Reed Smith associates Emma Weeden and Charles Sauvage explore the impact of the Consortia Block Exemption Regulation's (CBER) expiry on the liner shipping industry and evaluate the potential of the Specialization Block Exemption Regulation (SBER) as a replacement. They also discuss the resulting changes, including legal adjustments, compliance considerations and the future landscape for competition, innovation and sustainability.

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Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith litigation, regulatory and finance lawyers across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.

Emma: Welcome to the Trading Straits podcast. Today, me Emma Weeden and my colleague Charles Sauvage from Reed Smith's London and Brussels office will be talking to you about the consortia block exemption regulation. So the Consortia Block Exemption Regulation actually expired in April and it applied to container shipping lines to allow them to collaborate on space and their sailings. Today we're going to be talking about the implications of that law expiring and how shipping consortia will work going forward. So to start off with, we should talk a little bit about what shipping consortia are. These are shipping lines that jointly cooperate in the provision of container services. These cooperations are in respect of sharing space on vessels. This can be done through highly integrated consortia using vessel sharing agreements or simply by slot charter agreements. This is exchanging slots on vessels. The features of consortia are that they share capacity to create regular weekly sailings for each line's clients. Where consortia cooperate across trades, these are known as alliances. It's important to note that these aren't conferences. So shipping conferences were abolished in 2008 and these allowed lines to collaborate on price and capacity. Here we're talking about collaborations in relation to capacity only. Today, the consortia that are often talked about are the large East-West alliances. Here, most of the world's top 10 lines participate in one of three alliances, the Alliance, 2M, and the Ocean Alliance. However, there are a lot more consortia than just these three alliances. These big alliances are famous because they operate on the world's largest trades. However, it's important to remember that there are other small consortia and alliances. They operate north-south and they operate regionally. In the Med, for example, there are lots of smaller lines operating in consortia and they shouldn't be forgotten. So what did the consortia block exemption do? So a good place to start is what are block exemptions? So block exemptions allow businesses to carry out and collaborate on activities that would usually be caught by competition law. So what did the consortia block exemption let lines do? So this regulation was introduced in 1995 and renewed in 2014 and 2020. And it specifically allows shipping liner companies to form consortia and operate a joint service on vessels and share port facilities under certain conditions so the main condition in this was that the lines together wouldn't have a market share of over 30 percent and the period of the agreement and lock-in had to be limited the agreement also had to not have any hardcore restrictions you can't do things like price fix or market share and and it's also worth noting that when the UK left the European Union it adopted the consortia block exemption regulation. The benefits of this law were that it facilitated these consortia by making the competition or assessment easier there was a regulation that laid down what lines could do this created legal certainty reduced risk reduced legal costs it was it's a straightforward assessment for shipping lines do they fit within these rules. The big benefit of this law is that it allowed lines to join up to provide ships and regular services. This has meant that you know if one line buys a big big ship it's got other partners that can fill space on this ship, so with the consortium you can fill the space have a regular sailing. You know the goods that are transported by a container often have to be there you know just just in time it's a different industry to to tramp shipping so being able to collaborate together to have one weekly sailing is a good thing for for shippers. It's also helped with environmental protection so if you've got one ship sailing rather than four ships sailing at the same time you know that reduces carbon emissions. The vessel utilization of a big ship can also be higher so you're not sailing more half empty ships. So Charles it'd be good to know your thoughts on why the consortia block exemption regulation was abolished.

Charles: Thank you, Emma. Yeah, the CBER, in relation to why was the CBER abolished, it's important to note first that the CBER was one of the very few sector-specific block exemption regulations that were adopted in the EU. Unfortunately, the EU Commission has adopted, has moved towards getting rid of these sector-specific exemptions. And even though we continually and regularly advised in favor of maintaining the maritime, the CBER, as the sector-specific block exemption regulation for the shipping sector, we have not been heard, and we had argued that because the shipping sector was, in our view, very specific, was very international by nature, and was very high cost, and therefore needed its own legislation. Fortunately, as I said, and as Emma explained, the sewer was drawn and now the only sector-specific block exemption regulation left in the EU is the one relevant to the motor vehicle sector. This move of the EU Commission was not a given, in particular because other jurisdictions have and continue to have sector-specific block exemption regulation in the maritime sector. For instance, Hong Kong, Singapore, and Israel. And the U.S. Have a slightly different system, but in a way even more constraining because in the U.S. you have even a sector regulator, the U.S. Federal Maritime Commission, to which shipping lines must not only file the agreements they enter into, but also submit information such as their meeting minutes and other documents in order to allow the Federal Maritime Commissions to perform real-time monitoring of the maritime sector. So, yeah, the CBER in the EU was withdrawn and the same in the UK. And this is somewhat confusing, in particular because the market conditions haven't changed drastically since the last time it was renewed. For a while, the Commission considered that the shipping rates had increased, But given that they have now, since the end of the COVID-19 pandemic, fall down again, that was not found to be a good reason. The Commission also thought that the quality and reliability of services have remained since 2014. So really, the reasons for underlying the withdrawal of the CBER are yet to be determined. The Commission also considered that it wasn't clear whether a consortia could deliver sufficient consumer benefits to justify renewal. And it also queried the indispensability of having the consortia for achieving the standards required by Article 101.3 of the Treaty on the Functioning of the European Union, and in particular, the efficiencies bringing consumer benefits. But maybe in order to better understand why the expiry of the CBER will happen, why was it decided, and how it will have negative consequences, it's important to further explore the reasons underlying the EU Commission's decision to withdraw it. Maybe the first one I briefly touched on is the inconsistency in looking at the effects of the COVID-19 pandemic. So as I said, for a while, the Commission, during the pandemic, we could observe that the freight rates had increased, but evidence since suggests that these are now falling. So in its review of the specialization block exemption regulation in 2021, the Commission considered, in line with what I've just said, that the effects of the pandemic were temporary and therefore did not cause reason for concern. And yet, conversely, a year later, during its review of the CBER, the Commission focused on the adverse effects of the pandemic on fright rates and deemed it as a good reason for the CBER to expire as no longer being fit for purpose. This inconsistent approach really is a cause of concern. We also noticed that the Commission for sure underestimated the legal uncertainty and the compliance costs that the expiry of the CBER will entail for carriers. And this, even though we highlighted it several times in the consultations that were carried out in the context of the CBER review. So we'll come back to this, but as a result of the withdrawal of the CBER, carriers will now have to self-assess their cooperation agreements using the specialization block exemption regulation, which, amongst other reasons, which is not sector-specific and which will therefore increase the compliance costs. Not only because the shipper carriers will now have to familiarize themselves with this complex new sectoral new regulation, but because also precisely it is not sector-specific. And there is no, in parallel to the SBER, there is no longer any sector-specific guidance. And finally, another reason is probably is that the commission failed to properly consider the negative impacts of the expiry of the CBER on competition, innovation, and sustainability in the liner shipping sector. Indeed, there's a chance that consortia will be replaced by less efficient and environmentally friendly standalone services, or by more integrated forms of cooperation, such as merg...