offence in both the House of Lords (Welham v DPP [1961] AC 103; R v Scott [1975] AC 819) and the Privy Council on appeal from Hong Kong (Wai Yu Tsang v The Queen [1992] 1 AC 269). The Court pointed out (at 405D-E) that most cases of agreement to use dishonest means were cases of deceit. The Court rejected the argument that the offence, as formulated in Mo Yuk Ping, offended the principle of legal certainty.
In Norris, as well as Goldshield, the House of Lords did not refer at all to the formulations in its two earlier decisions, though in Goldshield there was a reference to Wai Yu Tsang. No doubt this was because their Lordships were directing their attention to the precise issue which arose for decision in the proceedings before them. In Norris, that issue was whether the defendant’s alleged conduct in conspiring with producers of carbon products to operate a price fixing agreement or cartel in several countries, which was the subject of the conspiracy offence with which the defendant was charged in the United States, constituted common law conspiracy to defraud. In Goldshield, the issue was whether arrangements to fix and maintain prices for drugs supplied and for manipulating the supply of drugs constituted such a conspiracy.
It was in this context that the House of Lords held, after reviewing the relevant authorities, that (Norris at 933 F-G).:
[t]he common law recognised that an agreement in restraint of trade might be unreasonable in the public interest, and in such cases the agreement would be held to be void and unenforceable. But unless there were aggravating features such as fraud, misrepresentation, violence, intimidation or inducement of a breach of contract, such agreements were not actionable or indictable.
Neither the appellant nor the respondents contend that Norris is inconsistent with Mo Yuk Ping. Be this as it may, neither what was decided nor what was said in Norris or Goldshield constitutes any reason for this Court to depart from the general formulation of the offence of conspiracy to defraud as expressed in Mo Yuk Ping. On the issue of legal certainty, the Court’s approach in Mo Yuk Ping was consistent with the approach which it had adopted earlier in Shum Kwok-sher v HKSAR (2002) 5 HKCFAR 381. On the other hand, the discussion in Norris about the common law treatment of price fixing agreements, in particular the conclusion that, absent the so-called “aggravating features”, they did not involve dishonesty (see 936 C-E), is a matter that calls for close attention.
The issue for decision in this appeal
The issue argued in this Court therefore is whether a secret agreement between potential bidders not to compete at an auction, or such an agreement followed by participation by such bidders at the auction, falls within the formulation of the common law offence of conspiracy to defraud as formulated in Mo Yuk Ping. The focus of attention in that formulation was on the expression “by dishonest means”, where the word “dishonest” is to be understood in its ordinary sense (see R v Ghosh [1982] 1 QB 1053).
The English authorities on agreements restricting bidding at auctions
There is no doubt, as the Court of Appeal held, that there is strong English authority to support the proposition that an agreement by potential buyers not to bid at an auction, what is called in England a “knock out” agreement, in order to keep the price down, is neither unenforceable as being contrary to public policy nor criminal. Whether they go so far as to hold that such an agreement, if secret, is dishonest for the purposes of the law of conspiracy, is a question I leave for later consideration.
Galton v Emuss [1844] 1 Coll. 243, In re Carew’s Estate [1858] 26 Beav 187 and Heffer v Martyn [1867] 36 LJ Ch 373 were cases in which two potential buyers agreed that one would not bid against the other at an auction for valuable consideration. The agreement in each case was held to be valid and enforceable, resulting in Galton v Emuss and Heffer v Martyn in an order for specific performance. In re Carew’s Estate the agreement was that the parties would divide the property between them if it was bought by the bidding party under the sale pursuant to a court order. On a summons to set aside the sale on the ground that the agreement was unlawful, Sir John Romilly MR said (at 190) that “a mere agreement” between two persons not to bid against each other was not “sufficient to invalidate a sale to one of them”.
