AFTER decades of hostilities between the European Commission and container lines, has a truce finally been called?

Brussels has proposed extending the Consortia Block Exemption without any modifications, suggesting that the relationship between the two sides has changed.

But why?

The regulation dates back to 1995 when European competition officials drew up the rules under which ocean carriers could co-operate with each other through, for example, vessel sharing or slot swapping arrangements.

The one activity that is not allowed is collective pricing. This has been outlawed in Europe since 2008 when the conference system was banned.

Brussels decided that these co-operative agreements brought greater efficiencies to liner shipping, which would benefit both carriers and shippers.

Since then, the block exemption has been renewed four times, and now looks like being extended again from next April, albeit for only four years rather than five.

Contradictory policy

That decision appears to contradict European Commission policy of doing away with special treatment for particular industries, and bringing all sectors within the remit of the European Union’s competition rules.

Yet Brussels has always said it understands the need for lines to form consortia and alliances, despite underlying suspicions that the container shipping industry was intrinsically anti-competitive.

Reed Smith partner Marjorie Holmes, a long-time advocate of the block exemption, thinks that the European Commission has learned a lot about how the industry functions, from the late 1990s when conferences such as the Far Eastern Freight Conference and Trans-Atlantic Conference Agreement were being investigated, to the detailed look at numerous mergers and takeovers that have transformed the sector in recent years.

During those clearance procedures, Brussels regulators also spoke to customers and found that few were particularly concerned about the consolidations taking place.

Most recently, Brussels conducted a series of dawn raids on the European offices of many global carriers in search of evidence of price signalling.

After a lengthy and expensive investigation, Brussels eventually cleared the carriers involved of any wrong doing, but nevertheless imposed a new system of commitments to make pricing more transparent.

Incidentally, those three year commitments have just expired, yet no-one seems quite sure about what happens next.

But after so many in-depth probes to find out whether container lines were colluding, price fixing, or acting unlawfully in some other way, Brussels seems to have finally concluded that this is a highly competitive industry that is subject to the vagaries of the marketplace. Hence, the proposal was made last month to leave the BER alone, assuming the final round of consultations before the April 25, 2020 renewal date do not come up with anything new.

But is there also a sub-text here? Is the decision a nod to the fact that Europe’s four major container lines not only face a multitude of legal and commercial challenges in the coming years, but also the constant threat of Cosco Shipping’s global ambitions, and that any regulatory disruption could just add to their problems at this critical juncture?

Having said that, the BER covers 61 consortia but only one of the big three global alliances. With market shares above the 30% threshold set by rules which grant an exemption from EU competition law, both the 2M partnership and Ocean Alliance have to conduct self-assessments to ensure they are not abusing their dominant position.

There is, though, another side to this.

Legal uncertainty

At a recent round table discussion on the Consortia Block Exemption organised by the European Maritime Law Organisation, Mishcon de Reya partner Rob Murray questioned whether the commission’s decision would hold up in a court of law.

Both Brussels and the lines would have difficulty producing the proof that the consortia rules had been necessary to enable, for example, lines to share ships or invest in bigger and more efficient vessels. Both may well have happened regardless of the regulation, and indeed the two biggest alliances fall outside the block exemption, and yet still pool ships and have ordered vessels independently of each other.

More importantly, have the required benefits to shippers and forwarders of the consortia rules ever been quantified?

For most of the past decade or so, freight rates have been cheap, yet that is not because carriers have cut prices in response to lower operating costs resulting from cooperative agreements between lines. Prices are dictated by the laws of supply and demand, and for the most parts, carriers are price takers, not price makers.

Furthermore, as more vertical integration along to supply chain occurs, is it possible to work out whether customers are getting their fair share of the benefits of these highly complex transport systems.

Cargo interests have, of course, raised objections to the extension of the BER, and were undoubtedly taken aback by the decision to extend it until 2024.

But they have also come in for criticism for not taking steps to challenge some of the apparent flaws in the decision through the courts where they could formally request to see disclosure documents that would show how the benefits are being distributed.

It is not just lawyers who have questioned why the customers of container lines have failed to be more vociferous in asking whether or not the consortia rules are actually working as they should be, and demanding some clear data-based evidence.

Some on the cargo side are also privately highly critical of the lacklustre response of shippers’ councils, in contrast to the robust stance of the past.

For now, though, carriers finally seem to have convinced European competition regulators that they are a special case, in need of their own set of rules, and that the consortia block exemption provides much needed legal clarity and certainty in a highly unpredictable and uncertain world.