On 14 September 2016, the Hong Kong Competition Commission (the "Commission") published its first proposed block exemption order (BEO) for certain liner shipping agreements, accompanied with a statement of preliminary views setting out reasons for its proposed decision. This follows the BEO application made by the Hong Kong Liner Shipping Association (HKLSA) on 17 December 2015. The Commission invites interested parties to submit representations about the proposed BEO as well as the Commission's provisional position on the BEO application.

What is a BEO?

Under section 15 of the Competition Ordinance (Cap. 619) (the "Ordinance"), the Commission may issue a BEO for a category of agreement (which has potential to harm competition) where it is satisfied that such category of agreement enhances overall economic efficiency. Agreements that fall within the scope of a BEO will be exempted from the application of the first conduct rule (click here for our Hong Kong Competition Law Investigation Series to learn more about BEO).

What does the proposed BEO cover?

The Commission intends to issue a BEO for vessel sharing agreements (VSAs), but not for voluntary discussion agreements (VDAs), which were both sought to be exempted. VSAs are agreements between shipping lines on certain operational arrangements (i.e., joint operation of liner shipping services, capacity adjustments and joint operation or use of port terminals and related services), and are often compared to code-sharing or alliance agreements of airlines. VSAs in the simplest form may provide for the transfer or reciprocal exchange of container slots, while more sophisticated VSAs may include coordination of the parties' respective sailing schedules and the operation of joint services. On the other hand, VDAs are agreements between carriers for other commercial issues relating to particular shipping routes. They provide for the exchange and review of market information, supply and demand forecasts and business trends, and may also involve the issuance of pricing recommendations. The Commission considers VSAs generate sufficient economic efficiencies to justify exclusion from the application of the first conduct rule, in that they result in, among other things, increased quality of service (through broader service coverage and higher service frequency), costs efficiencies and decreased costs of entry and expansion. In contrast, it was not considered that rate stability, service stability and rate and surcharge transparency as claimed to be benefits arising from VDAs justify the grant of an exemption.

Under the proposed BEO, activities undertaken pursuant to VSAs will be exempted if (1) the combined market shares of the parties to the VSA do not exceed 40 percent; (2) the VSA does not authorise or require parties to engage in anti-competitive behaviour (i.e., price fixing, output restriction and market allocation); and (3) parties to the VSA are free to withdraw from the VSA without penalty upon reasonable notice. The proposed BEO also provides for the basis of calculating market shares in the liner shipping market. It was proposed that the duration of the BEO would be for five years and the Commission intends to review the BEO four years after its commencement.

What is the next step?

As required under section 16 of the Ordinance, the Commission calls for representations from interested parties on the proposed BEO and its provisional views on the BEO application. Specifically, the Commission asks for substantive information and empirical evidence that are relevant to the BEO assessment of both the VSAs and VDAs. A non-exhaustive list of specific issues have been provided by the Commission identifying matters that interested parties may wish to address, including whether VSAs or VDAs give rise to economic efficiencies, terms of the proposed BEO and proposed transitional arrangements. The Commission will take into account the representations received in reaching a final decision relating to the BEO application. The deadline for submitting representations to the Commission is 14 December 2016. It should be noted that representations submitted will be accessible by the public on the Commission's website, and parties should consider providing a non-confidential version for uploading if confidential information is to be included.

Why is the BEO important?

The proposed exemption provides legal certainty and safe harbour to the liner shipping sector, which is important given Hong Kong's status as one of the busiest and most significant ports in the world. The proposed BEO is broadly in line with the EU approach, where exemption has been granted to VSAs but not VDAs. However, it appears to be more restrictive than the position in the US and Singapore, where both VSAs and VDAs are permitted, respectively by specific legislation and block exemption order, despite the fact that in the US liner agreements involving discussion and fixing of rates would have to be filed with and reviewed by the Federal Maritime Commission, the US maritime regulator. In China, international liner shipping agreements are required to be filed with the Ministry of Transport within 15 days of execution, and could be subject to investigation if they harm fair competition. The National Development and Reform Commission, one of the antitrust regulators in China, is currently looking into VDAs and in particular how they influence the price setting process of carriers. Given the significance of the liner shipping sector to the Hong Kong's economy, interested parties will want to carefully consider the terms of the proposed BEO and the preliminary views of the Commission, and to make necessary representations before the consultation closes.