In view of the Competition Ordinance (Cap 619) (the “Ordinance”) coming into force on 14 December 2015, the Hong Kong Liner Shipping Association (“HKLSA”), on behalf of the carriers in Hong Kong, submitted a formal application for a block exemption order for certain liner shipping agreements under section 15 of the Ordinance on 17 December 2015 (the “Application”).

Under section 15 of the Ordinance, if the Hong Kong Competition Commission (the “Commission”) considers that these liner shipping agreements are excluded agreements under section 1 of the Schedule 1, namely, agreements enhancing overall economic efficiency, then exemption order can be granted, subject to a review every 5 years. The Commission has also expressed that during the period when the Application is being considered, it is unlikely that legal actions will be taken against the agreements under the Application.

The liner shipping agreements seeking to be exempted
The Application seeks to have 2 categories of liner shipping agreements being exempted, namely, (1) voluntary discussion agreements and (2) vessel sharing agreements.

Voluntary discussion agreements are agreements which the carriers exchange and review market data, trade flows, supply and demand forecast and business trends etc., and importantly, parties may agree to recommend voluntary guidelines for rates, charges, service contract or tariff terms.  However, as these guidelines may result in fixing or maintaining the price for the shipping services, it would be a form of price-fixing and is regarded as a “serious anti-competitive conduct” under section 6(1) of the Ordinance (namely, the “First Conduct Rule”).  In addition, an agreement to exchange competitively sensitive information may also contravene the First Conduct Rule.  In general, information concerning sales, market shares, sales to particular customer groups or territories is considered to be highly competitively sensitive so the agreement to exchange market data may also violate the Ordinance.

Vessel sharing agreements, on the other hand, concern the technical and operational aspects of the provision of liner shipping services. It includes coordination or joint operation of vessel services.  Clearly, these actions may prevent, restrict or distort competition and would be caught under the First Conduct Rule.

The Application and its Opposition
As these liner shipping agreements are clearly at risk of violating the Ordinance and may result in a substantial fine amounting to a maximum of 10% of their annual turnover (see Section 93 of the Ordinance) for each year in which the contravention occurred, the Application was made to seek for an exemption for these liner shipping agreements. According to HKLSA, over 95% of the liner shipping operators in Hong Kong have vessel sharing agreements.  It is argued that it will adversely affect the shipping industry in Hong Kong as a lot of transhipment cargo may choose to be transhipped in other ports nearby instead, such as Shenzhen and Kaohsiung, given they are highly flexible in changing ports. Danish liner giant, Maersk Line, also expresses that if the Application fails, it will probably drop calls at Hong Kong.  

In the Application, HKLSA also argued that even with liner shipping agreements, the liner shipping industry remains to be very competitive because there are significant competitive constrains such as the huge market power of the buyers, low entry barriers and a very wide and fragmented market on each major trade.  Moreover, the very nature of liner ships relies upon these liner shipping agreements for cooperation to survive as they sail on scheduled time and date even if they are not full. The agreements are necessary to ensure that the liner shipping operators can provide regular sailing schedule at a price that is not subject to huge fluctuation.

On the other hand, the Hong Kong Shippers’ Council (“HKSC”) is not in favour of the Application and intends to oppose it.  HKSC considers that the exemption, if granted, will give the liner shipping industry a privilege which is not enjoyed by other industries.  Further, it finds the arguments by HKLSA unsound.  For example, as each liner ship would cost almost HK$1 billion, it is impossible to argue that the entry barrier is low.  It also believes that from a business perspective, the shipping companies would not choose another port to berth.

The positions in other jurisdictions
Despite the opposition, the trend over the world seems that generally, certain exemptions (to different extent) would be granted to the shipping lines, especially the vessel sharing agreements. 

For instance, in 2014, the European Commission has extended the exemption for liner shipping consortia for another 5 years until 2020.  Under its maritime consortia block exemption regulations (Commission Regulation (EC) No 906/2009), which was first adopted in 1995, liner shipping consortia with combined market share of below 30% can operate joint services, make capacity adjustments in response to fluctuations in supply and demand and jointly use port terminals etc.  After public consultation, the European Commission holds that the exemption does not unduly distort competition while provides legal certainty. One should note that, however, price-fixing arrangements are still prohibited and the scope of this exemption mostly covers vessel sharing arrangements only.  Exchange of market information, which is found in the voluntary discussion agreements (which the Application currently also covers), does not fall within this exemption in Europe.

Similarly, in Singapore, “Competition (Block Exemption for Liner Shipping Agreements) Order 2006” (the “2006 Order”) was recently extended for another 5 years until 2020. Parties to a liner shipping agreement fulfilling the requirements under paragraph 5 of the 2006 Order and having no more than 50% of the aggregate market share would be exempted from the prohibitions in section 34 of the Competition Act (Cap 50B, Laws of Singapore).  Unlike the consortia block exemption regulations in Europe, the scope of the 2006 Order is wider.  Liner ships can co-operate in technical, operational or commercial arrangements of the liner shipping services as well as price and remuneration terms.  Even if their aggregate market share exceeds 50%, it is still possible to be exempted if they fulfil the requirements in paragraph 5(2) of the 2006 Order. Interestingly, the Singapore Competition Commission will issue a Notification for Guidance or Decision upon application by parties who are uncertain if their agreements are caught under the 2006 Order.  This would provide even more certainty to the liner shipping operators.

Other Asia-pacific countries such as South Korea and Taiwan even went further to exempt all co-operative carrier agreements.  The Competition Commission of India has also exempted the vessel sharing agreements of liner shipping industry from Section 3 of its Competition Act (2002) until early 2016. 

Nonetheless, some countries also start to narrow down the exemption.  For example, in Australia, the Competition Policy Review Panel recommended to change its existing exemption system in its final report published in March 2015.  Currently, under Part X of the Competition and Consumer Act 2010 in Australia, the liner shipping operators can enter into agreements in relation to the freight rates to be charged, and the quantity and kinds of cargo to be carried, on particular trade routes. However, given this blanket exemption is available only to the liner shipping operators, it is recommended that the Australian Consumer and Competition Commission should be given power to grant block exemptions for conference agreements that meet a minimum standard of pro-competitive features to replace the current system.  The recommendation would mean that the exemption will no longer be automatic but dependent on the approval by the Australian Consumer and Competition Commission (in consultation with shippers, their representative bodies and the liner shipping industry). While the scope for new exemption will also be narrower as a minimum standard is set, it is in fact more in line with the worldwide practice which approval from the commission has to be sought.    

In view of the above, it is possible that the Commission would follow the world trend in granting a block exemption order, at least for the vessel sharing agreements. There is no schedule on when the Application will be determined. Nevertheless, the Commission has announced that it will contact with the stakeholders before making a decision and there will be a consultation period of at least 30 days. It is therefore expected that several months would be taken before a decision can be made, and we shall wait and see the future development of the Application. 

The law and procedure on this subject are very specialized and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
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Published by ONC Lawyers © 2016