SOUTH KOREA: An Introduction to Shipping
South Korea Overview – Shipping
Contributor: PARK, Sung Won, Law Offices CHOI & KIM (www.choikim.com)
COVID-19 remains the biggest issue in South Korean industrial circles in 2021, just as it was in 2020. The first half of this year saw the country commence mass COVID-19 vaccinations, but the tyranny of the coronavirus refuses to subside even in the second half of the year. Shipping has also borne the brunt of the pandemic. Not only that, the year 2021 has brought other changes and issues to the shipping industry, including the Serious Accident Punishment Act and such legal issues as shipping companies’ alleged collusion for freight rate manipulation. This overview discusses these three issues one after another in the sections that follow:
1. COVID-19
Demand for maritime transport surged in keeping with soaring global demand for medical supplies and personal care products in response to the pandemic itself, as well as demand for a range of products required to cope with the New Normal represented by far greater penetration of remote learning, telecommuting, and e-commerce.
The pandemic has not only brought surging demand for maritime shipping. COVID-19 has also given rise to legal issues. By way of example, quarantine requirements have been imposed on seafarers, which have in turn disrupted crew changes worldwide. The crew changeover situation remains difficult in 2021. Due to the delays in crew changes, numerous seafarers have been stuck at sea for extended periods of time. It goes without saying that their contract extensions have incurred additional costs to the shipowners. The difficulties surrounding crew changes have sometimes forced ships to move to ports other than the ports designated in their charterparty, giving rise to a legal issue as to which party between the shipowner and the charterer should bear the related costs. In response to those issues, BIMCO published the “COVID-19 Crew Change Clause for Time Charter Parties 2020” in June 2020.
Seafarers have been infected by the coronavirus, and this has also brought about legal issues. If a port authority prohibits a ship from entering the port and orders that the ship be quarantined due to the high possibility of crew members having the virus or actually confirmed to have the virus, the shipowner and the charterer may argue as to whether such period additionally incurred due to the port authority’s order shall be treated as off-hire. In addition, if a ship is forced to change her originally scheduled course for the disembarkation and treatment of crew members who have become infected, the two parties may also contend over the issue of whether or not such change of course can be a deviation permissible under the charterparty.
The legal problems above must have been common to all shipping companies in other countries due to the coronavirus, and Korean shipping companies were no exception.
2. Enactment of the Serious Accident Punishment Act
On January 26, 2021, the National Assembly of the Republic of Korea passed the Serious Accident Punishment Act. The statute will enter into force on January 27, 2022. Modelled on the Corporate Manslaughter and Corporate Homicide Act 2007 of the UK (which came into effect in 2008), the new act is intended to (1) punish the owner or responsible management of a business or a corporation itself in case the business or corporation causes a Serious Accident including bodily injury, illness, or death by breaching its health and safety duty in operating a business, business premises, public facility, or public transport service or in handling harmful raw materials or products and (2) hold such liable for punitive damages.
The enactment of the Serious Accident Punishment Act has created ripples throughout South Korean industrial circles. The shipping industry is not an exception. There are no expressly excluded individual industries from the application of the Serious Accident Punishment Act, so the act is construed to apply to the shipping industry, too. Application of the Serious Accident Punishment Act to the shipping industry is expected to engender a range of issues because of the characteristics of the industry, which demarcate it from other industries. Let us assume that there is a shipping company engaged in shipping business using an oceangoing vessel, for example. First, there are complicated contractual relationships facilitating to own or charter the vessel. Second, the vessel sails not only in South Korea’s territorial waters but through other waters. Third, a great portion of its crew members are of foreign nationality. Lastly, administrative, technical, legal, and other tasks required for operation and maintenance of the vessel may be contracted out or delegated in many different manners.
Here are examples of some conceivable legal issues that may be engendered by a Serious Accident in which a South Korean shipping company is involved: (1) Whether the Serious Accident Punishment Act is applicable with a result that the CEO of the shipping company shall be punished in a case where the vessel is not in South Korean territorial waters but instead in open sea or in the territorial waters of a foreign country when the accident happens; (2) Whether the Serious Accident Punishment Act is applicable with a result that the CEO of the shipping company shall be punished in a case where the CEO of the shipping company is not of Korean nationality; (3) Whether the Serious Accident Punishment Act is applicable with a result that the CEO of the shipping company shall be punished in a case where a seafarer of foreign nationality sustained a Serious Accident; (4) If the vessel is chartered, who should be punished under the Serious Accident Punishment Act – the CEO of the shipowner or that of the charterer?; (5) If the shipowner has contracted out the operation of the vessel to a ship management company, who should be punished under the Serious Accident Punishment Act – the CEO of the shipowner or that of the ship management company? As there are no precedents on these issues, the uncertainty is expected to be unavoidable for the time being.
3. Possible Administrative Fines for Freight Rate Fixing
In May 2021, the Korea Fair Trade Commission (KFTC) drew up an investigation report on the allegation that 23 South Korean and foreign shipping companies had colluded to fix freight rates for a route between the country and Southeast Asia from 2003 to 2018 and served the report on those shipping companies. The report warned the companies that they might face an administrative fine of up to KRW 800 billion (equivalent to USD 700 million). In addition, the South Korean antitrust authority is looking into alleged collusion involving two other sea routes, which link the country to Japan and to China, respectively. The shipping industry expects that the administrative fines for those three sea routes will total KRW 1.5 trillion – 2 trillion (equivalent to USD 1.4 billion – 1.8 billion).
In the face of the charge, the shipping companies seek to plead that the alleged joint determination of freight rates is not illegal but a lawful act that is grounded on the Marine Transportation Act. Indeed, Paragraph 1 of Article 29 of the act provides that shipping companies may do joint activities concerning the freight rate, allocation of vessels, stowage of cargo, and other transportation terms and conditions. The antitrust watchdog has not budged a bit at the defence and states that the shipping companies must be punished for their violation of the Monopoly Regulation and Fair Trade Act because they failed to comply with the procedural and other requirements of joint activities as provided in the Marine Transportation Act. After all, at the core of the issue is whether the shipping companies have violated the Monopoly Regulation and Fair Trade Act by crossing the boundaries of joint activities permitted by the Marine Transportation Act.
In this regard, the Ministry of Oceans and Fisheries regards what the shipping companies did about the freight rates as not amounting to freight rate fixing in violation of the Monopoly Regulation and Fair Trade Act. Also, “Given the unique nature of the shipping industry, joint activities are permitted globally,” said Young-Moo Kim, Standing Vice Chair of the Korea Shipowners’ Association in a recent media interview. “Joint activities in the industry serve as a defence for smaller shipping companies against the big guys.” He also explained, “Shipping is a market of completely free competition, so if joint activities were not permitted, smaller players would be pushed out of competition by bigger ones,” adding, “Joint activities also work for the better in that smaller guys can provide reliable service at lower rates by forming alliances.”
In any case, the final decision of the Fair Trade Commission will be rendered shortly.
On the other hand, the National Assembly has also acted on this issue by proposing a bill to amend the Marine Transportation Act. The bill seeks to expressly provide that shipping companies’ joint activities are not in violation of the Monopoly Regulation and Fair Trade Act. If this law is passed and put into effect before the Fair Trade Commission’s decision, the Fair Trade Commission will not be able to make a decision to impose a fine.