Vessel sharing agreements. If the order is adopted in its current form, parties to such agreements will be able to continue operating provided that they meet certain conditions. The Commission recognises that vessel sharing agreements may differ in scope. Accordingly it lists a certain number of activities which would benefit from the exclusion. All of these activities would be excluded if certain conditions are met.
- The main condition is that their combined market share remains below 40 per cent on the relevant market. This threshold should be calculated by reference to volumes carried or to capacity on the market, and allows for short-term fluctuations up to 45 per cent over a two-year period. Global shipping lines will already be familiar with this market share approach, which is broadly consistent with the methodology adopted in the European Union (where a 30 per market share threshold applies) and Singapore (where a 50 per cent market share threshold applies). While it is the parties’ responsibility to define the relevant markets in each case, the Commission signals in its Statement of Preliminary Views that it would be prepared to consider very broad markets for long-distance trades (such as between the “Far East and the Mediterranean”) and possibly country-wide markets (it cites “Hong Kong to the Philippines” as an example) for shorter routes. More specifically, the Commission recognises accessibility to inland transport and transhipment opportunities as a factor contributing to broader geographic markets.
- In addition to activities essential to the purpose of typical vessel sharing agreements, such as coordination on sailing schedules and destinations and capacity or vessel pooling, other ancillary activities will also benefit from the exclusion. These largely correspond to those listed under the EU block exemption for shipping lines and include the pooling or joint use of office premises, port facilities and container equipment, the joint operation or use of port terminal and related services, as well as any other activities which are considered necessary to the implementation of the agreement. Whilst the pooling of resources and the joint procurement of third-party services clearly fall within the scope of the exclusion, the test of “necessity” leaves some uncertainty as to which other types of ancillary activities might also benefit. In any event, cooperation within the scope of one vessel sharing agreement may well need to remain distinct from that envisaged as part of another, even where they share one or more of the same contracting parties.
- Amongst other conditions, parties cannot discuss or fix prices, limit sales, or introduce capacity limitations other than in the form of adjustments inherent to the operation of the vessel sharing agreement. Parties should also be free to withdraw from the coordination arrangements without the risk of facing onerous consequences. As with the list of excluded activities, these conditions are again broadly consistent with those found in similar block exemption decisions made in the EU and Singapore.
Where the conditions set out in the proposed order are not met, parties have a choice among several options, some of which are outlined below.
- They can make changes to fulfil the conditions, for example, by reducing the number of participants to bring the combined market share below the threshold. This would allow them to benefit from the legal certainty offered by the block exemption order. Note that the relevant market share refers to that of each party to the agreement, irrespective of how many vessels it contributes under the agreement. Accordingly, withdrawing vessels operating within the scope of the agreement while keeping them on the route is not an option that would enable the agreement to bring their collective market share within the safe harbour threshold.
- Another option would be for the parties to assess by themselves whether a particular vessel sharing agreement complies with the Ordinance despite not fulfilling the conditions of the order. For example, where they have a market share higher than 40 per cent on a new or thinly serviced route, they may still be able to show that no restriction of competition arises, or that specific market circumstances enable them to meet the conditions for exclusion.
- Finally, although this may be difficult to achieve operationally, parties could revise the vessel sharing agreement to exclude sailings to Hong Kong from its scope, and seek to exclude the application of the Ordinance on this basis.
Voluntary discussion agreements. As mentioned, the Commission is so far unconvinced that this type of agreement should benefit from a block exemption. While the Commission does not expressly rule out the possibility, the analysis contained in the Statement of Preliminary Views suggests that the Commission will be unlikely to find room to apply the economic efficiency exclusion to any agreement or practice that contemplates pricing recommendations or discussions on prices and commercial terms among independent operators. The Commission’s approach to voluntary discussion agreements differs from that adopted in Singapore, but reflects the same view as those held by competition authorities in the EU and Malaysia.
With little prospect of convincing the Commission that discussions of prices and commercial terms among independent operators would not fall foul of the Competition Ordinance, parties have few options other than to cease their involvement in such discussions, at least to the extent they have the object or effect of restricting competition in Hong Kong markets.
- Given that pricing discussions remain permitted in some other jurisdictions in the Asia-Pacific region, parties could conceivably carve out Hong Kong from their joint recommendations in respect of general rate increases or voluntary contract rate benchmarks. They will however need to be particularly careful to ensure that discussions of rates for services from other ports in North Asia do not have the object or effect of restricting competition in Hong Kong markets.
- The Commission’s Statement of Preliminary Views shows a clear concern with those aspects of voluntary discussion agreements that relate to commercial terms and pricing. In contrast, discussions of other matters in relation to particular shipping routes, such as for example forecasts of total demand, could possibly be conducted without violating the Competition Ordinance. The Commission’s Guideline on the first conduct rule contains guidance in this respect.
- The Commission proposes to offer a grace period of six months after its final decision on the application for a block exemption order, but thereafter, could well investigate pricing discussions. By then parties will need to have formally withdrawn from pricing discussions that have the object or effect of restricting competition in Hong Kong markets. Going forward, shipping lines will be mindful of recent commitments provided to the European Commission in relation to forward-looking price announcements, as these may well inform the views of the Hong Kong Competition Commission when assessing how prices are communicated to the Hong Kong market.
Further reading
The following resources are available:
- the Competition Commission’s press release (English | Chinese)
- the Competition Commission’s statement of preliminary views and Proposed text of Block Exemption Order (English | Chinese)
- the Competition Commission’s public consultation notice (English | Chinese)
- the Competition Commission’s website
- our Briefing on the Competition Ordinance (English)