In Jones v North (1875) 19 Eq. 426, after a corporation had invited tenders for the supply of stone, A, B, C and D who were quarry owners agreed that A should buy stone at a fixed price from the other three and submit the lowest tender. B should not tender, that C and D should tender above A’s price and that B, C and D should not supply stone to the corporation during 1875. A purchased the stone as agreed but B sent in a tender, in breach of the agreement, and it was accepted. Bacon V-C held that the agreement was legal and valid. He also said (at 429) that the case was “on one side at least, a very honest one”, a statement which has been doubted (Norris [2007] 1 WLR 1730, para.50, per Auld LJ), indeed criticized (J. Lever and J. Pike, “Cartel agreements, criminal conspiracy and the statutory ‘cartel offence’”, Pt 1, (2005) European Competition Law Review, at 90-97). Bacon V-C rejected a submission that the plaintiff could not obtain equitable relief because the arrangement was a device to compel the authority, under the fiction of public competition, to accept tenders not representing the market price of the stone. He held (at 430) that the agreement was “perfectly lawful”.
In Norris, their Lordships stated that Jones v North has never been overruled and treated it as representing the law to-day (see 936 C-E).
In Rawlings v General Trading Co. [1920] 3 KB 30, the question was whether on the sale of Government stores by public auction, where no reserve was fixed, two or more buyers could agree that one of them only would bid in order to keep down the price, and that they would then share the profits between them. At first instance Shearman J concluded (at 34) that the agreement was one “which it is contrary to public policy to enforce”.
On appeal (1921) 1 KB 635, the Court of Appeal by majority (Bankes and Atkin LJJ with Scrutton LJ dissenting) allowed the appeal. Scrutton LJ considered (at 647) that “the agreement was contrary to public policy, as a restraint of trade contrary to the interests of the public”, though it was neither criminal nor actionable. On the other hand, Bankes and Atkin LJJ, on the basis of the long line of existing authorities, concluded (at 641 and 652 respectively) that the agreement was legal and enforceable. Atkin LJ said (at 652):
I can see no reason for saying that this contract is ex facie illegal. It would probably be sufficient to say that for nearly a century Courts of equity have held similar agreements legal and enforceable by suit for specific performance. But apart from decided cases, as between the parties it appears to be plainly reasonable, and if the defendant wished to establish that the public interests suffered he should have so pleaded so as to give the plaintiff notice.
Rawlings was subsequently followed by McCardie J in Cohen v Roche [1927] 1 KB 169 at 173. And the legality of a “knock out” agreement was assumed in Pallant v Morgan [1953] Ch 43 where a party to such an agreement who became the successful bidder refused to divide the property sold with the other party to the agreement as it provided. The Court declared that the successful party held the property sold for the other party to the agreement.
Rawlings was again followed by Templeman J (as he then was) in Harrop v Thompson [1975] 1 WLR 545. There specific performance was ordered of an agreement for the sale of two farms purchased at a public auction, despite the existence of an antecedent agreement between the purchaser and another potential bidder that the latter would not bid with the result that the purchaser obtained the property more cheaply.
In that case, counsel for the first defendant invited the court to follow the path favoured by Shearman J and Scrutton LJ in Rawlings and to conclude that an agreement not to bid, if not proved to be reasonable, is unenforceable and relieves the vendor from his contract. A “knock out” agreement, he submitted, is an interference with the liberty of the potential bidder to bid at the auction and ought not to be enforceable if the sole or primary object of the knock out agreement is to buy the property cheaply. Templeman J responded to this argument by saying (at 548H-549A):
This submission tends to bring most contracts within the grasp of restraint of trade and therefore unenforceable unless proved to be reasonable, because most contracts interfere with liberty of action one way or another. I am not convinced that the agreement alleged in the present case was in restraint of trade. If it was in restraint of trade, I am not convinced that it therefore invalidated or affected the contract between the vendors and the purchaser.
Templeman J went on to say (at 549D):
A vendor can protect himself by conditions under which he imposes a reserve and keeps the right to bid and to withdraw. A timid vendor need not sell by auction.
The significance of this observation is a matter to which I shall return.
In Norris, Rawlings, as well as Jones v North, was accepted as correctly stating the law. The other authorities which I have discussed were not referred to in Norris, but if Rawlings and Jones v North correctly state the law in England so do they.
