Singapore extends block exemption for liner shipping agreements

January 2011

Ship moored

Contacts

Introduction

The Minister for Trade and Industry of Singapore has announced its decision to extend the block exemption for liner shipping agreements (BEO) for another five years until 31 December 2015. This follows a public consultation by the Competition Commission of Singapore (CCS) and its subsequent recommendation to renew the existing exemption regime.

Competition law exemptions in the shipping sector

Competition laws are built around three pillars. The first pillar is a general prohibition of agreements or concerted practices between undertakings which have the object or effect of restricting competition. This rule prohibits cartel conduct and certain other types of restrictive cooperative practices between competitors. The second pillar is a prohibition on the abuse of market power. This rule makes it unlawful for undertakings with market power to restrict competition by engaging in exclusionary or exploitative conduct. The third pillar is a regime of merger control aimed at preventing harmful business “concentrations”. This often translates into requirements for notification and clearance of sizeable M&A transactions.

The first of these pillars, making certain restrictive agreements unlawful, has raised the most issues in the transport industry. For historical reasons, but also for reasons of market efficiency, transport networks rely on a large degree of cooperation among market players. This is why regulators have historically exempted large sectors of the transport industry from the application of this prohibition against restrictive agreements. Accordingly, the aviation or shipping sectors have enjoyed generous exemptions or immunity regimes in jurisdictions with established competition law such as Europe, the US, Japan or Australia.

In more recent years, however, there has been a move away from broad exemptions in these sectors. In late 2008, the European Commission withdrew its block exemption for liner conferences, after a detailed investigation showing that there was no evidence that the liner shipping industry required such an exemption to operate. Similarly, most block exemption regulations in the aviation sector have been repealed. In the US, recent legislative proposals were introduced to withdraw the current antitrust immunity regimes for international aviation agreements and shipping conferences. In other jurisdictions, such as Australia or Canada, there have also been efforts to reduce the scope of the existing exemption regimes: limited exemptions remain for registered international liner shipping conferences, but they do not cover the most restrictive provisions - such as mandatory adherence to collective tariffs - and the agreements remain subject to regulatory oversight by the competition authorities. Finally, in jurisdictions such as China or Indonesia which have more recent competition law regimes, these liner shipping agreements do not benefit from any express exemptions.

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The public consultation

The CCS received a total of eight submissions during the public consultation process on the BEO. After review of the submissions received, the CCS made a recommendation to the Minister for Trade and Industry for a five-year extension of the BEO.

The CCS considered submissions to the effect that the extension would maintain freight rates and recent legal developments in this context in other jurisdictions including the EU and the US but concluded that the rationale for the BEO remained relevant today, and continued to fulfil the legal criteria for a block exemption under section 41 of the Singapore Competition Act. Essentially, the reasons given were:

  • as a small and open economy, the presence of an extensive network of liner shipping companies has contributed significantly to Singapore’s status as a premier international maritime centre for liner shipping operations;
  • the presence of a large number of major shipping companies has important flow-through benefits for local shippers and the Singapore economy, in particular, as a result of Singapore’s success as a transshipment hub; and
  • despite the recent withdrawal of similar exemptions in the EU and proposals in the US to revoke the US antitrust immunity afforded to similar shipping agreements, antitrust exemption for liner shipping continues to be the regulatory norm and the BEO will provide continued certainty to the shipping industry.

The Singapore Shipping Association welcomed the extension of the BEO while the Singapore National Shippers’ Council was not in favour of the extension. The Council expressed the view that the BEO may have a negative impact for shippers in particular in a context where the US was likely to move away from antitrust exemptions for shipping conferences.

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Scope of the liner shipping exemption

Under liner shipping agreements, two or more liner operators agree to co-operate on (i) technical, operational or commercial arrangements, (ii) price, and (iii) remuneration terms. The BEO exempts all liner shipping agreements from the prohibition contained in section 34 of the Singapore Competition Act - prohibiting restrictive agreements - subject to a list of specified conditions and obligations.

To be exempted under the BEO, the liner shipping agreement must allow the parties to the agreement to:

  • enter into individual confidential contracts and to offer their own service arrangements; and
  • withdraw from the collective liner shipping agreement on giving any agreed period of notice without financial or other penalty.

The liner shipping agreement must also not require liner operators to adhere to the agreed tariffs or disclose confidential information concerning individual service arrangements.

Where the aggregate market share of the parties to a liner shipping agreement exceeds 50 per cent (calculated by reference to the volume of goods carried, or the aggregate cargo carrying capacity of the vessels operating in the market measured by freight tonnes or 20-foot equivalent units), the parties are required to file their agreement and any variation or amendment of it with the CCS.

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Limited reach of the exemption

Shipping companies active in Singapore need to exercise caution where they seek to rely on the BEO. This is because, whilst the exemption may be of use for shipping lines between Singapore and destinations where the conduct is exempted or where no competition law exists, this will not be the case for lines to Europe and other jurisdictions where such collective tariff arrangements are not shielded from competition law prohibitions.

In addition, the Singapore exemption conditions have some features appearing to be more flexible than in most other jurisdictions with similar liner shipping exemption regimes:

  • Firstly, unless the combined market share of the parties exceeds 50 per cent, no prior registration is required for the BEO to apply. In other jurisdictions - such as Australia, the US or Canada - prior registration is a condition, irrespective of market share.
  • Secondly, whereas the BEO provides that a liner shipping agreement must allow liner operators to withdraw from the agreement, the parties may decide what the appropriate notice period should be. In other jurisdictions, like the US or Canada, such notice periods are subject to specific regulatory limits. They must typically not exceed 5 days.
  • Finally, in most other jurisdictions, exempted agreements remain subject to regulatory oversight by the competition regulators and specific complaint and monitoring procedures apply. Parties are required to provide detailed information about the agreement and its implementation, so enabling the competition authorities to monitor these agreements and intervene if necessary to remedy harmful effects. Although the CCS retains the power to cancel exemptions, its monitoring powers appear more limited, at least in relation to non registered agreements.

Because competition law is applied extraterritorially, foreign competition regulators will not hesitate to apply their laws to any conduct which may affect competition in their markets or does not comply with their strict exemption conditions. As we have seen in the recent cargo air transport cases, which resulted in the imposition of hundreds of millions of US dollars in fines on several airlines for collusive fuel surcharge practices, foreign antitrust authorities will remain insensitive to the fact that the practices were encouraged or exempted in other jurisdictions.

These collective agreements could also face competition law scrutiny elsewhere in Asia. A number of countries such as China or Indonesia have recently adopted or strengthened their competition laws and these regimes do not provide express exemptions for liner shipping conferences. New jurisdictions - such as Hong Kong or Malaysia - will soon appear on the competition map and may follow this trend. As the authorities are gradually stepping up their enforcement efforts, liner shipping agreements may become subject to increased regulatory scrutiny in the region.

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Contacts

Singapore

Gervais Green

Ben Rose

Robert Driver

Chuan Tat Yeo

Hong Kong

Marc Waha

Maxime Vanhollebeke

London

Ian Giles

Bangkok

Sarah Chen

Beijing

Tom Luckock

Ho Chi Minh

Jakarta

Rick Beckmann

Shanghai

Sun Hong

Tokyo

Jeremy Gibb

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