Pools and the EU

The report was published on the Commission´s website last Friday and has already attracted a lot of attention.

18 October last year saw the end of the exclusion of tramp shipping to the application of competition rules and also the end of a long-lasting exemption from the competition rules to liner conferences.  The effect of the repeal of the exemption is that price fixing and capacity regulation are no longer permitted for liner shipping.

The position for tramp shipping was however unclear apart from the fact that all the usual competition rules apply to tramp shipping and the European Commission now has power to enforce them.  The crucial question is how this will affect the most usual cooperation in the sector, the shipping pool?

Pool agreements and other similar horizontal cooperation arrangements frequently contain clauses which may have the potential to restrict competition, such as non-compete clauses and certain exit provisions.  If such clauses are deemed to be so called hardcore restrictions of competition they are automatically prohibited and the agreement will be considered illegal. By the analysis in the report Fearnleys and its associates was hoping to redeem some of the uncertainty.  The European Commission has however not yet given any indications as to what the new status of the shipping pool will be or whether it agrees with our conclusions.  Having said that, we expect that the Commission does not entirely concur with what we have presented.

We argue, in principal, that although most pool agreements seem to contain hardcore restrictions they should nevertheless be considered as "production joint ventures" and therefore not falling within the prohibited area as discussed in a footnote in the Commission´s Horizontal Guidelines. As the saying goes: if you can´t beat them, join them. By using the Commission´s own guidance we are hoping to show the Commission how to deal with pool agreements in their current form.  If that strategy should fail, there is always a possibility to show that an agreement brings economic efficiencies that outweigh the adverse effects on competition the agreement may have.  What we have found is that most pools bring plenty of efficiencies. Examples of these efficiencies are greater flexibility, the possibility to undertake large contracts of affreightment and the provision of better services to customers following from better utilisation of the fleet. There are therefore strong arguments in favour of pooling, although in some markets and as between some parties the arguments may be stronger than for others.

Another important point when discussing competition and competition law is the effect the agreement has on the relevant market. The report attempts to define what the relevant tramp shipping markets are by using the Commission´s definition of the term and also what market shares the various pools would have in each of these markets if our definitions of the relevant markets were to be adopted by the Commission. We concluded that there are a number of relevant markets in the tramp shipping sector and the market shares for a majority of pools are insignificant.  However, in very few cases the market shares are staggering, although they can be explained by the market structure and customer demand.

A word of warning is probably appropriate. The European Commission has, by commissioning this report, cast an eye on the industry and major changes may come around quickly. A possible outcome could be an increased interest in consolidation between shipowners if pools in some or all segments were to be banned. Another outcome could be that pools will continue to be allowed save for the hardcore clauses, which in turn will require some major re-drafting of pool agreements.  The problem with the latter option is that some of the hardcore clauses are fundamental to the structure of pools (such as the integration of a number of commercial functions and removing those functions from the vessels´ owners) and the pool concept is most likely dead without them.

Maria Hempel

Fearnleys and Holman Fenwick and Willan will be giving half day seminars on the subject of tramp shipping and competition during spring 2007. Please contact us for further information.