On the other hand, the common law has taken a different approach to agreements the purpose of which is to raise the market value of public funds and shares. In R v De Berenger (1814) 3 M & S 67 the defendants were charged with conspiring by false rumours to raise the price of public Government funds and were convicted. On a motion to arrest judgment, which was dismissed, Lord Ellenborough CJ said (at 72) that the
purpose itself is mischievous, it strikes at the price of a vendible commodity in the market, and if it gives it a fictitious price, by means of false rumours, it is a fraud levelled against all the public ....
Bayley J and Dampier J were of a similar opinion, as was Le Blanc J who said (at 74):
the raising or lowering the price of public funds is not per se a crime .... But if a number of persons conspire by false rumours to raise the funds on a particular day, that is an offence ....
In Scott v Brown, Doering, McNab & Co. [1892] 2 QB 724 the Court of Appeal held that an agreement between two or more persons to purchase shares in a company in order to induce persons who might thereafter purchase shares in that company to believe, contrary to the fact, that there was a bona fide market for the shares, and that the shares were at a real premium, is an illegal transaction which may be made the subject of an indictment for conspiracy and no action can be maintained on the agreement or the purchase of the shares. The Court of Appeal followed De Berenger and held that the acts of the plaintiff in ordering shares to be bought for him at a premium was to deceive the public by leading the public to suppose that there were buyers of the shares at a premium on the Stock Exchange. The purchase of the shares was to be equated to a false representation.
Assessment of the English authorities on agreements restricting bidding
For present purposes, the English authorities establish that these agreements were lawful at common law. Although Jones v North is the only case which expressly holds that such agreements are “honest”. The other cases by holding that they are lawful necessarily negate the possibility that they could be “dishonest” in the sense that they could be the subject of a conviction for conspiracy to defraud. A contract which is valid and enforceable cannot itself be “dishonest” for the purposes of criminal conspiracy to defraud.
To an observer familiar with the modern law relating to restrictive trade practices and uninstructed in the way in which the law on this point developed, the proposition that “knock out” agreements are “honest” might seem somewhat surprising. The explanation lies no doubt in the nature of the capitalist economic philosophy which prevailed in England in the period 1800 – 1870, which strongly favoured freedom of trade and freedom of contract (see P. Atiyah, The Rise and Fall of Freedom of Contract, Oxford, Clarendon Press, 1979, pp 408-412). One consequence of this approach was that the courts were not concerned with the effect of a contract on third parties but with the legal effect and enforcement of the contract as between the parties to it (see P. Atiyah, supra, at 412-413). This serves to explain why the impact of a “knock-out” agreement on the vendor at an auction was not considered in the cases which have been discussed. They were, of course, with the exception of Cohen v Roche, cases in which the vendor at an auction was not a party.
The different treatment of an agreement to raise prices at an auction may be explained at two levels. First, they were cases which involved a misrepresentation by words or conduct, whereas a “knock out” agreement of itself did not, though it might lead to the making of such a misrepresentation. Secondly, there was a recognition that a false increase in market prices has an adverse impact on the public; such an impact may or may not occur in the case of a false lowering of auction prices. Although a “knock out” agreement may be in restraint of trade because it is restrictive of freedom of competition, it may not necessarily be contrary to the public interest, a matter that was acknowledged in Rawlings (see para.61 above).
Until Rawlings, there was no suggestion that a “knock out” agreement might be in restraint of trade. In the period which the cases before Rawlings were decided, the courts were not disposed to invalidate or treat as unenforceable agreements which were restrictive of competition on the ground that they were in restraint of trade. It seems to have been thought that restrictive agreements would not survive the pressure of freedom of competition (see, for example, Wickens v Evans (1829) 3 Y & J. 318 at 330; 148 ER 1201 at 1206 which was cited with approval by Fry LJ in Mogul Steamship Co. Ltd v McGregor, Gow & Co. [1889] 23 QBD 598 at 628, in a judgment upheld in the House of Lords (1892) AC 25). Jones v North itself was a striking illustration of how far the courts were prepared to go in enforcing contracts which, to modern eyes, might seem to be in restraint of trade. There, the court having rejected the argument that the agreement was in restraint of trade and an unlawful conspiracy, granted an injunction which prevented the defendant from carrying out his contract to supply the Birmingham Corporation to the detriment of its interests, though it was not a party to the proceedings.
