On 14 September 2016, the Hong Kong Competition Commission (“Commission”) announced its intention to adopt a Block Exemption Order (“BEO”), conditionally exempting certain agreements between shipping liners from the Competition Ordinance (“CO”).

In December 2015, the Hong Kong Liner Shipping Association (“HKLSA”) applied for an exemption covering two main types of agreements between carriers:

Vessel Sharing Agreements (“VSAs”) under which liners agree on technical and operational arrangements and exchange or charter vessel space; and
Voluntary Discussion Agreements (“VDAs”) which allow liners to exchange data about supply and demand and discuss guidelines on recommended rates.

Both types of agreements, although are today a common practice in the Hong Kong shipping industry, risk being in violation of the CO if an exemption order is not granted by the Commission.

The Commission’s proposed BEO and the Statement of Preliminary Views is a watershed moment for the liner shipping industry. HKLSA had asked for an exemption for both types of agreements, modelled after other Asian jurisdictions such as Singapore and Malaysia, where both VSAs and VDAs are considered legal under their respective competition laws. As was broadly expected, the Commission has proposed to exempt VSAs. However, the exemption is subject to a market share cap of 40%, which is lower than that requested by the applicant and lower than competing shipping hubs such as Singapore.

More significantly, the Commission has not proposed to exempt VDAs. Noting the international divergence on how these agreements are assessed, it intends to reject the HKLSA’s claimed efficiencies. The Commission was of the view that, as VDAs involve parties exchanging information on pricing and services terms and jointly issuing non-binding pricing guidelines , VDAs could potentially harm competition in contravention of the CO.

In rather strong terms, the Commission rejected the HKLSA’s claimed efficiencies. It noted that, even if VDAs gave rise to any efficiencies, they would not satisfy the conditions of the economic efficiency exclusion under the CO as narrowly interpreted by the Commission. In particular, the Commission was of the preliminary view that:

• Rate stability, as claimed in the application, is questionable in practice and is unlikely to amount to an “efficiency” for the purpose of the CO;
• While service stability may be accepted as an economic efficiency, there was insufficient evidence to establish a causal link between VDAs and the claimed service stability;
• The fact that some pricing recommendations are not implemented in practice was taken by the Commission as a sign of price volatility, and contrary to the applicants’ claim that such recommendations help achieve rate stability; and
• Rate and surcharge transparency arising from the pricing guidelines issued pursuant to VDAs is questionable in the circumstances, and generally cannot be considered as an “efficiency” for purposes of the CO.

In addition, the Commission considered that it was difficult to see how customers benefit from the claimed efficiencies and, even if there were any efficiencies, there were alternative economically practicable and less restrictive means of achieving them. For instance, rate stability may be obtained through fixed rate contracts with customers; service stability and rate and surcharge transparency may be achieved through enhancing the scope of publicly available information.

The Commission therefore decided not to include VDAs in the scope of the proposed BEO. Nevertheless, the Commission has proposed a 6-month transition “grace period” starting from the date of the Commission’s final decision on the application. This will give parties a period of time to make the necessary changes to their practices and ensure compliance with the CO.

The Commission has now opened a three month consultation period on the proposed BEO. Taking into account the Commission’s review of submissions and consideration of new evidence it receives, a BEO is unlikely to be adopted before mid-2017.
Source: Linklaters