Arrangements such as these, when found to exist in other sectors of the economy, would stand a fair chance of being investigated for leading to hardcore cartel-like behaviour, with the participants frequently censured — and often fined substantial sums — as a result. This is true particularly in the case of price-fixing agreements, which, although until recently were permitted in significant segments of the shipping market, are pursued relentlessly in all other areas of commercial activity.
Following a prolonged period of discussion and debate, the European Commission (EC) recently set about removing the exemptions and exclusions enjoyed by the maritime transport industry, thereby exposing it to the same free-market economic disciplines prevalent in all other sectors.
In 1986, the EC Council adopted regulation 4056/86, which laid down detailed rules for the application of articles 81 and 82 of the Treaty of Rome to international maritime transport services, empowering the EC to investigate alleged infringements.
As an integral part of regulation 4056/86:
- liner conference agreements were, under certain conditions, exempted from the prohibition contained in article 81(1) (the ‘liner conference block exemption’); and
- ‘cabotage’ and ‘tramp’ vessel services were excluded from the scope of Regulation 4056/86 altogether, which in effect precluded efficient enforcement of EC competition law in these sub-sectors. These are the two principal exceptions to the rules that the EC sought to make regular, and are now addressed by a new Council regulation 1419/2006.
The new regulation entered into force on 18 October, 2006. The repeal of regulation 4056/86 puts an end to the possibility for liner carriers to meet in conferences, fix prices or regulate capacity. A two-year transitional period means that the repeal will not become effective until October 2008. Existing liner conferences will be able to continue operating on routes to and from
After that date, conference activities will no longer be permitted. The EC anticipates that repealing the block exemption will bring about substantial benefits to European Union (EU) industry and consumers, in particular in the areas of transport prices, reliability of liner shipping services, the competitiveness of the EU liner shipping industry and small EU liner carriers.
Prior to the introduction of the new Council regulation, cabotage and tramp services were the only remaining sectors to be excluded (as opposed to exempted) from the EU’s competition implementing rules. The EC acknowledged that the lack of effective enforcement powers for those sectors was an anomaly from a regulatory point of view. No convincing reason was given to maintain the exclusion for tramp vessel services. Similarly, the EC reasoned that although cabotage services often have no effect on intra-EU trade, this does not mean that they should be excluded.
During the consultation process leading up to the adoption of the new regulation, various parties emphasised the need for guidance for the sector on the application of the EC competition rules. Many in the trade have questioned the ability of ship owners to ‘self-assess’ their arrangements with so little guidance, arguing that there is a need for the commission to introduce increased legal certainty across the maritime sector. To this end, the EC is engaged in discussions with operators so as to better understand the issues at stake. Arguably, however, it is more difficult to define the markets within which some tramp companies are operating than the liner trades where ships operate to a schedule on fixed routes. Nor is it easy to calculate market shares and thereby be sure of the existence of any meaningful market power.
The EC has commissioned lawyers and economists to carry out an in-depth study of the sector, which was due to be published in December 2006. This will form the basis of any guidelines it produces. Operators, however, should not expect anything dramatic. The EC will studiously try to shy away from anything that might be interpreted as a ‘block exemption’ under another name.
As a result of the changes, a large number of the commercial arrangements that currently exist between competitor ship owners/operators will have to be rethought and either restructured and/or abandoned. Failure to make changes could result in investigation, fines and enforced dissolution. It is not, however, all bad news for the shipping community. The compliant alternatives to pools and conferences, arguably, are not so grim.
Concentrations
Mergers are expressly excluded from the ambit of article 81(1). One option, therefore, is to replace the looser collaboration that may currently exist between ship owners/operators with full structural tie-ups. Merging entities are frequently required to undertake a tailor-made notification and review process to obtain clearance for their proposals.
The benefit of this clearance process is that the parties can obtain legal certainty concerning the compliance status of their arrangements going forward. Notification and clearance systems no longer exist for any other form of collaborative arrangement.
Joint ventures
Certain types of joint venture are treated, for competition law purposes, as being the functional equivalent of a ‘concentration’. For those ship-owning entities that do not want to enter into as radical an arrangement as a merger, entering into a joint venture may prove to be a more flexible alternative. Again, such arrangements can be notified and cleared. This, in turn, provides participants with a compliance guarantee going forward.
Consortia
The only general exemption to survive the EC’s review relates to ‘consortia’ agreements. The consortia block exemption covers international liner operations where goods are transported chiefly by container. It provides participating entities with a blueprint for what the Commission considers acceptable cooperation. There is some suggestion that the EC could be persuaded to extend the scope of the exemption to cover other types of shipping. Even if the Commission decides that a formal extension is not appropriate, the consortia block exemption can provide useful guidance to companies looking to cooperate in the field of maritime transport in the future as to what might be considered to be acceptable and what not.
In addition to these compliance options, the shake-up that will result from the introduction of the new Council regulation will also create certain opportunities. Old groupings will disintegrate and new ones will be formed. For those interested in taking a stronger position on certain trades, there ought to be an increasing number of ship owners prepared to discuss sales. If there is one certainty concerning the proposed changes, however, it is that things are unlikely ever to be the same again.
Despite the silver lining, news of the rule change has been welcomed with the kind of enthusiasm that one might have expected had the Commission mandated the return of the cat o’ nine tails. At present, many within the industry are hoping to convince the EC that their particular pooling arrangement is ‘different’ and/or so insignificant, in terms of its effect on the market, as to be pardonable. This is something of a high-stakes gamble. Win and you preserve the ‘old’ arrangement. Lose and the lawyers clean up. The smarter play perhaps is to go with the flow and change — before change is forced upon you.
Stephen Tupper is a competition partner at Watson Farley & Williams.