And even when, at the end of the 19th century, restraint of trade issues were litigated before the courts, arising out of combination, cartel and restrictive trade agreements, the courts were unwilling to hold that they were illegal. They might be void and unenforceable as between the parties but they were not illegal. That was the real point of the decision of both the Court of Appeal and the House of Lords in Mogul Steamship. Indeed, the underlying thrust of the reasoning both in the Court of Appeal and the House of Lords in that case was that, so long as traders individually or collectively were pursuing their own business interests without infringing the rights of others or intending to do them harm, that pursuit was legitimate, even if, by deliberately lowering prices, it drove others out of business. In this respect, Mogul Steamship is generally consistent with, and supports, the long line of decisions in the “knock out” cases and Jones v North.
Should this Court follow the English authorities?
The question which arises therefore is whether the Court should, in stating the law of conspiracy to defraud for Hong Kong, declare that the long line of decisions on “knock out” agreements, including Jones v North, no longer represents the law of Hong Kong. The argument for taking this course is that such agreements are dishonest and anti-competitive and strike at the very essence of a competitive auction. Even assuming that there is strong reason to take this course in an appropriate case, this is not such a case because the appeal must be dismissed for the reasons already given.
And, in any event, to discard the long line of English authority to bring “knock out” agreements within the reach of the law of criminal conspiracy would be a step too far. Not only have the relevant decisions stood for a very long time – they go back more than 160 years – they almost certainly have been taken to represent the law of conspiracy in Hong Kong. For all we know, people in Hong Kong have relied on them. If there is to be a change, then in my view it is a matter entirely for the legislature.
It is, of course, true that the FEHD can protect itself from “knock out” agreements by fixing a reserve (and not disclosing it) and reserving the right to bid and withdraw, as Templeman J pointed in Harrop v Thompson (at 549D) but this expedient leaves unresolved the question whether there should be a criminal sanction against the making of collusive “knock out” agreements.
Finally a word about s.7 of the PBO. It seems that it has not been enforced in Hong Kong due to doubts about its efficacy. The section, though expressed in different terms, is broadly similar to s.1(1) of the Auctions (Bidding Agreements) Act 1927 (UK). Professor A.T.H. Smith discusses the section in “Auction Rings” [1981] Crim. L.R.86 and identifies the problems associated with it.
At the conclusion of the hearing, the Court announced that the appeal was dismissed for reasons to be handed down in due course. The reasons given by Sir Anthony Mason NPJ constitute the reasons of the Court. Costs will be dealt with on written submissions as to which the parties should seek procedural directions from the Registrar.
Any person who, without lawful authority or reasonable excuse, offers any advantage to any other person as an inducement to or reward for or otherwise an account of that other person’s refraining or having refrained from bidding at any auction conducted by or on behalf of any public body, shall be guilty of an offence.
Any person who, without lawful authority or reasonable excuse, solicits or accepts any advantage as an inducement to or reward for or otherwise on account of his refraining or having refrained from bidding at any auction conducted by or on behalf of any public body, shall be guilty of an offence.
Kevin P Zervos SC, Wesley W C Wong and Michael Wong (of the Department of Justice) for the applicant
Martin Lee SC, Siu-him Lee and Ms Bonnie Tam (instructed by Messrs JCC Cheung & Co.) for the 3rd, 5th to 9th, 13th, 15th to 17th respondents
Kenny Chan (instructed by Messrs Liu, Chan & Lam) for the 4th, 10th and 11th respondents
Gibson Shaw (instructed by Messrs Lo, Wong & Tsui) for the 12th respondent
The 1st, 2nd and 14th respondents in person (present).